NCDA.COM 19 Tariffs have long been used to regulate trade, and companies naturally seek ways to reduce costs. One legitimate strategy is known as “tariff engineering,” which involves designing or configuring a product to qualify for a lower tariff rate under customs classifications. For example, a company might ship unassembled bicycle parts to the United States and perform the final assembly domestically, allowing the import to qualify as “parts” rather than a complete bicycle, thereby paying a lower duty rate. While such planning is legal when done transparently and in compliance with customs regulations, improper execution, such as disguising the true nature of goods, can lead to severe penalties, as seen in Ford Motor Company’s recent case. At a time when trade policy shifts so quickly, engineering fixes aren’t the only tools in play; policy workarounds also operate alongside design choices, and both can materially affect costs and risk. HOW TARIFFS WORK Importers pay tariffs to U.S. Customs and Border Protection (CBP) upon entry into the United States. Tariffs are based on three factors: • Classification: The Harmonized Tariff Schedule (HTSUS) assigns tariff rates based on product type. • Country of Origin: Determined by where the product was made or substantially transformed. • Valuation: Used to calculate applicable duties and fees. WHAT IS TARIFF ENGINEERING? Tariff engineering involves altering a product’s design to fit a classification with lower tariffs. This could mean modifying materials, assembly or components. Courts have upheld that merchandise is classifiable “as imported,” allowing legitimate tariff engineering. However, deceptive modifications meant solely to evade duties may be illegal. Legal Basis Since the Supreme Court decision in Merritt v. Welsh, 104 U.S. 694 (1882), U.S. courts have consistently upheld the principle that importers may lawfully design or modify products to secure lower tariff rates, so long as no fraud or deception is involved. The Court in Merritt recognized that an importer has the right to make goods in such a manner as to avoid the higher duty if this can be done honestly. Subsequent rulings have reaffirmed that a product’s tariff classification is determined by its condition as imported, not by its intended use or post-importation processing, provided the importer does not misrepresent the goods. Ford Motor Company Case In the case of Ford’s “Transit Connect” case, Ford imported Transit Connect vans with temporary rear seats to classify them as passenger vehicles (2.5% duty) rather than cargo vans (25% duty). CBP viewed this as a scheme to conceal the vehicles’ true commercial purpose and reclassified them as cargo vans. The Court of International Trade upheld Ford’s position under the doctrine of tariff engineering, which allows lawful structuring of imports to obtain favorable duty treatment. The Federal Circuit reversed, emphasizing the vehicles’ intended use as cargo vans. Ford ultimately settled for $365 million, illustrating the narrow boundary between legitimate tariff engineering and unlawful evasion. (Ford Motor Co. v. United States, 926 F.3d 741 (Fed. Cir. 2019).) POLICY WORKAROUNDS: BEYOND ENGINEERING Beyond product design, governments are increasingly using policy tools such as quotas, offsets and targeted tariffs to steer automakers’ production and investment decisions. Recent actions in Canada and the United States highlight how trade incentives and penalties now complement traditional tariff engineering. Canada Tightens Remission Quotas After Production Shifts Ottawa curtailed tariff-free “remission” quotas that let automakers import a set number of U.S.-assembled vehicles duty-free into Canada, cutting Stellantis’s quota by 50% and GM’s by 24% after both firms announced pullbacks in Ontario. The move enforces prior job and investment commitments tied to the exemptions and signals that policy relief can be revoked if production migrates. U.S. Extends the Auto Parts “Offset” Program The White House has extended the tariff offset mechanism from a two-year rampdown to a five-year window (through 2030), allowing Tariff Engineering Legal Maneuver or Illegal Evasion? By Scali Rasmussen, with contributions from Halbert Rasmussen, Shareholder, and Eric P. Weiss, Principal
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