US tariffs on EU goods: Five strategies for overcoming supply chain uncertainty

US tariffs on EU goods: Five strategies for overcoming supply chain uncertainty

Just as businesses were getting used to the new tariff changes on items imported from China, the United States Trade Representative (USTR) announced the potential for new tariffs on goods from the European Union (EU). Announcements from April and July have many US importers wondering what the changes mean for their import strategies. Amid this uncertainty, I have five strategies to successfully prepare for these and other future tariff changes.

Background: EU provided subsidies to Airbus

First, I’ll provide some background on what triggered the EU tariffs and a summary of the proposed EU tariffs. Per the USTR, the EU illegally subsidized Airbus for approximately 14 years, causing adverse effects to United States industry on large civil aircraft. The United States has challenged those subsidies since 2004, and the case is currently in litigation with the World Trade Organization (WTO).

Because the United States estimates the subsidies caused $11 billion lost in trade each year, they released a preliminary list of products from EU countries that could face additional duties. The USTR is expected to issue a final list of commodities affected once the WTO issues its arbitration findings later this year.

$25 billion of EU goods are potential targets for US tariffs

In April 2019, the USTR posted a preliminary and initial list of EU products that may be assessed additional duties. This initial list included a wide variety of items, including new aircraft and aircraft parts; fresh and frozen seafood; dairy products such as cheese and yogurt; fruits, juices, and jams; olives; wine and liqueurs; yarn and textiles; clothing, purses, and accessories; ceramics; metals; and clocks.

Three months later, the USTR added more products to their initial list. This additional list included items such as meat, more dairy and fruit, pasta, metals, alcohols including whiskey, and cleaning chemicals. The items added affect an additional $4 billion worth of goods.

While the USTR has made their commodity list final, they have not yet announced a percentage for the new tariffs. While between 5 to 10 percent is possible, after seeing 25 percent tariffs applied to China imports — to be increased to 30 percent Oct. 1 — a higher amount is not out of the question.

Trump specifically threatened French wine

In mid-July, the French Senate announced a 3 percent tax on revenue from digital services earned in France. This law applies to companies that have more than €25 million ($28 million) in French revenue and €750 million worldwide. In response, President Donald Trump threatened a specific tax against French wine. The USTR issued a statement regarding this, as well, stating the French digital tax had the purpose of “penalizing particular technology companies for their commercial success.” According to Reuters, in 2018 the United States accounted for nearly a quarter of all French wine exports, equaling €3.2 billion worth of products.

The US and France announced a deal to end the trade spat during the G7 summit in France earlier this week, with France saying it would drop the tax once an international deal on digital taxation is agreed.

The effect of proposed EU tariffs on supply chains

Similar to when the recent China tariffs were announced, many US importers want to find the best strategy to deal with potential tariff increases. Unfortunately, not all of the strategies used for China tariffs will be as effective due to the nature of the commodities the USTR has proposed for the EU, but there are still similar ways to prepare.

The five most promising strategies for compliance

1. Review customs bond sufficiency. Importers must have a customs bond in place to cover import transactions throughout the year. The bond amount is generally 10 percent of the duties and taxes a company expects to pay US Customs and Border Protection (CBP).

Depending on the final tariff percentage, the customs bond may no longer be sufficient and CBP can shut down all imports. Bond insufficiency can negatively affect a company’s ability to conduct business by adding delays and expenses, especially if not addressed in a timely manner.

It’s smart to consider increased duty amounts well before the bond renewal period. Often with significantly higher bonds, surety companies require additional documentation — from financial statements to letters of credit — which can take weeks or more to obtain and/or generate.

2. Consider duty drawback programs. Because duty drawback programs refund 99 percent of certain import duties, taxes, and fees for goods that are subsequently exported, it’s not surprising there has been a spike in the number of duty drawbacks filed since the China tariffs went into effect.

While less applicable for food and similar commodities, certain companies may find duty drawback programs are a game changer — especially if the EU tariffs turn out to be in the 20 percent-plus range.

Keep in mind that with duty drawback, duties are still paid at the time of import. Once a duty drawback claim has been filed (i.e. after export), companies can then wait as long as one to two years to receive the refund. Take this into consideration to avoid potential cash flow problems.

3. Prepare to pay the tariffs. While there may not be a way to avoid paying additional tariffs, how an importer plans to pay for the added costs can make all the difference. While increasing prices to end consumers may be an option, there are other ways to incorporate tariffs into supply chain costs without unduly harming the business.

For example, consider working with the manufacturer or supplier to adjust the cost of the goods to accommodate a portion of the additional tariff. However, any adjustments in pricing must still meet the valuation regulations with CBP. Consider discussing potential changes with a trade attorney or trade policy consultant as there are many factors and variables to consider.

4. Confirm all your import classifications are correct. Don’t be tempted to change the import classification of product(s) simply to circumvent tariffs. It won’t work and is the wrong thing to do. CBP will be watching closely for noncompliance with classifications and penalties can be severe. Additionally, most customs brokers will not, and certainly should not, agree to this strategy.

Instead, now is a perfect time to ensure all products are classified correctly. If an error or adjustment is needed, work closely with a customs broker or consulting service on how to properly make the necessary changes so past filings can be addressed and any potential fines and penalties minimized.

5. Work with an experienced customs broker. Customs regulations are always changing. Ongoing communication and collaboration with a qualified customs broker is the only way to successfully navigate these ongoing changes and adjust strategies as needed.

When looking for a service provider, search for one who believes in a consultative approach and has the scale to offer support around the world. Also look at single providers that offer customs brokerage and trade compliance services, as well as global ocean, air freight, and surface transportation services.

Bottom line: Reevaluate your supply chain to reduce risk and spend

Not all of these strategies for compliance may resonate for every business, and that’s okay. The most important step to take, even before the US tariffs on EU goods are finalized, is to analyze how different tariff percentages could affect specific products, the entire supply chain, and the business at large. Discuss these issues with a trade attorney or customs compliance expert.

Ben Bidwell is director of US Customs for C.H. Robinson.