Expert Advice on Surviving the 2019 U.S. Importers Crisis

How to Lessen the Impact of the New Tariffs

Recently, The U.S. raised tariffs on $200 billion worth of products from 10% to 25% with a threat to levy additional tariffs on an additional $325 billion worth of goods from China. These new tariffs follow a host of previous White House-imposed duties on various trading partners for steel and aluminum, as well as retaliatory tariffs from trading partners. For U.S. importers and exporters whose options are limited, these tariffs can create a direct hit to profit and create a crisis for survival. Although there has been a large amount of media coverage and proposed federal bailouts for farmers affected by the trade war, little to nothing has been done to help importers.

This article is meant to be a resource for advice for import companies on steps they can take to try to lessen the impact of the tariffs. In putting together this article, I sublimated Ravinia Capital’s experience helping importers with a select group of experts on various aspects of helping importers. These include:

• Jeremy Page, partner at Page Fura, a law firm which concentrates on Import/Export Law
• Mathew Mermigousis, Director-Customs and International Trade Practice of PricewaterhouseCoopers
• Bruce Denby, Managing Director and co-head of Asset Based Lending at CIBC
• Kobus Van Der Zel, Managing Director of Ravinia Capital Profit Improvement.

My own experience includes thirty years of helping advise and run import companies, including my current role as Managing Director of Ravinia Capital LLC, an investment bank with experience helping importers find the best solution.

Understand the Tariff Laws and How They Affect Your Product

The first thing to do is to ensure you understand your products and your sourcing practices, Jeremy Page of Page Fura recommends. “The rules defining how a product is ‘classified’ at the time of entry, as well as the country of ‘origin’ assigned to those goods, are complex and must be carefully applied. Once that has been verified, a determination can be made as to which of your products will be affected by any new tariffs that may be imposed.”

Determine Whether an Alternative Tariff Classification May Apply

The next step is to determine if an alternative classification may apply. Page advises, “In many ways, tariff classification is an art, not a science. As a starting point, therefore, you should investigate if there is any way to reclassify your products to exempt them from the categories subject to these tariffs. Depending upon the nature of the item involved, alternative classifications may present themselves for consideration based on current legal and regulatory interpretation.”

“In addition, there may be an opportunity to perform ‘tariff engineering’ by modifying the production process or product functionality in such a manner such that the classification that did apply is no longer applicable to the re-engineered product. These considerations do not come without risk, however, as U.S. Customs & Border Protection (CBP) is carefully scrutinizing import filings to isolate out changes in the classifications declared at the time of entry for potential follow-up and/or investigation. Given this practice, any such change must be substantively supported, or CBP could find that the change was ‘unreasonable’ and subject to potential enforcement action.”

Evaluate Whether “First Sale” Might Apply

Under U.S. law, companies that import through a multi-tiered sourcing pattern can base their import value on the first sale in the transaction flow rather than based on the price they ultimately pay. Page notes that “the rules that must be satisfied to benefit from this provision are complex and require significant documented support.” Where those requirements can be met, the benefits from implementing a first sale program can help alleviate the adverse impact imposition that these tariffs may create.

Look Into Duty Drawback

Mathew Mermigousis of PwC suggests, “Under U.S. law, companies that import and/or purchase imported articles and subsequently export those (or like) articles, or export articles manufactured from those (or like) materials may be eligible to receive a refund from CBP for up to 99% of duties, taxes and fees paid including Section 301 duties but excluding Section 232 duties. Duty drawback can help manage and mitigate tariffs both retrospectively and prospectively. Like first sale, the rules are complex and require documented and auditable support”.

Renegotiate Contracts with Suppliers

In the short run, changing suppliers is generally not an option, particularly where the product involved has been specially designed or developed. In the absence of that option, the best way to lessen any impact from these new tariffs is to use whatever negotiating leverage you have to get your supplier to either agree to a price reduction or some form of cost sharing. With related suppliers, consider review of transfer prices, and whether cost unbundling may mitigate the impact. This review should also factor in recent changes under tax reform.

The onset of the trade war, along with other factors, has resulted in the dollar appreciating by over 10% over the last few months which should help exporters absorb some of the burden of the tariffs. Your existing suppliers also have an incentive to keep you from beginning the process of moving your orders to a new supplier.

Page adds, “Before renegotiating prices, however, bear in mind that CBP is likely to consider pricing changes from unrelated suppliers different than those from related sources of supply. For the former, CBP’s position is generally that importers are able to benefit from a good bargain as the presumption is that unrelated parties each act in their own best self-interest. Where the parties are related, however, CBP’s approach is different as any price declared at the time of entry must be at arm’s length which, in ‘short hand’ generally requires that the price ensure the recovery of the foreign seller’s costs plus a fair profit. If the price renegotiation falls short of that standard, then the reduction in declared value is likely to be rejected and could, again, lead to further investigation or enforcement action.”

