Tackling Trump’s tariffs

From farmers to auto makers, American business is feeling the jabs of Trump’s trade policy and many are wondering how they might soften, if not duck entirely, the pain Trump’s tariffs are inflicting.

Held up like an archeological find is Ford Motor Co.’s ongoing effort to ‘outfox’ the so-called Chicken Tax, a relic of a 1960’s trade war between the U.S. and Germany over American chicken parts exported to Europe, the last vestige of which is a 25 percent tariff duty on trucks imported to the United States. Since late 2009, Ford has been importing the Transit Connect, often seen on the streets as a small delivery or service truck, from its factories in Europe. Ford imports this vehicle as a passenger car, which attracts a 2.5 percent tariff. After Customs clearance, many, but not all, are converted into trucks, which if imported as such would be subject to the 25 percent Chicken Tax.

As Ford’s in-house trade counsel from 2000 to 2017, I advised Ford how it could legally import the vehicles without paying the 10 times higher duty. Ford’s imported Transit Connect program is instructive in showing importers some options to avoid falling victim to high tariffs, but, perhaps more important, that there is no easy, one-size-fits-all solution.

A successful trade strategy has three elements: a well-defined business need, an appropriately scoped and scaled solution, and a commitment from the entire organization to both flawless execution of strategy and then being prepared to explain and defend the strategy, if questioned or challenged. For a trade strategy to be truly successful, all elements are required and must be applied in order.

Around 2006, Ford identified a “white space” in the U.S. commercial vehicle market for a small, fuel-efficient delivery truck, meaning there was consumer demand but no supply. Because projected sales volume was relatively low, manufacturing in North America was ruled out. Not coincidentally, the Transit Connect was already in production in Europe.

Ford realized that it could save hefty design and developments costs and be first into the new segment, but only if they could figure out a way to import the truck without having to pay the 25 percent Chicken Tax. Despite its historical origins as a temporary retaliatory tariff, the official U.S. tariff on imported trucks has been 25 percent for more than 50 years and only Congress has the power to change it. This strong and clearly articulated business case coupled with the Chicken Tax’s permanence justified creative thinking about a possible trade solution.

Second, the trade strategy should be of a scale and scope commensurate to the trade problem. Ford spent more time and resources in designing and implementing the U.S. portside conversion process than it did adapting the European-made Transit Connect for North America. Establishing sufficient manufacturing capacity in Europe to support both European and North American markets for the vehicle and establishing a supply chain that included the U.S. portside post-Customs clearance wagon-to-van conversion process were relatively long-term commitments, the scale and scope of which were appropriate to the problem of overcoming the 25 percent Chicken Tax.

Finally, Ford committed resources and personnel from all parts of the company to support and ultimately defend the Transit Connect program. While my legal trade advice provided critical direction to avoid the Chicken Tax, it was the execution of that direction primarily by Ford’s product and process engineering teams that made the Transit Connect program so legally sound and strong. Without the care and skill from Ford’s engineers and operations personnel, the trade strategy I laid out may well have been disastrous for Ford.

Even though the amounts of Trump’s tariffs are the same as the Chicken Tax, they are not the same trade problem and, therefore, overcoming Trump’s tariffs will require very different trade solutions. The key difference is the timeframes. Having been around for more than 50 years, the Chicken Tax is effectively permanent. Trump’s tariffs are recent, highly volatile and not likely to stay in place for very long.

The approach, however, to solving the Trump Tariff problem should be exactly the same as Ford took with its Chicken Tax solution.

Identify the business need. Wanting to avoid payment of higher tariffs is not necessarily a business need. How dependent is the business for those products from a particular country? Can the additional costs be reasonably absorbed or passed on to customers?

Establish the appropriate scale and scope of the trade solution. Because Trump’s tariffs are likely to be relatively short-term, any solution should be scaled so that it can be quickly implemented and then undone or switched to another trade flow just as quickly.

Finally, the chosen trade solution must have complete commitment from the entire enterprise; it cannot be a desk exercise for the Customs manager and logistics team. Making the trade solution part of the business, supported by all areas, validates it.

While a solution to Trump’s tariffs may be short-term, the business must recognize that the consequences of actions taken may be long-term and the business must be prepared to explain and defend the action whenever the question comes up. The Transit Connect first came to the U.S. in late 2009; Customs claims it didn’t become aware of potential issues until early 2012; and now in 2018, the case is still being fought in the courts.

Successful trade strategies employ out-of-the-box thinking to create entirely in-the-box solutions. Ford’s Transit Connect strategy is a useful case study that shows how business can avoid becoming collateral damage to aggressive, hurtful trade policy.

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