How Ford's Tariff Engineering Strategy Cost Them

In our last post, we introduced tariffs as a tax on imports to a country. As with all taxes, there are various ways an importer can lower their customs liability. In this post, we will explore some of the techniques employed by importers to reduce their tax bill, in particular tariff engineering.

What is Tariff Engineering?

Put simply tariff engineering refers to design, sourcing, and manufacturing decisions made primarily so that the manufactured good is classified at a lower rate for tariffs  than it would have been otherwise.

Unlike tariff evasion (which involves lying on forms or mislabelling boxes), tariff engineering is transparent. You are presenting the product exactly as it is; you’ve just changed what the product is to fit a cheaper category.

For the strategy to hold up in court, the product must be a "commercial reality" at the point of import. This means the features you added to lower the tariff must be genuine and not just a "sham" or temporary disguise. Some case studies can help us to understand how this technique has been used successfully and unsuccessfully.

The Ford Transit Connect and the "Chicken Tax"

In post-war America, intensive chicken farming led to significant exports of US chickens to Europe. The European Common Market accused the US of flooding Europe with cheap chicken, below the cost of production. They collectively imposed minimum pricing on all imported chickens. In response, in 1964, President Johnson imposed the "Chicken Tax" which levied a massive 25% tariff on a range of imported goods, including light trucks.

This 25% tariff made imported light trucks and transit vans uncompetitive in the US. However, Ford identified that passenger vehicles have only a 2.5% tariff and saw this as an opportunity to use tariff engineering to their advantage. From 2002, Ford began importing their Transit Connect vehicles from Turkey. They fit these vehicles with rear windows, rear seats and rear seatbelts. When these vehicles arrived in Baltimore, Ford removed the rear seats and seatbelts and replaced the window with a metal plate thus allowing them to sell these vehicles once again as transit vehicles.

This process, added a minor cost to each truck but saved thousands in associated duties. It is estimated that between 2002 and 2018, Ford saved over $250 Million in tariffs through this loophole.

In 2013 however, US Customs ruled that these seats were a mere disguise and that the 25% tariff should still apply. Following a lawsuit and a drawn out legal battle, Ford settled for $365 Million in unpaid duties and penalties. Not only did this negate their saving, but resulted in increased scrutiny on all of their future import activities.

What Ford failed to recognise, is that Customs is concerned with the intent and permanence of a feature. If the sole purpose of a feature is to avoid tax, it is evasion not engineering.

Success Stories

Without the right expertise, tariff engineering efforts can cost a company significantly more than they stand to save. However, with the right knowledge, countless importers have saved significantly.

Converse's "Fuzzy Sole"

Sneakers carried a whopping 37.5% tariff in the US. To circumvent this, Converse began adding a thin layer of felt to the underside of their sneakers, thus allowing them to be classified as slippers. This dropped tariffs to roughly 3%. Within a few weeks of use, this felt bottom is rubbed away. Where this technique succeeded is that the feature remained part of the product until it reaches the customer.

Columbia's "Security Pocket"

Columbia sold women's shirts which would have been classified as blouses. By installing a functional pocket, below the waistline, they could classify these as "other garments" and obtain a 10% saving. Since this pocket, functioned and was integrated into the design, this technique was valid.

The Snuggie

The Snuggie is a blanket with sleeves. In a court case, they demonstrated that the Snuggie was purely a household item, not a garment for walking around and thus achieved an 8.5% rate for blankets as opposed to a 14.9% rate for robes.

The Verdict

Tariff Engineering presents a significant opportunity for importers, when combined with associated expertise. In the past, supply chain consultants were the only way to access the expertise required to properly identify these savings, leaving SME importers priced out.

Harbour AI is built for SMEs. We assist importers to identify these savings and to develop defensible strategies. Book in for a supply chain audit today and work with us to lower your landed costs and improve your margins.