Three ways companies are getting around tariffs

0:01NPR.

0:11This is The Indicator for Planet Money. I'm Adrian Ma. And I'm Paddy Hirsch. There's a phrase going around the business community right now that has the indicator written all over it. Tariff engineering. God, I love a good buzz term. Yeah, but the engineering we're talking about here is not the engineering that went into Trump's tariffs. Tariff engineering is the way that companies get around these tariffs without breaking the law, of course. That's key. So on today's show, we'll learn the tricks of the tariff dodging trade. We'll find out what's legal, what's not, and we'll hear about the possible silver lining to President Trump's tariff regime.

0:47Ooh, I do love a silver lining. That's all coming up after the break.

0:57This message comes from Vanguard. Capturing value in the bond market is not easy. That's why Vanguard offers a suite of over 80 institutional quality bond funds, actively managed by a 200-person global team of sector specialists, analysts, and traders. They're designed for financial advisors looking to give their clients consistent results year in and year out. See the record at Vanguard.com slash audio. That's Vanguard.com slash audio. All investing is subject to risk. Vanguard Marketing Corporation Distributor. This message comes from Dell Technologies. Your new Dell PC with Intel Core Ultra helps you handle a lot when your holiday to-dos get to be a lot.

1:41Luckily, the Dell PC helps you get it all done. Get yours at dell.com slash holiday. This message comes from Warby Parker. Prescription eyewear that's expertly crafted and unexpectedly affordable. Glasses designed in-house from premium materials starting at just$95, including prescription lenses. Stop by a Warby Parker store near you. Loyal indicator listeners will know this, but for any newcomers, a reminder that President Trump's tariffs fall into roughly two parts. Baseline tariffs, where almost all goods from almost all countries anywhere on the surface of the globe are subject to a flat 10 % tariff.

2:18Sort of like a 10 % cover charge to get into a club. Exactly. And then there's the so-called reciprocal tariffs based on, well, frankly, whatever their president sees fit. And initially, when these tariffs were applied back in early April, it was chaos. This is Izzy Rosenzweig. He's CEO of Portless, which is a logistics company based in Toronto. So the business of getting stuff across the U.S. border is kind of his bread and butter. He says things in tariff world have begun to calm down a bit. Importers are getting a clear sense of how much they're going to have to pay the government in order to bring stuff into the U.S.

2:53Now that there is more direction that we're going to work within a framework, that is doable. People can work with that, including by engineering their products in innovative ways. Today, we're going to look at three of those innovations, three types of engineering that companies can do to lower their import tax burdens. So first off, let's talk about tariff engineering. This is where you can tweak the components of a product that you're importing to try and get a lower tariff rate. Real life example of our brands was a sweatshirt. This sweatshirt used to have a blend of materials that made the sweatshirt fall under a high classification, 22 % base tariffs.

3:29And then And that brand changed the blend more towards cotton, which brought it down to about 12 % base tariffs. Of course, changing the makeup of a product isn't cost-free. You have to source the materials, maybe change the manufacturing process. You've got to have real volume. 100%. Now, if your cost of good is$20, that's$2 per order. You do$1 ,000 a day, that's$2 ,000 a day. That's$60 ,000 a month. When there's enough savings, it's worth taking the time to do it. Now, importers have been using this type of tariff engineering to cut their import costs for years. But it's actually become less useful under the Trump tariff regime.

4:06Lenny Feldman is an attorney at the law firm Sandler, Travis & Rosenberg, and he's also a former senior attorney for Customs and Border Protection. So Lenny really knows his tariffs. Tariff engineering has been interesting. But now that we have reciprocal tariffs in place, the classification is in some respects less relevant. Because regardless of where you classify your merchandise, you're still going to be faced with right now 50 % from India, 50 % from Brazil, 10, 20, 30 % from other countries. Importers are now coming to Lenny for advice on our second method of engineering, product engineering.

4:39Product engineering, as the name indicates, is to enable the importer to declare a different country of origin. So remember, tariff engineering focused on what your goods are made of. product engineering focuses on where your goods are made. That where is actually not as simple to determine as it may sound. In these days of global supply chains, a product might have components sourced from two or three countries and might be assembled in a fourth. So in that case, what's the country of origin? To illustrate, Izzy says, imagine a blender. You can have the entire blender made in China, other than the razor or the slicer of the blender itself.

5:22And let's say that's made in Japan. Well, even though a blender is very big, let's say it's a foot tall, seven inches wide, and the blade itself is tiny because the most important part of that blender is the blade. And that blade was made in Japan. Country of Oregon is legally Japan. This really feels like one of those eye of the beholder inkblot tests. It's customs Rorschach. And this concept of country of origin is becoming a big deal for importers who are looking to cut their costs right now. If they can make the most important part of the product in a country with a lower tariff rate, they can save a lot of money.

