When’s a van a van and when’s it a car?
Rob Gardenier | M.E. Dey & Co.
The results of fruitful conversations from the scheduled dinner between the Presidents of the USA and China this past weekend resulted in a compromise for List 3. List 3 was set to increase from 10% to 24% starting Jan 1st 2019. This will now remain at 10% for an additional 90 days.
Modifying tariffs upwards is quite simple as we have seen this year. Is the opposite true? Some history suggests that removing or reducing tariffs does not have the same resolve. But not all is despair.
Example: The duty on the importation of vans and light trucks is 25%. It has been at this high level since 1964. This punitive rate of duty was introduced in reaction to the European Economic Community assessing an additional tax on imports of US poultry. Originally, this 25% tariff was also assessed on potato starch, dextrin and brandy. Eventually the additional duty was removed for all of these products save the vans and light trucks. While our outrage of the European ‘Chicken tariff’ has long since been addressed, imports of vans and light trucks are still faced with the increased duty.
There are two things to learn for this bit of history. First, actions taken by our government are not always easily undone. The second, the economic response to the cost of duties. Duty is assessed on imports based on what the good is at the moment it entered the United States. Change the nature of the good and you change the duty classification and the resultant duty rate. Sometimes called ‘Duty Engineering’, this perfectly lawful strategy could lead to cost benefits in the form of reduced Duty liability. Ford Motor company’s response to this high duty on light trucks and vans illustrates the power of ‘Duty engineering’. Ford, an American company, makes its smallest cargo van in Spain. Ford imports thousands of ‘Spanish’ cargo vans into the United States every year. Ford, prior to export, fits rear seats and windows to the vans, only to then remove both after they have cleared US Customs. This makeover changes the classification of the ‘van’ to a car – at a duty rate of only 2.5%. After importation the makeover from a ‘car’ import to van is said to take two-and-a-half hours per vehicle. Ford has saved more than $150,000,000 in duties by lawfully changing the imported good into something else.
Example: A long time ago, our duties on sugar where based on the color of the sugar. White sugar, being more refined was assessed a higher duty than ‘brown sugar’. One importer devised a way to color its refined sugar to as to get the lower duty rate afford to brown sugar. Customs pushed back. The importer sued and WON a lower duty rate.
Example: A more contemporary example, the US assessed high anti-dumping duties on the imports of wax candles from China. Importers soon started importing wax cylinders with holes drilled in the center – for a wick to be added later. Successfully avoiding the anti-dumping tariff.
Duty engineering is a tool in your battle to contain your costs of production. The only restriction in the ‘dutiable’ condition of an imported product is that the product when imported has a commercial use.