Donald Trump’s decision to impose different tariff rates on countries around the world has created huge uncertainty for companies exporting goods to the US — and, in theory, an opportunity to take advantage of the varying levels.
However, trade experts warn that rejigging supply chains to exploit those differences would be highly complex and subject to how an unpredictable US administration decided to enforce its new trade rules.
In a trading environment upended by tariffs, companies will be seeking ways to reduce the burden.
Exactly how they do so will depend on their own ability to reorder supply chains and gather the data needed to play a system whose rules are still being built.
What are ‘rules of origin’ and why do they matter?
Rules of origin are detailed regulations on how companies must show where not only a product but also its component parts come from. Exporters will need to demonstrate which country an item comes from to determine what tariff it should attract.
Now that tariffs vary so sharply from one country to another under Trump’s system, proving that your goods come from a lower-tariff country could result in significant savings at the US border.
Rules of origin come into play within bilateral trade deals — where they are known as “preferential” rules of origin — but also outside them, where they are used in applying anti-dumping duties, sanctions and quotas, among other trade rules.
The latter “non-preferential” rules will be used to determine what tariffs products incur under Trump’s new rates, many of which come into effect on Wednesday.
How will Trump’s new tariff policies work in practice?
That is a question to which traders are still seeking answers.
The US Customs and Border Protection, the US federal agency that enforces trade regulations, has published some initial guidance on how the new tariffs will be implemented.
It says exporters will need to break down the contents of the articles they are exporting, differentiating between US inputs — which enter tariff-free — and non-US inputs, which must pay the new tariffs at a rate that depends on where the goods were manufactured.
Beyond US and non-US inputs, though, tariff rates are not broken down by the proportion of a product that comes from different countries, but determined by the final country of manufacture.
However Anna Jerzewska, founder of Trade and Borders consultancy, said that unlike in a bilateral trade deal — when the rules are explicitly set out as part of the agreement — for the so-called non-preferential rules of origin used outside such deals, the details were much less clear.
“With these non-preferential rules of origin it is much less certain and US Customs determine[s] it based on its own interpretation,” she said.
How might companies take advantage of Trump’s new tariffs?
Companies that can shift their supply chains to enable them to export from countries with lower tariffs should, in theory, be able to exploit the system, said Sam Lowe, trade policy lead at consultancy Flint Global.
To take advantage of a lower-tariff country, the final product must undergo “substantial transformation” in that country so the final product had a “use different from that possessed by the article prior to processing”.
A company that imports raw vegetables and cuts, freezes and packs them would not meet the threshold, according to US rules.
But a company that imported butter, flour and milk to make a cookie or cake would, with the final product treated as coming from the country where it was prepared.
In theory, a cheese maker in the Republic of Ireland — which as part of the EU is subject to a 20 per cent tariff — could shift production to Northern Ireland in order to export the product to the US under the lower, 10 per cent tariff handed to the UK.
“Given milk is often sourced on an all-Ireland basis there is already some ambiguity about where it is from, but in practice whether that works will depend a lot on how US customs authorities decide to interpret the rules if it believes companies are trying to do workarounds,” added Lowe.
How much will companies try to exploit tariff differences?
Trade experts say this is hard to predict, but warn that many companies may simply prefer to pay the tariffs rather than endure the cost and complexity of working out how much of their content is US and non-US.
This is despite the heavy potential burden of the tariffs, which have sent global markets plunging.
Proving the origin of entirely non-US goods is not simple either. Lawrence Friedman, customs lawyer and a partner at Chicago law firm Barnes, Richardson & Colburn LLP, said determining that a product had been sufficiently “transformed” to qualify for a particular country’s tariff was subject to uncertainty.
“It’s not a difficult process in itself, but it is subject to some subjectivity and vagaries. Someone can make an informed declaration of origin that customs just disagrees with,” he said.
“A decision can turn on which component makes the ‘essence’ of a finished good, but ‘essence’ is a slippery term.”
Some companies — particularly those used to trading under a bilateral trade deal, with systems set up to deal with “rules of origin” — might be better placed than others, said George Riddell, managing director of the Goyder trade consultancy.
“It depends on how good their supply chain software is and if that data has been updated with real-time data,” he said.
In practice, he said, many companies — including large multinationals — failed to update rules-of-origin certificates. “Rectification and updating is time consuming and costly,” he added.
Given the Trump administration’s unpredictability, many companies were likely to wait and see, added Jerzewska of Trade and Borders.
“Putting new processes to monitor non-US content in place is expensive. Given the volatility, companies will be asking: ‘How certain are we that the reciprocal punitive tariffs will stay in place long enough for that investment to pay off?’”
What are the risks of trying to game the new system?
The risks are significant. Shifting production to new countries to take advantage of a lower tariff can take several years, but Trump has made clear he reserves the right to increase or decrease tariffs on countries depending on their behaviour.
Since taking office in January he has introduced and postponed a series of tariffs on different countries and products, and on Thursday said he would impose 50 per cent tariffs on China to punish Beijing for its own retaliation to levies of 34 per cent and 20 per cent that Washington had already announced.
“There’s no guarantee that, by the time you switch production, that country hasn’t done something to upset Trump, who then puts the tariff up,” Jerzewska added.
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The risk is also the political in an environment in which the US, EU and China may be locked into a global trade war.
In that scenario, added Riddell, the risk was the US authorities take a punitive approach to any measures to circumvent tariffs.
He cited the example of US motorcycle manufacturer Harley-Davidson shifting its production to Thailand to avoid retaliatory tariffs that Brussels imposed during the first Trump administration. The EU ruled that duties still applied because the relocation had aimed to avoid tariffs.
“US law as it stands right now would not allow that kind of retaliation, but it is not impossible to imagine the US going down the same kind of route in the event of a full-blown trade war,” he said.
Infographic by Alan Smith
