Create Order Out of Chaos: How to Beat Tariffs’ Disruptive Effects on Your Supply Chain

Deal or No Deal?

 As of October 2019, containerized exports to the U.S. declined by 21.5%, while exports from SE Asia increased 11.8%. That represents a net decline of 9.7% in exports from China and the rest of SE Asia.

 A few weeks ago, President Trump issued another warning further ratcheting up the pressure on the Chinese to negotiate in good faith. Specifically, the President stated he would increase tariffs by 10 percent on another $300 billion of Chinese goods to start on September 1, 2019. That’s on top of a 25% tariff on $250 billion of Chinese imports.

 On November 7, 2019, the Chinese Commerce Ministry reported that China and the U.S. had agreed to roll back their tariffs. Markets responded as expected and the Dow rose almost 200 points.

 On November 8, 2019, Reuters reported President Trump stated he “… had not agreed to roll back tariffs but that Beijing would like him to do so”. 

 So, the question is will there be a deal or not? If you’re a logistics service provider, waiting for negotiators to reach common ground isn’t a viable strategy.

 You don't have to sit idly by and hope for a positive outcome.

 And hope is not a strategy. So, what can you do? 

 Here are five ways you can beat tariffs’ negative effects of on your supply chain.

 #1 Business Process Re-engineering: Achieving Efficiency and Effectiveness

 To improve response times, you’re looking to improve efficiency. To optimize your response times, look at your entire service offerings holistically. Additionally, you ought to look at organizing business processes that you can perform in parallel rather than serially.  

 Then you can prioritize them to begin improving response rates on only those processes that need improvement. 

 In reviewing your business processes, you should also aim to simplify complex business processes. Also, you should eliminate business processes that do not add value to your bottom line. This further streamlines your business processes from billing to contract management to compliance matters.

 Finally, and most important, focus your re-engineering efforts on creating a customer-facing supply chain. Focus on processes not functions - customer-focused companies and are more able to respond rapidly to changing requirements.

 All of these will help improve your efficiency and effectiveness. But it not just about efficiency and effectiveness.

 #2 Tariff Engineering: Harmonized Tariff Schedule (HTS) and Changing Tariff Classifications That Impact Your Bottom Line

 In the current market environment, logistics service providers must pay attention to tariff classifications. When a vendor produces parts in one country but finishes or transforms them in another country, the product code changes from one HTS code to another. 

 To stay on top of these changes, it pays to have experienced and qualified customs specialists who are conversant with the latest import regulations.

 One benefit customs specialists provide comes in the way of Drawbacks of 301 duties. With the increase in tariffs, more imports are eligible for a refund in duties, taxes and fees paid on products. And with duties at 25% it makes more sense to purse these drawbacks than when duties were at 3%.

 Besides that, businesses can benefit from an underutilized Tariff remedy known as Section 301 Exclusions. One benefit allows shippers to apply to have their goods enter the country duty-free.  

 Deep knowledge of current import regulations can help reduce cost and increase profits.

 #3 HTS 9802 Exemptions: Another Available and Potentially Profitable Remedy

 This remedy pertains to an item’s components sourced and manufactured in the U.S. and exported abroad where it is assembled with no further fabrication.

 Once the item returns to US, the importer can obtain a tariff exemption. Some examples where exclusions apply are welding, soldering, riveting, gluing, fastening and laminating. 

 Be aware, however, Section 301, substantially reduces the opportunities for exploiting HTS 9802 exemptions. Nonetheless, in August 2019, the US Trade Representative announced a list of products and procedures for exclusion.

 As you can see, paying attention to the details can result in significant rewards. Let’s look at another potentially sizable benefit called the First Sale Rule.

#4 Use of the First Sale Rule to Minimize the Impact of Tariffs

 According to the U.S. international Trade commission “… the First Sale rule allows importers, in certain circumstances, to use the price paid in the “first or earlier sale” as the basis for the customs value of the goods rather than the price the importer ultimately paid for the goods”.

Let’s clarify that with an example. 

 A foreign manufacturer sells item for $10K to another foreign company, then a US importer buys the item for $15K. The U.S. the importer pays the tariff based on the original $10K sale price instead of the $15K it paid for the product.

 The bottom line is the First Sale Rule can lower the duties importers pay. 

Expert knowledge in customs and trade regulations can make the difference between profit and loss in uncertain times. Although most of these solutions are technical, here’s a management tool you can employ to help mitigate tariffs’ impacts on your bottom line.

  #5 When Times Are Uncertain - Measure What’s Important to Reduce Costs and Increase Profits

 You’ve heard the adage, “What gets measured gets done.” That’s why performance management should be a mainstay of your business. However, in today’s volatile markets, performance management is essential.    

 Earlier I mentioned the need to achieve efficiency and effectiveness. Now I’ll elaborate on that here.

 You see, how you measure your business processes is just as important as what you measure.

 Efficiency and effectiveness have been a staple of sound supply chain management (SCM). Today, those principles are changing. 

 In the recent past, shippers focused on efficiency – reducing costs. Today, the priority has shifted to emphasizing effectiveness – adding customer value.

 This may seem counter-intuitive. However, this subtle change can impact your business considerably. As a result, your metrics ought to reflect this shift in emphasis towards effectiveness.  

Cost is important, but in today's’ uncertain market environment, agility and flexibility prevail.

 Beyond Tariffs’ Disruptive Effects

 Whether the next round of tariffs kick in … or not… is unpredictable. Whether the China and the U.S. roll back tariffs is also out of your control.

What is under your control is how you decide to approach uncertainty.

You can choose to do nothing and react, or you can take a proactive approach and influence what comes next. 

Taking a proactive approach can make the difference between success and failure. 

At Terra Worldwide, we connect the dots. Our team will help you create order out of chaos by optimizing your supply chain and your bottom line. 

Contact us at Terra Worldwide to find out how you can gain an edge over your competitors in today’s uncertain and competitive market.