Everything seems to be on the table for companies today, as they search for the best way to respond to the new tariffs on goods from China.

Some shippers claim they will change product classifications to avoid tariffs entirely, a practice I discourage. What they can do instead is collaborate with a customs adviser to rethink how tariffs are likely to impact supply chains, and explore compliance options that can reduce risk and spend.

Here’s where we stand today with the list of U.S. tariffs against Chinese products:

• List 1 tariffs on $34bn of products went into effect on July 6.
• List 2 tariffs on $16bn of Chinese products went into effect on August 23.
• List 3 tariffs on $200bn of Chinese goods: the 1 percent duty effective on List 3 products went into effect on September 24, 2018; the 25 percent duty effective on List 3 product goes into effect on January 1, 2019.
• On Labor Day weekend, the Administration said it was working on List 4 tariffs on $264bn of imports.

In response, China has issued retaliatory tariffs on U.S. goods.

For purposes of this article, it’s important to note that if Lists 1 through 4 go into effect, there will be tariffs on essentially all goods from China.

Transpacific Ocean Shipping

It is still too soon to know the full impact that tariffs will have on businesses. But it is instructive to look at what seems to be happening now. In most years, shipping by air and ocean follows a fairly predictable pattern of peak and slow times. But businesses are already seeing the impact of tariffs this year, particularly in the transpacific eastbound (China to U.S.) ocean lane.

In a typical year, new service contracts in this lane go into effect May 1. Peak season volumes ramp up in August and run through September. Ocean rates increase at this time, and remain high until after Golden Week ends in China. This is usually the first week in October. Then, volumes normally trail off until the ramp-up for Chinese New Year, which is normally the end of January or start of February (the date is different every year); we experience a slack period following that holiday as well. After that, ocean carriers announce their winter programs before rates decrease during the slack season.

This year, peak season started early in June and July, as shippers front-loaded their shipments to avoid the new duties. U.S. import volumes through August increased 4.8 percent compared with 2017. As volumes increased, carriers were also removing 6.7 percent of their capacity on the West Coast, and 1.5 percent of their capacity on the East Coast. The result has been tight space and higher rates on the spot market.

As news emerged that List 3’s 25-percent tariffs would begin January 1, 2019, companies began to move up shipping deadlines. Many hope their suppliers can ship to them before the deadline so they can avoid as much of the additional tariff as possible. Space, already in short supply, is likely to remain tight. Carriers announced blank sailings for the start of October to keep space demand high and rate levels elevated. While carriers will bring in extra loaders to clear some of the backlog, new bookings continue to surge. Currently, East Coast loops are running near full capacity, and West Coast loops are expected to run full through the middle of November.

What can shippers expect next? It’s likely the market will continue to see elevated freight rate levels and stressed space demand through November, driven, at least in part, by the tariffs. Shippers will need to weigh whether to ramp up their shipping early, pay higher spot rates during their preferred shipping times, or hold out until after Chinese New Year, to see if anything has changed by then tariff-wise.

Meanwhile, some shippers are also thinking about changing their suppliers from China to countries where tariffs don’t apply. But it takes time to find new suppliers who can meet product specifications and provide the volumes a shipper might need. And some materials can only be sourced from China.

In addition, companies might consider shifting manufacturing locations to avoid tariffs. Some have already been able to import from Thailand, Vietnam, and India instead of China. But shifting is not an option for everyone. It can take years to bring new manufacturing facilities online, and to ensure those locations will have the infrastructure to support their business’ shipping activities.

Fitting Compliance Into the Overall Strategy

As activity on the transpacific eastbound shows, there’s never been a better time for shippers to do careful cost analyses of various scenarios in their supply chains. Within this reevaluation, companies should not neglect the compliance component of their strategy. Certain steps can and sometimes should be done as the trade war continues to play out. Here are a few ideas to consider:

1. Customs bond sufficiency. If you import to the U.S., you must have a customs bond equal to 10 percent of the duties and taxes you expect to pay to U.S. Customs and Border Protection (CBP) for transactions throughout the year. Since tariffs (and duties) are increasing substantially, many bonds are no longer sufficient to meet that requirement. Now is the time to consider the increased duty amounts, well before the bond renewal period comes up. Before issuing a higher bond, surety companies may require financial statements, letters of credit, or other documentation. All of these take time to obtain, and customs can shut down all imports if they discover a company’s customs bond is insufficient.
2. Duty drawback programs. Duty drawback programs were available to importers in pre-tariff years. Under these programs, importers can obtain a refund up to 99 percent of certain import duties, taxes, and fees for goods that are subsequently exported. When duties were only 1-2 percent, many companies didn’t bother filing the paperwork to get the refunds. But now, duties of up to 25 percent can make these programs a game-changer for some business. (It’s important to know that the company must pay the duties up front, then wait for one to two years to receive the refund under the current drawback environment. This can be a cash flow issue for some.)
3. Free trade zones. Unlike duty drawback, companies don’t have to pay duties when their goods enter an FTZ. They are secure areas in or near CBP ports of entry that are under CBP supervision, and they enable duty deferment. That is, the company pays duties at the rate of either the original foreign materials or the finished product when the goods enter CBP territory for domestic consumption.
4. Exclusion requests. In certain cases, companies can request that their products be excluded from U.S. tariffs. The deadline for submission of List 1 exclusions has passed, but there is still time to file exclusion requests for List 2 before the December 18 deadline. When filing an exclusion, be sure to use the best classification for the product. Also, have a trade attorney help navigate the law and apply it to the product so the exclusion isn’t rejected on a technicality.

The real takeaway about tariffs is that they will impact products and supply chains in different ways. In unsettled times, consulting an expert in customs is a must. It takes a customs expert to know that a t-shirt company will pay a big difference in duties for t-shirts that are 55-percent cotton/45-percent polyester vs. those that are 45-percent cotton/55-percent polyester. By discussing the impact of tariffs on specific products, organizations can make more informed decisions that will be least disruptive on the business.

Of course, not all of these ideas or options will fit or resonate with every business. It takes a trade attorney or trusted expert in customs compliance to explain the options and help businesses minimize your exposure and risk.

Ben Bidwell is director of U.S. Customs for C.H. Robinson.