Tariff FAQ

A tariff is a tax levied by a government on goods imported from another country. The importer of record, your company, pays the tariff directly to U.S. Customs and Border Protection at the point of entry, not the foreign supplier. The cost is calculated as a percentage of the declared customs value of the goods. While companies often attempt to negotiate tariff cost-sharing with suppliers or pass costs to customers, the legal obligation to remit payment always rests with the importer. Understanding this cash flow reality is essential for accurate working capital planning.

The Harmonized Tariff Schedule (HTS) Code is a standardized 10-digit number that classifies every imported product. It determines which tariff rate applies, whether trade agreement benefits are available, and what compliance requirements must be met. Misclassifying your product, even unintentionally, can trigger back-duties, interest penalties, and U.S. Customs audits. For manufacturers importing thousands of SKUs across multiple origins, systematic HTS classification management is a direct cost-control lever and financial risk mitigation strategy. Classification errors are among the most common and costly trade compliance failures.

Section 232 tariffs are national-security-based import duties authorized under the Trade Expansion Act of 1962. The Trump administration applied this authority to impose 25% tariffs on imported automobiles, auto parts, steel, and aluminum. These tariffs apply broadly across all import origins unless specifically exempted. For manufacturers, Section 232 tariffs often represent the single largest line-item increase in landed cost. They cannot be easily avoided by supplier switching unless you shift to domestic or qualifying free-trade-agreement sources. Explicit modeling of Section 232 exposure is essential in procurement and pricing strategies.

Section 301 tariffs are punitive duties imposed when a trading partner, primarily China, is found to engage in unfair trade practices such as intellectual property theft, forced technology transfer, or government subsidies. Rates range from 7.5% to over 100% depending on the product category. Companies sourcing electronics, machinery, tooling, fasteners, and industrial components from China carry the highest exposure. These tariffs stack on top of standard import duties, meaning total effective rates on some Chinese goods now exceed 50%. Strategic sourcing decisions must explicitly account for Section 301 exposure by HTS code and supplier origin.

Tariff stacking occurs when two or more tariff programs apply simultaneously to the same imported product, compounding the total duty burden. An imported Chinese auto component, for example, could simultaneously face a 25% Section 232 automotive tariff plus a 25% Section 301 China tariff, creating an effective 50% duty rate. Without a structured landed cost model that accounts for all applicable tariff layers by HTS code and country of origin, companies routinely underestimate their true sourcing costs and erode margins invisibly. Tariff stacking must be modeled explicitly in procurement systems and ERP configurations.

The United States-Mexico-Canada Agreement (USMCA) is the free trade agreement between the U.S., Mexico, and Canada. It allows qualifying manufactured goods, including vehicles and automotive parts, to enter the U.S. duty-free, bypassing Section 232 and standard import tariffs. To qualify, products must meet strict Regional Value Content (RVC) and Labor Value Content thresholds. For automotive manufacturers, USMCA compliance represents a significant cost advantage, but it requires continuous supplier audits, origin documentation, and value-content tracking to maintain eligibility legally. Non-compliance eliminates duty-free status and triggers retroactive tariff bills.

Regional Value Content (RVC) measures what percentage of a product's total value originates from within the USMCA trade region (U.S., Mexico, Canada). Under USMCA, finished passenger vehicles must achieve 75% RVC from North America to qualify for duty-free treatment. Core parts like engines and transmissions carry their own RVC thresholds. Falling below the threshold, even by a small margin, eliminates duty-free eligibility for that shipment, triggering 25% tariffs retroactively. Manufacturers must track RVC continuously as supplier compositions and input costs change. This is not a one-time certification; it is an ongoing compliance obligation.

Rules of Origin (ROO) are the legal criteria that determine which country a product "originates from" for tariff purposes, based on where it was substantially manufactured or transformed, not merely shipped from. A component assembled in Mexico using Chinese-origin parts may fail ROO requirements and not qualify for USMCA benefits. For companies operating multi-country supply chains with Tier 1, Tier 2, and Tier 3 suppliers, incorrect origin determination is one of the most common and costly compliance errors, generating unexpected duty bills, supplier disputes, and U.S. Customs penalties. ROO documentation should be audited quarterly at minimum.

Duty Drawback is a U.S. Customs program allowing importers to recover up to 99% of duties paid on imported goods or materials that are subsequently incorporated into a finished product and exported. For a manufacturer that imports components, builds a product domestically, and exports it, significant duty costs are legally recoverable. Despite its financial upside, duty drawback is chronically underutilized in manufacturing because of its documentation complexity. Companies with active export businesses should treat drawback as a systematic revenue recovery program, not an occasional exercise. Annual recoveries can reach millions of dollars for mid-sized manufacturers.

