Tariffs and Procurement – What you should know

Tariffs are real, and they are making a real impact. If you look through most major news outlets you will see them discussed, a lot. Even with all that information out there, a lot of procurement professionals are still looking for an answer to one question, “what can I do about it?”

   

Before I go any farther, I would like to add a caveat: this is not a political post. I am not going to argue for tariffs, or against them. I am not going to pretend to know whether or not they are a short term issue, or a permanent and lasting part of the global economic landscape. 

Back to it. Before you can actually do anything about tariffs, it’s important to have a rough understanding of the nuances between the different tariffs. Here is a quick illustration to help:

Tariff	232	301: List 1	301: List 2	301: List 3	301: List 3 Escalation	301 List 4 Addition
Effective Date	3/23/2018	7/6/2018	8/23/2018	9/24/2018	5/10/19	TBD
Type	Raw Materials	Finished Goods; 25%	Finished Goods; 25%	Finished Goods; 10%	Finished Goods; 25% (Additional 15%)	TBD
Estimated Impact		$34 Billion	$16 Billion	$200 Billion		TBD

The initial 232 tariffs were unique in two ways. First, they were not levied on individual items, but on raw materials- Aluminum and Steel. Second, it impacted more countries then just China. These can be verified by looking at raw commodity markets. If you would like more information on the 232 tariffs, click here.

The more impactful tariffs are the 301 tariff lists. Unlike the 232 tariff, these are all specific to China. These were announced with 3 different lists (so far), and they all apply to finished goods. The first 2 lists came in at the 25% level. Meaning, if a supplier was paying $1.00 to import an item, going forward they would be paying $1.25.

List 3 is different from the first 2 lists in a few ways. First off, it is much bigger. In fact, the amount of goods impacted is substantially larger than the first 2 lists combined. Second, it came in two pieces. Initially, goods on this list were tariffed at a 10% level. More recently, that tariff was escalated to 25%. Third, while the escalation became effective on 5/10/2019, it came with a delay clause. Any goods that were already on the water, were not subject to the tariff.

Finally, there is 301: list 4. This tariff list has not been enacted yet, nor has a date been given. But the US Government has threatened to impose it. The estimated impact is not yet known, but it is expected to exceed that of 301: list 3.

How do you know if an item is tariffed? That’s where Harmonized Tariff Schedule Codes, or HTS codes, come into play. Whenever you import an item, it falls under a very specific HTS code. These 301 tariffs are called lists because that is essentially what they are, a list of HTS codes. If an item’s HTS code is on one of these lists, and it’s coming from China, then it’s being tariffed.

Now, as a responsible procurement professional, how do you handle this? First, you’ve got to take a look at how you are getting your items. Are you buying them on a direct import basis? By this I mean, do you become the owner of the goods as they enter the US and are you responsible for paying the tariffs? If so, here are your options:

• Option 1: Pay the tariff
•  Option 2: Switch to a supplier based outside of China. Many companies are reviewing nearshoring options as a means of cost reduction.
• Option 3: Work with your Chinese supplier to help share the burden of the tariff. Some suppliers are willing to do this, as it lessens the chances of them losing the business. Others, especially those who bid on a strict net/net basis, are probably unable or unwilling to cover any of the tariff costs.

If you are buying from a domestic supplier who is importing the item, things become even murkier. Since you are not the one directly paying the tariff, it’s difficult to judge the exact dollar impact it will have. But from a high level, your options are still more or less the same. Pay the tariff, switch suppliers, or work out a plan for sharing the burden.

Option 3 should be more effective when working with a domestic supplier. First off, there is a lower cost of change as the impact on your international logistics is minimal. Here are a couple other tips to help you in negotiating a burden sharing plan with domestic suppliers:

• Trust, but verify. If a supplier claims that an item is being tariffed, ask for its HTS code. You can do a quick look up here to verify that it is in fact being tariffed.
• Understand what the percentage is based off of. The tariff is not based off the invoice price you pay. It is based off the supplier’s Cost-of-Goods from China. The transportation, overhead, and margin that is included in that invoice price, are not being tariffed. Therefore, increasing the invoice price by the full tariff percentage isn’t entirely fair. If they do apply the full tariff percentage to your invoice cost, they are effectively increasing their margin dollars.
• This type of conversation can be an awkward one to have with a supplier. However, if you want to mitigate your cost impact from tariffs, it’s one you’ll need to have.

There is a lot going on in this crazy world of ours. I do not know if tariffs will be a part of it in the long-term. But hopefully this post helped shed light on how exactly the tariffs are impacting you, and provides some guidance for ensuring you’re only paying what’s fair. Thanks for reading.