In this second installment of our four-part trade series, we consider strategies importers may adopt for addressing anticipated tariffs imposed under the Trump-Vance administration.
As we draw closer to President-elect Donald Trump’s inauguration, imposition of tariffs remains top of mind. In this second LawFlash in our series on the Trump-Vance administration’s anticipated trade strategy, we discuss possible strategies for importers to mitigate or challenge new tariffs. In our January 7, 2025 webinar, we discuss anticipated trade actions under the Trump-Vance administration and importers’ tools for addressing those actions.
The third piece in our series will help importers understand how tariffs are imposed and calculated, and the fourth segment will provide an overview of enforcement risks for getting it wrong. Each subsequent LawFlash will also be accompanied by a webinar, and our lawyers are available to discuss any of these concerns in more detail.
When a shipment arrives at a port in the United States, the importer of record, generally through a licensed customs broker, files entry documents relating to the goods with Customs and Border Protection (CBP). The “importer of record” is the owner or purchaser of imported merchandise or a licensed customs broker that has been appointed by the owner, purchaser, or consignee (19 USC § 1484). An owner or purchaser is someone who has a financial interest in the transaction (actual owner or purchaser, selling agent, consignor, lessee, etc.), rather than a nominal interest (for instance, as a related party to the transaction).
Tariffs are largely imposed based on the classification, origin, and valuation of imported merchandise. We cover these data elements briefly below, and will delve into them more deeply in our next installment.
Classification of merchandise imported into the United States is determined according to the Harmonized Tariff Schedule of the United States (HTSUS), which is based on the international Harmonized Tariff System. The HTSUS is a complete product classification system, meaning that it covers all imported merchandise. The HTSUS consists of 96 chapters grouped into 21 sections. It is broken down by headings, subheadings, and statistical breakouts, and classification appears in the format 1234.56.7890. Chapter 77 is reserved for future use, and chapters 98 and 99 are reserved for national use by individual countries in the coding of provisions other than according to the Harmonized System, e.g., for special tariff programs and temporary duty suspensions or increases.
Valuation at the time of importation serves as the basis for assessment of applicable duties, taxes, and fees on imported merchandise. There are several methods of valuation, all of which are designed to determine the “commercial reality” of the transaction.
The country of origin determines the goods’ eligibility for trade programs and treaties and is generally considered the country of manufacture, production, or growth of an article. Rules of origin are then applied to determine if goods are eligible for duty-free or reduced duties even though they may contain non-originating components. There are two basic types of rules of origin: preferential and non-preferential. While preferential rules apply to determine eligibility of merchandise under trade agreements or special legislation, non-preferential rules of origin generally apply in the absence of trade agreements.
The country of origin of merchandise is not necessarily the country from which the goods are shipped (the country of export). In the United States, non-preferential rules of origin employ the “wholly obtained” criterion for goods that are wholly the growth, product, or manufacture of a particular country. For goods that consist of materials from more than one country, the rules employ the “substantial transformation” criterion, which is typically based on a change in name, character, and use—meaning an article is considered a product of the country in which it has been substantially transformed into a new and different article of commerce with a name, character, and use distinct from that of the article(s) from which it was so transformed.
With an understanding of the measures that the Trump-Vance administration is likely to utilize to impose new or increased tariffs as discussed in our first LawFlash in this series, we turn to possible tools importers can use to address tariffs.
Tariff Engineering
Duties are imposed on imported merchandise in their condition as entered, so adjusting the condition upon importation can impact the classification and associated duty rate for that merchandise. Importers can explore reclassifying goods under different HTSUS codes if alternative classifications align with the goods’ composition or functionality. Adjusting the product’s design or composition at the manufacturing stage can also change its classification to a category with lower tariffs. This is known as tariff engineering, and it is a legitimate strategy for importers to lower their import duty obligations. For instance, components or subassemblies may be subject to a completely different duty rate than the finished product, or vice versa.
Tariff engineering is not tariff evasion. It involves understanding how import duties are imposed based on design, production, and importation of merchandise to legitimately take advantage of lower duty rates. It may involve evaluation of materials used, chemical combinations, construction of the product, fiber content, and other considerations.
It is critical, though, that importers engage in legitimate design or manufacture adjustments and maintain thorough documentation, as recent settlements highlight that this strategy is subject to scrutiny. Inclusion of modifications that amount to artifice, disguise, or a fictitious product may negate any duty benefits.
In March 2024, a US company agreed to pay $365 million to settle allegations that imported cargo vans included sham rear seats and temporary features to take advantage of a 2.5% duty rate on passenger vehicles rather than a 25% duty on cargo vans. The seats and temporary features were immediately removed upon importation. CBP determined that the features were not legitimate modifications to the imported merchandise and the company could not alter the classification and applicable duty rate.
