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.
The weapon of choice for the Trump Administration’s multi-front war on international trade is tariffs on certain goods produced by U.S.A. trade partner countries that the President claims have cost American jobs or, even, implausibly, threaten America’s national security. The words used in international trade are, to say the least, unfamiliar to the general public; some of them are arcane even to veteran trade practitioners. The term “tariff” is one of them.
To help their audience, the media covering the moment-to-moment drama of Trump’s trade wars have attempted to provide a definition of tariff. Most get it mostly right, but in these times of misinformation and lack of clarity and specificity, intentional or innocent, it is essential to get the definitions of trade terms, such as “tariff”, exactly right. Unless those affected or even potentially affected by international trade (and there seem to be very few anywhere who aren’t) have a clear, precise understanding of the words being used, they will not know how to react appropriately.
For example, a video published by Canada’s Globe and Mail, in connection with their otherwise excellent and comprehensive coverage of the NAFTA renegotiations and the increasing friction in trade and political relations between Canada and the USA (See “Risk of Trade War Continues to Rise”), correctly said that tariffs are fees, similar to taxes, imposed by a government on goods produced in a foreign country, but incorrectly said that those tariffs were paid by the foreign producer. Tariffs, also known as import or Customs duties, are paid by the importer, usually the purchaser, of the foreign goods when those goods arrive in the importing country; they are not paid or payable by the foreign producer. (In fact, at least in the USA, it is illegal for a foreign producer to reimburse its importer-customer for certain types of tariffs, such as Anti-Dumping and Countervailing Duties.)
Who will actually and literally pay the price of the tariffs Trump has imposed or threatened to impose apparently has not been widely understood. For example, in a recent op-ed in Crain’s Detroit Business, the CEO of Lucerne International expressed surprise and alarm that the tariffs “her” President wanted to impose on Chinese metal products (comprising the entirety of her product line sold in the US) would be paid by her company, adding an uncompetitive and potentially crippling cost.
So, let’s be clear: tariffs are essentially taxes imposed by the government of an importing country on foreign goods. Tariffs are paid by the importer of those goods, not by the foreign producer or the foreign government. Even if the purpose of the tariffs is to change the conduct or policies of the foreign producer or government, that change will only be affected by the changed behavior of the importer or the importer’s customers, assuming that the importer or the ultimate consumers can or want to change their purchases of the target foreign goods.
The Trump trade team has made jaw-dropping demands in the NAFTA renegotiations, but has yet to offer any specifics how to achieve them. If the Americans don’t come up with something concrete, the talks and NAFTA could collapse. On autos, I have three tips; take them for what they’re worth. Trump wants the NAFTA content threshold for cars to increase from 62.5% to 85%, with no less than 50% to come from the US alone. My suggestions would provide a more accurate measure of how much NAFTA content is in a car; use origin rules already in NAFTA for most other manufactured goods; and modernize NAFTA to conform to most of the rest of US FTAs. (1) Eliminate “tracing” and restore cumulation so that all NAFTA originating inputs: materials and jobs get proper credit.
(2) Allow “intermediate processing”, so that the contribution of parts and subassemblies made in the same factory as the finished vehicle and all the associated jobs get their rightful due.
(3) Finally, allow “transaction value”, which looks at prices paid for inputs, to be used in addition to the more cumbersome Net Cost method, which relies on analysis of production costs from accounting records. Adopting these changes may seem cosmetic, but they are consequential. Yet, by going to already extant rules that are familiar and tested, they stand a good chance of being accepted by the Canadians and Mexicans, who have been anxiously waiting for the Americans to put some skin into the game.
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