As the trade dispute between the United States and mainland China continues, businesses in the US are beginning to face the harsh reality that the cost efficiencies generated by offshoring production to mainland China are being rapidly negated.

A recent Reuters report, citing a business survey conducted by the American Chamber of Commerce in South China, revealed that about 70 percent of American companies in mainland China are considering relocating production, although only one percent are eyeing reshoring it to the US.

Such numbers are hardly surprising when one considers the breadth of products affected by US tariffs on Chinese imports, not to mention the fact the tariff rate will be increasing from 10 percent to 25 percent on January 1, 2019.

Many of the companies we work with have approached us with questions about how they can mitigate the impact of tariffs. My colleague, David Rish, recently wrote in JOC.com about some of the key actions midsized American firms can take to reduce the impact of the trade war on their business. One of these actions is reviewing and challenging how products are classified.

Without question, US Customs and Border Protection (CBP) will be reviewing imports from Asia with increased scrutiny and carrying out audits on those companies it believes are misclassifying imports. In fact, CBP is planning to increase its auditing staff to pinpoint violations related to the Section 301 tariffs against Chinese imports.

The stakes are high

The tariffs being collected on Chinese imports represent a significant influx of cash into government coffers, hence the heightened vigilance by CBP and the need for importers to approach classification even more scrupulously.

Importers of record must be equally alert to how products are being classified, particularly when working with overseas exporters who may be willfully or unwillfully trying to skirt the system by declaring goods with the wrong country of origin or an incorrect Harmonized Tariff Schedule (HTS) code.

The stakes are far too high to leave this unaddressed. In some cases, companies could see penalties that equal the full value of a shipment, plus retroactive damages that have the potential to triple the customs costs associated with the shipment.

Many large companies, particularly those that deal with customs in multiple jurisdictions with many part numbers or stock keeping units (SKUs), choose to automate the classification and compliance process using trade management software. Automation helps to relieve the time burden associated with classification of multiple products through numerous customs agencies. The trouble is, the automation is only as effective as the cleanliness of the data being put into the software.

That’s where companies tend to fall short. In many cases, companies adopt automation as a means of relieving the burden on personnel. However, the integrity and accuracy of the data is rarely reviewed closely. This increases the chances an error could occur, resulting in audits and penalties.

But the consequences of compliance can be far worse than the associated financial penalties. In some cases, supply chain partners will refuse to work with companies that have a history of noncompliance for fear they will targeted by CBP by association and for fear of losing business due to unethical practices.

Companies that want to automate their classification process and/or ensure their imports are compliant with rules of origin should first work with customs experts to certify the completeness and accuracy of their import data. Just as it is best for a writer not to edit his or her own work for risk of overlooking errors he or she may have made in the first place, it’s ideal for internal compliance personnel at a corporation not to evaluate the accuracy of their own data.

As new trade actions are introduced and the scope of existing ones expand, product classification and trade compliance will become even more complex and demanding than it is already. Getting ahead of the challenge means not only fewer headaches down the road but reducing the risk of costly consequences for noncompliance.

Bernie Hart is vice president, global trade management division, Livingston International.