New York
CNN
—
A few months ago, the words “bonded warehouse” and “harmonized system codes” might not have been on the minds of many American business owners. Now they’re in a massive spotlight.
After President Donald Trump slapped a whopping 145% minimum tariff on most goods coming from China, 25% tariffs on cars, auto parts, aluminum and steel and a 10% tariff on almost every country’s imports, US businesses are desperate for ways to lower their import costs.
Two popular — and legal — strategies involve those bonded warehouses to defer tariffs and harmonized system codes to qualify for lower rates.
There are over 5,000 different product classification codes that governments across the globe use when assessing tariffs.
Consumers don’t care whether the imported coat they’re wearing was officially classified as a windbreaker or a raincoat.
But for businesses, that distinction can be the difference between lower and higher tariff rates – and potentially turning a profit or not. And to qualify for the lower rate, all a manufacturer would have to do is tinker with the product’s materials, otherwise known as tariff engineering.
For instance, Converse’s signature All Stars sneakers have a sole that contains felt as opposed to the fully rubber one traditionally seen in sneakers. That may have been a purposeful decision, since foreign-produced shoes with felt bottoms could be considered “house slippers” for the purpose of tariff codes. And house slippers have qualified for significantly lower tariff rates compared to other kinds of footwear in the past. (Nike, the parent company of Converse, didn’t respond to CNN’s request for comment. CNN could not determine the latest tariff rates for sneakers versus house slippers given their respective classification codes.)
Columbia Sportswear has not been shy about its use of tariff engineering. “I have a whole team of people that work … with the designers and developers and merchandisers and with customs, actually, and to ensure that during the design process that we’re considering the impact of tariffs,” Jeff Tooze, the vice president of global customs and trade at Columbia Sportswear told Marketplace in 2019.
Among its uses of tariff engineering: adding small zippered pockets below shirt waistlines to qualify for lower tariff rates, he said.
Even in the current environment, with Trump’s efforts to target tariffs at China and specific sectors, there are still plenty of opportunities for businesses to tariff engineer products, said Erik Smithweiss, a partner at the law firm GDLSK, who specializes in trade compliance.
While there’s little way out of the initial 20% tariff Trump levied on China earlier this year, there are some opportunities to avoid the additional 125% that came into effect last month. That’s because Trump has, in some cases, quietly exempted some products from those tariffs.
“We are working with companies who say, ‘Gee, I really want to be on this list, look at my tariff codes,’” said Smithweiss. “If we think that there is something that can be modified on a product that will change it into one of these exempt codes, we’ll work with them on whether that is a reasonable position to take.”
But just slapping a new code on a product isn’t enough; the product itself has to be different in some way. US Customs and Border Protection agents can examine goods closely, including, for instance, sending fabrics out to labs to see if they meet applicable requirements, Smithweiss told CNN. If it doesn’t, the importer can be subject to a penalty on top of the higher tariff.
The bonded warehouse route takes the opposite approach. Rather than mess with a good’s contents or move production elsewhere, businesses can import products from across the world without paying any tariffs when they enter the US — as long as they remain locked up in a special customs-regulated warehouse.
Businesses can keep goods in these warehouses for up to five years without paying a tariff. They only pay the current tariff rate when they take goods out of storage.
It’s a bet that tariff rates will go down in the short or medium term.
Jennifer Hartry, president of Howard Hartry, a customs broker that rents out bonded warehouses, told CNN’s Julia Vargas Jones that 95% of the inquiries she’s received are for goods coming from China.
Hartry said her family-owned business based by the Port of Los Angeles experienced a stark slowdown in recent years, but, since Trump introduced a slew of aggressive new tariffs, business has been booming.
There’s no limit to the monetary value of the goods stored in bonded warehouses — the only constraint is how much a business can fit in the space they’re renting.
For example, Hartry said the value of her tenants’ goods ranges from $37,000 to half a million dollars. Those goods include lithium batteries, metal rods and electronics such as TVs and treadmills.
Hartry said it’s not lost on her how much of a toll tariffs are taking on businesses. At the same time, she told CNN’s Vargas, “it’s saving our business, which we’re grateful for.