To ensure that tariff engineering is legitimate, importers should know their products, examine relevant interpretations, and ensure they are following appropriate compliance processes. Knowing your product involves understanding product design, material composition, supply chain and sourcing, and design and manufacturing. Once an importer understands their product, they can assess the HTSUS, Explanatory Notes published by the World Customs Organization, published CBP rulings, and other guidance from CBP including Informed Compliance Publications. We will focus on these and other strategies in our third installment of this series.
Customs Valuation Planning
Where goods are sold more than once before they are imported (e.g., in sales involving middlemen), the first sale rule allows an earlier sale to be used in declaring customs value if that sale can be documented as a sale for exportation to the United States and the importer meets all other US customs requirements. Because the value attributable to earlier sales may be lower than that assigned to later sales, use of the first sale rule can lower the duties paid by importers.
CBP operates under the presumption that the transaction value is the price paid by the importer. However, an importer can establish that the “first sale” price is acceptable under existing standards. To import goods under first sale, three primary requirements must be met:
Whether merchandise is clearly destined for export to the United States is a case-by-case determination considering whether, at the time the middleman purchased or contracted to purchase the merchandise, the only possible destination for the merchandise was the United States—in other words, whether the imported merchandise was “irrevocably destined” for the United States.
To establish that merchandise is clearly destined for exportation to the United States in a multitiered transaction, there must be a complete paper trail relating to the imported merchandise that shows the structure of the entire multitiered transaction. This would include invoices, sales contracts, purchase orders, proof of payment, shipping contracts, or other documentation for each individual transaction involved in the multitiered transaction with consistent prices, dates, parties, and merchandise.
Other evidence would include manufacture, design, and other unique specifications or characteristics of the merchandise (often manifest in samples) made in conformity with the US buyer's or importer’s standards; labels, logos, stock numbers, barcodes, and other unique marks; and markings, visas, warranties, or other types of certification or characteristics required for the entry into and sale or operation of the imported merchandise in the United States. This evidence must show that the only possible destination for the imported merchandise was the United States at the time the middleman purchased or contracted to purchase the merchandise from the foreign manufacturer.
CBP recognizes that property is “sold” when there is a transfer of title from one party to another for consideration. In determining whether property or ownership has been transferred, CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. Contracts, distribution and other agreements, invoices, purchase orders, bills of lading, proof of payment, correspondence between the parties, and company reports all may serve as evidence that a party possesses title in and assumes the risk of loss for the imported merchandise and functions as a buyer or a seller.
CBP may examine whether the purported buyer paid for the goods. Evidence that would establish the passing of consideration includes evidence of payment by check, bank transfer, or payment by any other commercially acceptable manner. It also is necessary to demonstrate that payment was made for the imported merchandise in question. General transfers of money from one corporate entity to another that cannot be linked to a specific import transaction are not sufficient to show passage of consideration between the parties with respect to that import transaction.
Other factors that CBP considers in determining whether a bona fide sale occurred include whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties were functioning as buyer and seller. Specifically, CBP considers whether the buyer provided or could provide instructions to the seller, was free to sell the transferred item at any price it desired, selected or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory. While several factors may indicate that a bona fide sale occurred between the purported buyer and seller, no single factor is determinative.
Whenever there is a purported series of sales, and the same terms of sale are used in both transactions, there is a concern that the middleman obtains risk of loss and title only momentarily or never at all, and thus has nothing to sell to the ultimate purchaser. In such situations, the middleman may be a buying or selling agent rather than an independent buyer/seller, and the sale will be the one between the middleman and the US purchaser.
To the extent that an importer is using a middleman for foreign purchases, it would benefit from conducting a first sale analysis to see if that lower value may be used for US customs purposes.
Foreign Trade Zones
Foreign-trade zones (FTZs) are secure areas that are under CBP supervision but outside the customs territory of the United States. Foreign and domestic merchandise may be moved into zones for operations including storage, exhibition, assembly, manufacturing, and processing. The usual and formal CBP entry procedures and associated duty payments are not required on foreign merchandise entering an FTZ unless and until that merchandise is entered into the United States for consumption. At that point, the importer generally has the option of paying duties on the original foreign merchandise entered into the zone or the merchandise as withdrawn from the zone, depending on the status of the merchandise as held in the FTZ. Most FTZs are public use spaces, while subzones are private plant sites authorized by the US Foreign-Trade Zones Board for operations that cannot be accommodated within an existing general-purpose zone.
