There is no shortage of red tape facing importers. If you want to get a tariff exemption for an item you are importing, you must demonstrate that there is either insufficient quality or quantity of the item available via a United States source, or that there is a national security need for the imported item. The nature of a national security need generally renders that category nonapplicable. To be eligible under the other category, an importer generally must obtain detailed information regarding the available supply of similar U.S. items, and the importer will have to analyze the quality of similar items as well. An importer’s simple cost comparisons to U.S.-made items will be unlikely to succeed.
In sum, these administrative burdens on the importer add additional costs that are either absorbed or passed along.
(Editor’s note: This is part 2 of a two-part column examining how tariffs may affect your business. See part 1 here.)
Sometimes, the burden can encourage creative workarounds. For instance, one tariff that is dubbed “the chicken tax” levies a 25% import tax on U.S. importers of light trucks, which was enacted in response to foreign tariffs on the export of U.S. chickens. The normal U.S. import tax is 2.5% on most vehicles.
To implement a workaround, companies such as Mercedes build vans – classified as light trucks under the applicable tariff regime – in Germany, then disassemble them, ship the pieces to the United States, then reassemble them here. Another creative tariff workaround resulted in the Subaru Brat. This small truck – think of a miniature El Camino – had rear-facing seats added in back so that it could be classified as a passenger vehicle instead of a truck.
Even domestic companies have gotten into the game. Ford sought a workaround from import taxes on its vans, which are made overseas, by shipping the cargo model to the U.S. with seats and rear windows installed. Here the seats are removed, and the windows replaced with metal panels.
These workarounds are not always successful or practical. For Mercedes, the inefficiency led it to convert part of its U.S. manufacturing facility to make the vans locally. Subaru stopped selling the Brat in the U.S. (though admittedly for reasons that were unrelated to tariffs). And Ford’s ploy to avoid the chicken tax was ultimately a failure, with the U.S. government stating that the vehicle alterations were not enough to exempt them from the higher tax.
If they are so complicated, why use tariffs?
Added together, the additional costs on consumers and the administrative complexity for businesses make import taxes burdensome on the American economy. But tariffs are nevertheless a negotiating tool available to a president as he navigates international trade agreements. The goal of such agreements is to offset the additional costs of import taxes by greater productivity in the U.S., or more profitable exports from the U.S.n
Barret Pinto is a director in the Tax Group at CBIZ & MHM New England, with offices in Providence and Boston.