Mermigousis also adds that there are “opportunities to examine transfer prices and potentially remove certain costs from dutiable value (e.g., unbundling) thus mitigating the impact of the tariffs. However, such planning needs to be aligned with tax to consider 1059A and tax reform changes.”

Raise the Price of Your Products Affected by the Tariffs

It is no secret, and you are not alone in dealing with the increase in your costs of goods sold due to tariffs. Although customers never like a price increase, you will have plenty of justification for asking for price increases. There is always a risk in asking for price increases, but pricing experiments show that in the short run most companies will accept price increases and not shift supply. Caution should be taken and, as always, any material price increases to important customers for your firm should be handled in as courteous and professional a manner as possible including, for critical customers, in-person meetings.

Some price increases may take time to impose, and some will require rewriting contract language to make it easier to pass along increased tariff costs. Page advises, “In addition, any future negotiations should anticipate that tariffs are here to stay and incorporate protective language providing an opportunity to pass along such costs as part of the supply agreement, as well as retaining the rights to duty drawback”.

Begin the Process of Switching Sources

Where possible, begin the process of locating alternative sources of supply that are not subject to the tariffs. Kobus Van Der Zel advises, “This process often takes several months to years to fully implement, but depending upon the nature of the product involved, there may be manufacturers who have the skills and capacity to support new production more-readily. Even with the increased cost of goods due to the tariffs, however, it is often still not worth making a change due to the absence of any price-competitive alternative vendors, whether in the United States or elsewhere.

Van Der Zel continues, “Moreover, even where there might be cost savings from switching to a supplier in another country such as Vietnam or Thailand, it is often not worth the aggravation and risk of starting with a new supplier who may not understand or be able to meet your quality and delivery requirements. Finally, although there may be options to redesign products to either avoid Chinese components or transfer aspects of production to a third country other than China, as noted above, the rules for determining origin under the Customs laws are historically complex and in a state of significant flux at the moment. Extreme care must be taken, therefore, for any decisions to shift production short of a complete transition, as CBP will again be closely scrutinizing any new import flows to ensure any change in the country of origin comports with all applicable legal requirements.”

Special Trade Programs

Mat Mermigousis suggests companies learn about and consider Special Trade Programs, “such as foreign-trade zones, TIBs, bonded facilities and Chapter 98 options (e.g. US Goods Returned, Articles exported and returned) to mitigate the impact of the tariffs.”

Product Exclusion Request

Another area of potential relief is to learn about the potential to make a product exclusion request, if applicable. “Administrative exclusion process to seek exemption from the additional tariffs is available,” Mermigousis said.

Explore Financing Options

For import and export businesses and multinational companies, today’s uncertainty is seemingly here to stay. With ongoing trade disputes and protectionism in the U.S. and abroad, the threat or implementation of tariffs is likely to push companies into a liquidity or cash squeeze.

This external market pressure inevitably leads many companies to seek new financing structures like asset-based lending and other alternative financing options. As a borrower, it is critical to maintain strong communication with your lender so all parties understand the financial implications of these forces and how you plan to absorb or pass along the increased costs.

Bruce Denby of CIBC Asset-based Lending offers the following advice to clients, prospects and referral sources when dealing with tariffs:

• Diversification of Sourcing – The current trade war with China presents an ongoing risk to sole source supply chains. U.S. companies should consider diversifying suppliers in countries with less trade policy risk to reduce their exposure to increased tariffs with China.
• Direct Buy Programs – Companies with seasonal merchandise import programs are particularly exposed to trade disputes. Generally, orders and prices are locked in early in the season, preventing the importer from passing through the cost of an unexpected hike in tariffs. While some clients have been successful in renegotiating these contracts, a direct buy program can also mitigate this risk. In a direct buy program, the end-customer takes delivery from the foreign vendor and is not responsible for the tariff until the goods arrive.
• Utilize External Advisors – Customs brokers, risk management consultants, insurance brokers and lobbyists all provide strategic value in risk mitigation as clients shape a strategy to counter tariffs. These outside advisors can assist with product reclassification, regulatory compliance and insurance options to mitigate risk.
• Reforecast and Review Planned Capital Investments – If options for mitigating tariff exposure are limited, a recast of forecasting and planned capital investments is a prudent exercise to undertake with all stakeholders.
• Monitor sell through – For companies with consumer-oriented goods, a close monitoring of sell-through is advisable, as an increase in pricing can result in lower demand and potentially higher chargebacks from the retail customer.