One of the biggest benefits of an FTZ is the deferral of duty and federal excise tax payments, which are due only when the merchandise is withdrawn for consumption. There may also be inverted tariff benefits, meaning that where production within a zone results in a finished product with a lower duty rate than those rates imposed on the foreign inputs or components, the finished product may be entered at that lower duty rate, provided there is prior authorization. Merchandise in an FTZ may be assembled, exhibited, cleaned, manipulated, manufactured, mixed, processed, relabeled, repackaged, repaired, salvaged, sampled, stored, tested, displayed, or destroyed. Production activity that would result in the substantial transformation of a foreign article or change in CBP classification must be specifically authorized by the FTZ Board.
Classification of merchandise, and the associated duty rate, is based on the status of the merchandise when withdrawn for consumption. Privileged foreign (PF) merchandise is classified according to its character, condition, and quantity at the time of admission to the zone. Nonprivileged foreign (NPF) merchandise is subject to classification when that merchandise is constructively transferred at the time of entry.
Both PF and NPF status merchandise are valued according to the price actually paid or payable for the merchandise, plus any required statutory additions (e.g., assists, commissions, royalties). If items are combined in an FTZ, the value of the merchandise is the sum of the status of the materials used in the manipulation or manufacture of the entered merchandise.
Understanding your supply chain and the origin of the components needed to manufacture any product in an FTZ will be critical in understanding whether you can take advantage of an FTZ’s benefits. There are some duties that use of an FTZ cannot eliminate, regardless of whether a substantial transformation occurs. For any articles that are entered in PF status, the classification and duty rates are determined as of the date of admission to the zone rather than the date of entry for consumption.
This is the case for any product covered by Section 301 (other than products eligible for domestic status) per the US Trade Representative (USTR)’s Federal Register Notice published August 20, 2019 (84 Fed. Reg. 43304). PF status inputs must be listed separately on entry documentation, meaning that Section 301 duties would be paid on those inputs even in the admission of manufactured NPF or domestic status merchandise.
Notably, imports that have been granted an exclusion are not subject to this notice. To the extent that any exclusions are reinstated, the products could be entered as NPF status and manipulated or manufactured within the zone to change the classification and origin of the merchandise and potentially eliminate Section 301 duties on imported goods.
Specific Contractual Provisions
Parties are increasingly using detailed contractual provisions to specifically allocate the risks of importation and new tariff events that may impact duties imposed on imported merchandise. While some parties may attempt to use force majeure clauses to modify or terminate an agreement, these clauses often do not pertain to tariff increases or fluctuations as they are intended to guard against natural and unavoidable disasters.
Parties are much more aware of the ramifications of choosing Incoterms or a specifically designated importer of record for purposes of tariff responsibilities. It is often not worth the risk to buyers when the trade-off of lower product pricing is increased import risks. Depending on the expected tariff implications for certain industries and the varied fronts from which certain merchandise may be impacted, seller-manufacturers are taking on import risks and responsibilities in their bids or proposals as a benefit to buyers.
To address unexpected tariffs and duties that may affect imported merchandise, buyers and sellers can negotiate provisions to allocate the risk of price increases, quotas, trade remedies (antidumping and countervailing duties), and other price fluctuations. Many sellers now include, and buyers expect, known or anticipated tariff actions to be accounted for in proposals and prices offered. What about tariffs or duty adjustments that are imposed during the course of the agreement and before merchandise is imported to the United States? There are a few ways to account for such increases (or decreases in the event an exclusion is obtained).
One method involves including a price adjustment or escalation clause in which a buyer agrees to a change in the price based on specified increases to the seller’s price. The seller would need to provide evidence of the amount of and reason for the cost increase. Parties can determine an agreed upon percentage or dollar amount increase that will be allocated as agreed. The parties can also agree to terminate if the price increase exceeds a certain threshold that would result in significant financial hardship if performance were required. Tariffs can be included in a general escalator provision, or they may be addressed separately.
Where a seller is acting as importer of record, it will feel the direct implications of increased tariffs. It may then push for specified risk-sharing provisions. Buyers are often willing to negotiate as these provisions allow for more certainty as to unknown or unexpected price fluctuations occurring due to tariffs.
Product Exclusions
We have seen with nearly every imposed tariff regime the opportunity for product, origin, producer, or importer-specific exclusions, and we would expect any new tariff regimes to allow for some sort of exclusion application. Some exclusions or adjustments may occur between the United States and other nations for merchandise of certain origin.
For instance, when Section 232 tariffs were imposed on steel and aluminum, various countries used their existing trade relationships with the United States to negotiate exclusions (at one point, Australia, Canada, and Mexico), tariff rate quotas (the European Union, Japan, and the United Kingdom), or absolute quotas (Argentina, Brazil, and South Korea). For other tariff schemes, exclusions have been available based on product description as guided by HTSUS classification, designated producer, or identified importer or requestor. What system will be available for future tariff actions remains to be seen, though understanding prior systems will be instructive. We will discuss these options in greater detail in our next installment.
