Navigating Trump's Tariffs: Creative Strategies for Businesses to Minimize Trade Impact

In 1881, American customs officials intercepted a shipment of sugar, suspecting that its color had been intentionally altered to benefit from lower tariffs. At the time, the duty rate varied based on the sugar’s hue—the darker it was, the lower the tax. Chemical tests confirmed their suspicions, but the U.S. Supreme Court ultimately ruled in favor of the importer, concluding that modifying a product to minimize tariffs was legally permissible.

Today, history seems poised to repeat itself as businesses scramble to navigate the latest wave of tariff threats from Donald Trump. With new levies looming, trade restrictions could become "existential" for companies, warns Edward Steiner of Sandler, Travis & Rosenberg, a law firm specializing in trade law. While Trump aims to push firms to relocate manufacturing to the U.S., the costs of doing so remain prohibitive for many. Instead, businesses are likely to explore more inventive strategies to minimize the impact of tariffs.

The Limits of Old Playbooks

Companies hoping to deploy tactics from Trump’s first term may find their options more limited this time around. In 2019, Apple secured an exemption for some of its iPhone components, but Trump has now pledged "no exceptions." Similarly, shifting production away from China—where Trump has imposed an additional 10% tariff—may not be an effective workaround. If he follows through on his threat of reciprocal tariffs, goods manufactured in alternative locations like Southeast Asia could face similar penalties. "You could move production to Thailand or Malaysia," notes Dave Townsend of Dorsey & Whitney, another law firm, "but you may find yourself having the same conversation about tariffs in 18 months."

Tariff Engineering: A Strategic Approach

One of the most effective strategies businesses can use is tariff engineering, or modifying products to reclassify them under tariff codes with lower rates—much like the sugar importer did in the 19th century. The key lies in the fact that duties can vary significantly even between similar products, creating opportunities for companies to legally adjust their goods to qualify for lower tariffs.

A notable example is Converse, the footwear brand, which redesigned certain models of its Chuck Taylor All Star sneakers over a decade ago. By adding a layer of felt to about half the insole, Converse was able to classify them as slippers, subject to a tariff of around 6%, instead of as standard footwear, which could be taxed at rates as high as 48%. Likewise, Columbia Sportswear has incorporated pockets below the waistline on shirts, T-shirts, and blouses to shift them into a product category with lower tariff rates.

Manipulating Country of Origin Rules

Another form of tariff engineering involves strategic country-of-origin adjustments. Consider Hyundai’s cable harnesses, composed of wires, plastic coverings, and connectors. While most of the production takes place in China, U.S. customs officials classify them as South Korean because the raw materials originate there and final testing and packaging occur in South Korea. By structuring supply chains so that just enough production takes place in a favorable location, companies can sidestep higher duties without completely relocating manufacturing—an approach that also offers flexibility if tariffs change in the future.

Reducing the Tariff Burden

When product modifications or supply chain shifts are not feasible, businesses can still reduce their tariff liabilities through financial strategies. The first-sale rule, established by a 1988 court ruling, allows companies to value goods based on the price charged by the manufacturer rather than the higher prices set by intermediaries. This can significantly lower the taxable amount and, consequently, the total duty paid.

Another strategy is delayed tariff payments. Shipping giant Maersk recently advised its clients to use bonded warehouses, where goods can be stored without incurring duties until they are sold. Additionally, temporary import bonds enable firms to import goods duty-free if they are destined for re-export.

The Future of Tariff Workarounds

While these strategies offer temporary relief, they are not immune to regulatory crackdowns. In 2008, the U.S. Customs and Border Protection agency attempted to eliminate the first-sale rule, though legal opposition successfully kept it intact. If Trump returns to office, he may attempt similar restrictions. However, as one trade lawyer puts it, "People want stuff, and they’ll get it one way or another." Given the high stakes, businesses will continue to find creative ways to adapt—ensuring that tariff engineering remains a vital tool in the years ahead.