How Companies are Avoiding Tariffs

The biggest ever trade war is underway. China and the United States, which are the two largest economies in the world, are at loggerheads. President Trump drew first blood when he imposed duties on steel and aluminum imported from China and many other countries. However, the Chinese government was not far behind either. China unveiled its own set of tariffs which aim to hurt American companies doing business in China.

In the war between nations, multi-national corporations are taking a hit. Their business is getting severely impacted because of these tariffs which have been suddenly unveiled and implemented. Hence, many companies are getting extremely creative in dodging these tariffs. The ability to somehow dodge tariffs provides firms with a competitive advantage which they can use to price their opponents out of the market.

In this article, we will have a closer look at some of the shenanigans that companies are using in order to avoid tariffs.

Moving Supply Chains

The most obvious way to avoid tariffs is to modify the supply chain. The American government is levying tariffs on Chinese made goods, and the Chinese government is doing vice versa. Neither of the governments is levying tariffs on the companies themselves. Hence, if a company were to relocate its production, it could avoid paying tariffs. However, this can only be done if the company is large and has a huge market share in the target country. For instance, Harley Davidson has decided to move part of its production to China. This is because there are enough Harley bikes sold in China to justify this decision. Hence, the big firms can dodge the tariffs by relocating their supply chain, but the small firms are not able to do so. The tariffs, therefore, have the opposite effect. They are hurting small American businesses, and they are moving jobs out of the United States. The problem with changing the supply chain is that it is an expensive and a long drawn process. Building factories take time. Hence, these decisions are only effective in the long run.

Transshipments

Another shenanigan commonly used by companies is to dodge tariffs is a technique called transshipments. This works by disguising the place of origin of the goods. For instance, Chinese goods meant for America will not directly go to America. Instead, these goods will be shipped to a country like Malaysia. America has imposed tariffs on Chinese goods but not on Malaysian goods. Hence, Chinese companies send their shipments to Malaysia. They often have a partner company which is incorporated in Malaysia. This company takes possession of the goods and then forwards them to the United States. When they are received in the United States, they are considered to be Malaysian goods and are not taxed. The American customs department is aware of this workaround. This is the reason why they try and detect these transshipments. There are firms which specialize in transshipments. They often use multiple shipping points to get past the customs and get the goods in the United States without paying the tariff.

Minimal Processing

Some countries like Canada and the European Union do not allow direct transshipments. This is because they are concerned about the future of their relationship with America. In such countries, multinationals resort to minimal processing. This means that the multinational corporations import semi-finished goods from China to Europe. One or two insignificant processes are conducted within Europe. As a result, the final product has a “Made in Europe” tag. This tag enables tariff evasion. This process is slightly different from transshipment because here the goods actually undergo some sort of value addition whereas, in transshipments, only the paperwork was changed.

Trade Zones

There are some geographical areas within the United States where trade zones have been built. These trade zones were built during the Great Depression to shield important industries from the effects of tariffs. If a company’s factory is located within the premises of the trade zone, they are allowed to import products without being affected by the newly imported tariffs. Hence, ever since the tariffs have been imposed, many companies have been queuing up to buy a facility within the trade zone as this will help them to avoid tariffs.

Bonded Warehousing

Bonded warehousing is a technique which can be used to delay the payment of tariffs. The tariffs are still due, but their payment can be delayed. As a part of this technique, the goods are stored in a bonded warehouse specified by the government. The duty does not have to be paid when the goods are imported. Instead, the duty has to be paid when the goods leave the warehouse. Since the goods leave the warehouse only when they are sold, this strategy allows the importer to delay payment of duty.

The bottom line is that even though tariffs are being levied, the underlying objectives of the government are not being achieved. Multi-national corporations are still able to conduct their business unhampered. It is only the smaller businesses which are suffering. The policy, therefore, is a waste of time. It is rewarding dishonest companies which spend time trying to circumvent the law instead of rewarding hardworking and industrious companies.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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