Why this is important to Wisconsin businesses: With recent changes to the U.S.-Mexico-Canada trade agreement, exporters of textile and apparel goods in particular can benefit from reexamining the tariff category requirements.
Tariff amounts are dictated by the Harmonized System (HS) code classification system and are used by customs authorities to identify the duty and tax rates of various products. Under a practice known as tariff engineering that dates back to the late 1800s, companies would change their sourcing process and modify their products to fit within classifications with lower tariff rates as a way to reduce the cost of imported goods. This practice is still in use today, and in fact is an important part of adapting and pricing your company’s products for new export markets. Tariff engineering starts at the beginning of the design process, with consideration of how materials, fiber content, construction, design features and intended use may impact the applicable tariffs. In some cases, a slight tweak to a new or existing product can shift it into a different classification with lower tariff rates.
Two well-known examples of apparel and footwear companies that regularly practice tariff engineering are Converse footwear (a Nike brand) and Columbia sportswear. Converse adds a felt lining on the sole of their sneakers that serves no purpose but to qualify for a lower duty rate of 3%, instead of up to 48% by qualifying within the slipper category. Columbia also reduces costs by designing products to align with specific tariff codes, one example being women’s shirts that have pockets placed below the waistline—qualifying them for a 16% tariff instead of 26.9%.
U.S. exporters to Canada can look to the U.S.-Mexico-Canada trade agreement guidelines for potential tariff engineering opportunities specifically for textile and apparel goods. There are measures designed to encourage the use of North American inputs such as sewing thread, narrow elastics and pocketing fabric. These products must be produced in North America for finished goods to qualify for Tariff Preference Levels (TPL), a provision that allows for duty-free treatment of a specific quantity of non-originating products.
Tariff engineering can be applied to a variety of products, but it’s a complex and detailed process that requires a strong understanding of HS codes. Those looking to apply tariff engineering should consult a customs broker or trade compliance specialist for guidance. Consider a product review and analysis and evaluate if changes can be made to impact tariffs while still ensuring that the cost of manufacturing and materials used, as well as marketing costs, do not outweigh the benefit of tariff reduction. With proper planning, companies can discover and benefit from significant cost savings.