A Bonded Warehouse is a government-licensed facility where imported goods can be stored without paying duties until they are released for domestic consumption. If goods are subsequently re-exported, no duty is ever owed. For manufacturers managing global supply chains or navigating tariff policy uncertainty, bonded warehousing provides critical cash flow flexibility, allowing you to receive, store, and re-route inventory without triggering duty liability prematurely. This is particularly valuable when tariff policy is volatile and sourcing decisions need to remain reversible. It also supports just-in-time manufacturing models with international suppliers.

A Countervailing Duty (CVD) is a specific tariff imposed to offset the unfair competitive advantage created when a foreign government subsidizes its domestic producers, enabling them to export below true market cost. Unlike standard tariffs applied uniformly by product category, CVDs are product- and country-specific, determined through U.S. Commerce Department investigations. For industrial manufacturers importing steel, solar components, or specialized materials, CVD orders can appear suddenly and substantially change the economics of established supplier relationships with little advance warning. Active CVD monitoring should be embedded in supplier onboarding and quarterly sourcing reviews.

An Antidumping Duty (ADD) is imposed when a foreign manufacturer sells goods in the U.S. below the cost of production or below the price charged in its home market, a practice called dumping. ADD rates are calculated per manufacturer, not per country, and are reviewed annually by U.S. Commerce. Rates can exceed 100% in severe cases. Industrial manufacturers importing steel, bearings, rubber products, and fasteners are most frequently affected. Any procurement team considering a new Asian supplier should screen for active ADD orders before finalizing sourcing agreements. ADD exposure is supplier-specific and must be tracked at the vendor level.

Tariff Engineering is the legal practice of modifying a product's design, composition, or manufacturing sequence so it falls under a lower-tariff HTS classification. For example, importing a partially assembled component rather than a finished part may qualify for a meaningfully lower duty rate. This is a well-established and fully legal practice, distinct from fraud or misclassification. Leading manufacturers actively engage trade counsel and tariff engineers during product design and supplier selection phases to embed cost optimization before sourcing commitments are made. It is a proactive cost strategy, not a reactive compliance issue.

A Tariff Exclusion is a formal government exemption that allows a specific product to be imported without paying an otherwise applicable tariff. The U.S. Trade Representative (USTR) periodically opens exclusion processes for Section 301 tariffs, requiring applicants to demonstrate that the product is not available domestically and that the tariff causes disproportionate economic harm. Exclusions are product-specific, company-applicable, and time-limited, often lasting 12 to 24 months. Manufacturing and industrial companies should maintain active monitoring of USTR exclusion rounds as a structured cost-mitigation strategy within their trade compliance program.

Reciprocal Tariffs refer to tariff policies where one country mirrors or matches the tariff rates imposed by another country on comparable goods, often as part of trade negotiations or as a retaliatory measure. The concept is rooted in the principle of equitable treatment: if Country A charges a 25% tariff on imported vehicles from Country B, Country B may impose a matching 25% tariff on vehicles from Country A. Reciprocal tariff frameworks are frequently proposed as negotiation tools to encourage tariff reductions bilaterally. For executives, reciprocal tariff proposals signal potential policy volatility and should trigger scenario planning across multi-country sourcing networks.

The International Emergency Economic Powers Act (IEEPA) is a U.S. law that grants the President broad authority to regulate or restrict international economic transactions, including trade, payments, and financial flows, during a declared national emergency. IEEPA has been invoked to impose sanctions, freeze assets, and restrict imports from specific countries or entities. While distinct from traditional tariff authorities like Section 232 or Section 301, IEEPA can effectively block or severely constrain trade with targeted countries or suppliers. Executives should understand that IEEPA declarations can emerge rapidly and override existing trade agreements, requiring agile supply chain contingency planning.

De Minimis is the threshold below which imported goods can enter the U.S. without paying duties or requiring formal customs entry. The U.S. de minimis threshold was historically $800 per shipment. However, in 2025, the Trump administration moved to restrict or eliminate de minimis treatment for goods manufactured in China. For industrial and automotive manufacturers, de minimis is less relevant for bulk shipments but critically important for spare parts logistics, e-commerce procurement, and MRO (Maintenance, Repair, and Operations) purchasing. Changes to de minimis policy can substantially increase administrative burden and landed costs for low-value, high-frequency imports.

Total tariff exposure is not a single rate. It is a multi-variable financial risk requiring systematic measurement across four dimensions: (1) import value by product category and supplier origin, (2) applicable tariff rate per HTS code including all stacked orders, (3) trade agreement eligibility and compliance status, and (4) downstream ability to pass costs to customers. Mid-sized auto parts manufacturers saw procurement costs rise 8 to 12% from tariff exposure alone in 2025. A structured Landed Cost Model, incorporating duties, freight, insurance, and compliance costs, is the essential executive decision framework for any sourcing, pricing, or nearshoring strategy.