5:57Yeah, Lenny says he's getting a lot of calls from companies that import things from China that have electrical motors in them, like the pump for the fountain on my patio, for example. If the importer can make one core part of that pump motor outside of China, it can make the rest of the pump in China, yet still avoid that eye-watering China tariff. So companies have looked at their production processes and said, well, maybe if we take a portion of that production and we create that laminated core in Mexico, now we have a country of origin, Mexico, which is the prize. Yeah, goods made in Mexico are typically subject to zero tariffs, thanks to the trade agreement between the U.S., Mexico, and Canada, also called the USMCA.

6:40And Izzy says those potential savings are huge if done right. And this creates a temptation for companies to sometimes play it a little fast and loose. It is very easy to make a mistake, very easy like, oh, why don't I just package it in Mexico? Now it's made in Mexico. No, you get in a lot of trouble, you get fined, and they will catch up with you. There's many stories of people being caught doing a fake country of origin, and it's just not worth it. All right, here's a quick recap. Tariff engineering, that's what your product is made of. Product engineering, that's where your product is made.

7:11And now the third kind of engineering, valuation engineering, as in how much is your product worth? Again, a seemingly simple question with a frustratingly not simple answer. So let's say you import men's suits from Hong Kong. You pay a supplier 80 bucks for the suit and U.S. Customs says, okay, the value of the suit's 80 bucks and you have to pay a percentage of that as your tariff. But hold on, you see. The supplier who sold me that suit, well, he didn't actually make it. It was actually made by a tailor in Shenzhen or wherever. The supplier bought it from him for just 50 bucks. And that's how much I should be paying tariffs on the first sale price.

7:50Lenny's firm actually brought a case like this to the Court of International Trade in 1988. They established something called the first sale rule. The court said in that case, you can use that first sale price as opposed to the higher price to the U.S. importer because that's a sale for export, clearly destined to the United States. They're not artificially lowering the price. This first sale rule is pushing a lot of importers to look at exactly how much their products cost to make. in hopes that they can declare cheaper goods and end up paying lower tariffs. That kind of forensic work can be expensive.

8:26Lenny says importers can pay lawyers and accounting firms tens of thousands of dollars. But here's the silver lining we promised you. It could come with all sorts of benefits. It's requiring the importer to look deeper in their supply chain, to know who is that manufacturer that's selling to their vendor, to make sure that they are aware of whether that factory is providing an accurate value. And it also, I think, helps ensure that there's not forced labor in the supply chain as well. Both Lenny and Izzy agree that while tariffs represent a real disruption of global trade, they also present an opportunity.

9:03Yeah, they're forcing companies to examine and overhaul their supply chains in ways that could benefit them in the long term. A lot of companies are becoming savvy and they're finding these opportunities. And I do think, for example, if we see the EU model with a 15%, I think based on some type of supply chain restructuring or reconfiguration or engineering, companies may actually find themselves in as good, if not better, position on some of the tariffs if they handle it properly. Good heavens, Adrian. I don't know how you feel. I just, having told a story about tariffs that ended on an upbeat note, it's making me feel quite dizzy.

9:40Could you pass the smelling salts? We need to ring a bell or something. This episode was produced by Corey Bridges with engineering by Jimmy Keely. It was fact-checked by Sierra Juarez. Cake and Cannon edits the show and the indicators for production of NPR. You know what I'm still thinking about from that blender example? Uh-huh. Is the blade really the most important part of a blender? Well, if you've got no blade, what's the point, right? But then if you don't have a jar to surround the blade, then you just got a spinning blade on a stand. But I could see. You could see yourself kind of doing it.

10:11Like if you dropped that jar on the ground, I could feasibly see a workaround. You know, you get a couple of towels together and maybe like a bowl or something. I feel like you could get around it. But the blade... You just like chuck your fruits at an exposed spinning blade. Yeah. It sounds messy. This message comes from Soladyne. Yesterday's approach to storage can't meet the demands of today's AI ambitions. Bigger, faster, and more energy efficient. And Solid Dime solid-state storage solutions are optimized for AI. Learn more at storageforai.com. This message comes from EasyCater, committed to helping organizations order and manage food for all their business needs with online ordering from favorite restaurants, employee meal programs, and tools to see and control food spend at easycater.com.

11:03This message comes from NPR sponsor Capella University. With Capella's FlexPath learning format, you can set your own deadlines and learn on your schedule. A different future is closer than you think with Capella University. Learn more at capella.edu.