As a relationship-based lender, CIBC’s Asset-based Lending group has deep expertise in dealing with tariffs and the impact they can have on financial performance and loan covenants. Asset-based loans provide flexible covenant packages in exchange for a more closely-monitored borrowing base, liquidity review and advances against asset values. These structures allow for companies to absorb tariffs while protecting their customer relationships. If needed, CIBC and Ravinia Capital also have relationships with non-bank lenders that support importers. These lenders can be utilized as an asset-based financing alternative, such as purchase-order finance or factoring companies.

Cash from Continuous Improvement

Ravinia Capital Performance Improvement has shown several import clients how to release cash from their own supply chains. As an importer, inventory turns is a key metric, and by simply improving your turns from four to six times will reduce your bank line of credit by roughly 33%.

Van Der Zel says it best: “Clients are often convinced that their inventory turns are already at world class level. Our inventory simulation uses their item level data to show how many millions in cash they can still release by following our world-class supply chain coaching. This provides critically needed cash at a time when lenders may be reducing borrowing base availability”.

Lobby

Either join one of the many groups that are working to help ease the burden of the tariffs for importers, or reach out to your Congressmen and Senators to let them know how the new tariffs are adversely impacting your business. Stories of delayed investment, job losses or overall business risk are powerful and are being repeated across the nation.

While big companies oftentimes have an advantage over small and mid-size enterprises where such issues are concerned, Congress well-understands the importance of smaller businesses to the U.S. economy at large. At the least, it is still worth exploring if there is a group in your industry that can help relieve some of your pain.

Sale or Legal Restructuring

The new tariffs are hitting import companies suddenly, and at 25% can cause loss of profit, liquidity issues, defaults on loans and related operational issues. This article attempted to lay out steps that should be taken to help alleviate the harm caused by the tariffs. Still, there will be many companies hurt and concerned about how to move forward.

Before allowing the company’s value and future to begin unraveling, it is strongly advised that a company seek the help of an investment bank and a law firm to understand all of their options. An attorney can advise on legal options to gain temporary relief from creditors. An investment bank can help explore if additional capital is available.

Even in the worst case, where an importer defaults on its loan and cannot bring in additional capital before considering liquidation or total unraveling, the company still may be attractive for a sale no matter the current loss. Many import companies have built up valuable market share, and many well-capitalized buyers will understand that the tariff issues are temporary. At Ravinia we have had success selling importers even when the company is losing money, such as a toy company we were able to save.

By Any Means Necessary

No matter the path you take, it is important to be proactive in determining the options available, as you don’t want a short-term profit and cash hit from tariffs to create a liquidity trap that brings down the whole company. It should be remembered that most import companies have valuable market share that is often not tied to your source of product, so you need to take whatever actions necessary to get through the short-run crisis.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Trade Finance Basics and Leveraging and Protecting Trade Secrets in the 21st Century.]

More about the Contributing Authors:

Jeremy Page is a founding partner of the Chicago-based international trade law firm, Page•Fura, P.C. With more than 30 years of experience in import, export, taxation and general accounting, he provides counseling, strategic planning and advocacy to companies of all sizes engaged in global business. Companies turn to Jeremy for representation on a wide range of issues. He is a frequent speaker at both trade association and other venues, and has performed extensive public and private sector training in such areas as import controls and compliance, export management, NAFTA and foreign-trade zones. In addition to his legal background, he is also a licensed customs broker and an accredited zones specialist.

Mathew Mermigousis is a Managing Director in PwC’s Customs and International Trade practice where he advises U.S. and multinational companies on customs and international trade regulatory matters involving classification, customs valuation, country-of-origin marking, foreign-trade zones, and the use of trade preference programs and free trade agreements.

Bruce Denby is Managing Director and co-head of the Asset Based Lending Group at CIBC. He is responsible for developing and managing the national business efforts for the Asset-Based Lending team, as well as coordinating business opportunities with the Illinois Commercial, Specialty Banking and National Commercial Banking groups. He is a frequent panelist for the CFA and TMA.

Kobus Van Der Zel is partner at Ravinia Capital Performance Improvement with 28 years of experience in business improvement, including 19 years where 100% of his fees were tied to incremental monthly cash flow improvements. His specific passion is to help overleveraged companies and their people reverse the root causes of their past underperformance and return to market share growth and optimum business value in future sale transactions. In 2013 Kobus rescued a tool importer from liquidation by reducing their line of credit by 50% from cash tied up in their supply chain.