MICHEL MARTIN, HOST:
Companies are finding ways to get around the Trump administration's sweeping tariffs. Our colleagues from The Indicator, Adrian Ma and Paddy Hirsch, explain three tricks businesses are using to avoid import taxes.
ADRIAN MA, BYLINE: 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.
IZZY ROSENZWEIG: Real-life example - one of our brands was a sweatshirt.
MA: This is Izzy Rosenzweig. He's CEO of Portless, which is a logistics company based in Toronto.
ROSENZWEIG: This sweatshirt used to have a blend of materials that made the sweatshirt fall under a high classification - 22% base tariffs, and then that brand changed the blend more towards cotton, which brought it down to about 12% base tariffs.
PADDY HIRSCH, BYLINE: Of course, changing the makeup of a product isn't cost-free. You have to source the materials, maybe change the manufacturing process. You got to have real volume.
MA: 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. Lenny 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.
HIRSCH: Importers are now coming to Lenny for advice on our second method of engineering - product engineering.
LENNY FELDMAN: Product engineering, as the name indicates, is to enable the importer to declare a different country of origin.
HIRSCH: So remember, tariff engineering focused on what your goods are made of. Product engineering focuses on where your goods are made.
MA: 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.
ROSENZWEIG: You can have the entire blender made in China, other than the razor or the slicer of the blender itself. And let's say that's made in Japan. Well, even though a blender's very big - let's say it's, you know, a foot tall, 7 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 origin is legally Japan.
MA: 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.
HIRSCH: 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. And now the third kind of engineering, valuation engineering, as in, how much is your product worth?
MA: 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, OK, the value of the suit's 80 bucks, and you have to pay a percentage of that as your tariff.
HIRSCH: 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. Lenny's firm actually brought a case like this to the Court of International Trade in 1988.
MA: Both Lenny and Izzy agree that while tariffs represent a real disruption of global trade, they also present an opportunity.
HIRSCH: Yeah, they're forcing companies to examine and overhaul their supply chains in ways that could benefit them in the long term.
MA: Adrian Ma.
HIRSCH: Paddy Hirsch, NPR News.
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