How are you advising businesses in your jurisdiction when protecting themselves from the impact of trade wars and sanctions, and what strategies can professional services firms offer to mitigate these risks?
Only months into President Trump's second administration and the new tariff regime has already changed the international trade world dramatically. These tariffs have and will continue to significantly impact businesses' profitability and operational efficiency. Fortunately, businesses can implement proactive strategies and seek guidance from experts to minimise the impact.
Optimising logistics and distribution is essential to streamline operations and ensure compliance in this constantly evolving landscape. Businesses may benefit from shortening lead times and automating workflows, routing shipments through optimised ports, and prioritising documentation. Moreover, consolidating shipments to reduce transportation costs and leveraging local distribution centers are effective tactics for enhancing profitability.
In the modern trade context, technological advancements play a crucial role in transforming the partnership between customs and the private sector. Embracing these innovations may help uncover vulnerabilities from tariff changes and lead to significant monetary and operational gains.
To ensure compliance and maximise the benefits of complex trade regulations, some strategies may require additional support from professional services. These more complex strategies include verifying tariff classification, implementing tariff engineering, implementing valuation changes such as a "first sale" program and utilising special customs programs.
Tariff classification is critically important in international trade, as the tariff code determines the applicable duties and regulatory requirements. Misclassification may result in overpayments, penalties, legal headaches, or all the above.
First, companies should confirm the tariff classification of their products. If questions arise, E-Rulings by U.S. Customs and Border Protection (CBP) are typically processed within 30 days of submission and serve as legal authority for classification. It is also essential for companies to verify the sourcing of all inputs of their products to potentially qualify for a Free Trade Agreement (FTA). FTAs offer preferential rates to companies engaged in trade between contracting countries. This process requires calculating the regional value content, as a minimum percentage of the product's value must be sourced within the FTA region to benefit from the agreement. At the time of this response, the primary FTA that offers the greatest tariff relief is the United States Mexico Canada (USMCA) Agreement.
To navigate trade and ensure smooth international operations, businesses should also consider special customs programs such as First Sale for Export, Foreign-Trade Zones (FTZs), and bonded warehouses. First Sale for Export is a valuable mitigation strategy for importers with multi-tiered transactions.
Utilising FTZs and bonded warehouses can help companies defer duties and mitigate the worst effects of the current high tariffs. FTZs are designated areas within the U.S. that are considered outside of the country's Customs territory. Duties on the imported goods can be deferred until they are moved out of the FTZ for domestic consumption. The deferral not only provides significant cost savings but also offers greater flexibility in managing inventory. Similarly, bonded warehouses allow the goods to be stored but not entered into commerce, so duties are deferred until actual entry of the goods. With both regimes, if the goods previously imported and placed in the FTZ or bonded warehouse are subsequently exported, duties and tariffs are avoided.
Are you seeing shifts in supply chain strategies due to geopolitical conflicts? How can you help clients restructure supply chains to maintain resilience and regulatory compliance?
The tariffs represent a long-term shift in global trade, not a passing movement. Consequently, supply chain resilience and regulatory compliance are essential for an international business to survive. As expected, diversification has emerged as the dominant trend, as companies seek to reduce dependency on a single market, thereby minimising the impact of abrupt tariff changes.
To reduce vulnerabilities within global supply chains, companies are looking to align with countries that are both geopolitical allies as well as culturally and economically compatible.
This approach allows businesses to leverage political alignment and preferential agreement rates to lower costs and enhance robustness.
Additionally, companies are more focused on strengthening domestic production to reduce reliance on global supply chains that can be easily disrupted by changes in international policy. By shifting to domestic production, businesses are hoping to enhance supply chain resilience, tighten quality controls, and eliminate ethical and environmental concerns. As a result, moving operations home may result in significant cost savings in the long run.
These proactive approaches require careful evaluation of the rules of origin and how they affect global supply chains. It is critical to understand that simply changing the source of materials may not be enough. Products must undergo a substantial transformation in the new country to qualify as originating from there. This means the product must be fundamentally altered in terms of its name, character, or use.
With global markets in flux, how can businesses balance risk and opportunity in cross-border trade, and what strategic guidance can you provide?
The unpredictability of tariffs makes long-term planning and regulatory compliance difficult for businesses. More so than ever, companies will have to decide when to take risks and act on opportunities.
One way to balance risk and opportunity in international trade is to leverage legal avenues. Businesses should consider adding tariff clauses and reviewing International Commercial Terms (Incoterms) to shift tariff costs and risks. Moreover, force majeure clauses can provide relief when tariff changes make contractual obligations impossible to fulfill.
To effectively hedge against currency and freight volatility, businesses should lock in future exchange rates, align revenues and expenses in the same currency, and negotiate long-term agreements to provide certainty and predictability in costs. Moreover, modelling different tariff scenarios on budgeting will enable leaders to make more informed decisions, ensuring their company maintains its competitive edge.
As agencies take actions to implement President Trump's Executive Orders, it will be important for industries to take advantage of comment periods to provide input in the decision-making process.
Experts in a field may be able to present helpful data or an alternative way a regulation could be designed to benefit their business. A company may pursue an adversarial approach
by appealing decisions, challenging agency actions as unconstitutional under the Major Questions Doctrine, using monetary damages under the new tariff regime as standing to raise issues in U.S. district courts, and seeking injunctions because of irreparable harm for compliance with agency actions beyond the scope of legal authority.
These legal methods can serve businesses by managing risks and maximising opportunities. In this evolving trade climate, companies that adopt proactive tactics and demonstrate an openness to novel approaches will more likely succeed in the long run.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