Supply Chain Adjustments
Another effective strategy for mitigating tariff impacts is geographic diversification. By shifting production or sourcing to countries with favorable trade agreements or low tariff rates, manufacturers and importers can significantly reduce their exposure to tariff costs. Diversified sourcing not only minimizes tariff-related risks but also builds resilience against other potential disruptions.
For parties working with original equipment manufacturers (OEMs), geographic diversification through OEMs that have a global footprint offers the added flexibility to quickly reallocate production to regions unaffected by new tariffs or trade policy changes. At the same time, evaluating free trade agreements (FTAs) and understanding compliance requirements are critical steps in maximizing the benefit of diversification. Importers need to ensure that country of origin changes align with US customs requirements, as incorrect declarations of country of origin to evade tariffs will be a target for future enforcement.
Another important consideration is staggered timing. Strategic planning around shipment schedules can help businesses avoid higher costs associated with impending tariff hikes. For instance, in response to the USTR’s initiation of a Section 301 investigation into China’s practices related to legacy or mature node semiconductors, affected parties may consider accelerating imports to stockpile essential components ahead of potential tariff hikes. Stockpiling can provide breathing room while assessing production and sourcing changes; however, stockpiling may lead to increased freight, trucking, and warehouse rates. Alternatively, delaying shipments until trade negotiations conclude can offer financial relief and provide greater flexibility in inventory management.
To further ensure steady merchandise flow, onshoring or nearshoring—sourcing or producing goods closer to the target market—is another effective tactic. These strategies not only reduce lead times but also minimize risks of delays caused by customs bottlenecks or logistical challenges. In the context of the “Buy America Preference,” which requires certain materials used in federally funded infrastructure projects to be produced in the United States, onshoring has become an increasingly attractive option. Companies opting for onshoring can benefit from tax incentives for creating local manufacturing jobs and may also qualify as eligible bidders or applicants for government contracts and fund.
Implementing any supply chain adjustments requires a careful assessment of the financial impact, including potential increases in logistics, storage, or labor costs. A thorough cost-benefit analysis ensures that the chosen strategies align with long-term operational objectives and provide value beyond immediate tariff relief. Collaboration with logistics partners, customs brokers, and suppliers is critical to ensure seamless adjustments.
Additionally, and most critically, legal counsel should be part of early discussions to identify how changes to supply chain may, or may not, impact country of origin determinations and tariffs under applicable legal requirements. This coordinated approach helps businesses navigate complex trade environments while maintaining operational efficiency, competitive advantage, and legal compliance.
Litigation
Another potential avenue for importers to address new tariffs is to challenge the tariffs in court. This strategy was used during the first Trump administration (and continuing into the Biden administration) when approximately 6,000 US importers of Chinese goods filed suit in the US Court of International Trade challenging the Lists 3 and 4A tariffs under Section 301 of the Trade Act of 1974, seeking a refund of duties paid. Given the unprecedented volume of suits, the court assigned all cases to a three-judge panel, and created a single “master case,” selected a representative sample of claims to assess their viability, and stayed the remainder of the claims. On April 1, 2022, after 18 months of active litigation and extensive briefing, the CIT issued an opinion on the merits. The court ruled that the USTR acted within its statutory authority when it imposed additional tariffs, but that the agency had violated the Administrative Procedures Act when it did not sufficiently respond to comments from importers.
The case was remanded back to the government to provide more information to support the basis of its imposition of the tariffs. On May 16, 2023, the CIT issued a second opinion finding that despite the alleged flaws in the USTR’s explanation after remand, the 301 tariffs were legally implemented. Plaintiffs promptly filed an appeal and litigation is currently ongoing in the Court of Appeals for the Federal Circuit. If the appeal is ultimately successful, refunds of all Section 301 tariffs paid on List 3 and List 4A goods will potentially become available.
Legal challenges to tariffs offer opportunities and drawbacks. Litigation can drag on for years and be expensive: Four years later, the Section 301 litigation is still ongoing. At the same time, litigation offers relief that is unavailable through other strategies, including the potential to obtain a preliminary injunctive relief, as well as relief that addresses the underlying tariffs as opposed to requiring often expensive changes to an importer’s conduct.
Morgan Lewis has assembled a cross-disciplinary bipartisan team of lawyers who are former government agency officials and regularly represent clients before all federal agencies, including executive agencies (the Departments of Justice and Education, Consumer Financial Protection Bureau, Federal Trade Commission, Equal Employment Opportunity Commission, and US Securities and Exchange Commission), and congressional committees and inquiries. Our team is primed to help clients navigate the post-election landscape by providing executive order analyses and updates on key agency developments and regulations and will develop programming and guidance regarding legal and business developments in the weeks and months to come.
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