Tariffs are taxes that countries impose on imported products for one of two major purposes: protectionism or social change.

Most countries participate in the World Trade Organization. This worldwide independent body acts as mediator between countries to resolve trade disputes, often over trade rules for imports, and is dedicated to the reduction and removal of all tariffs between member nations. In spite of these efforts, there is still a long way to go.

Tariffs in global trade 101

The basic truth in international business is that countries have competitive advantages over other countries. These advantages can be in access to raw materials, cheap labor, and technological expertise.

As a result of these advantages, the cost of products produced in those countries can often be significantly lower.

Governments then use tariffs to ‘level the playing field,’ so that products produced internally can compete with lower cost imports.

Governments also use tariffs as leverage to encourage social change. Most countries are not at all receptive to other governments telling them what to do.

On the other hand, they are usually very interested in improving their economies. They can therefore be persuaded to implement changes in human rights practices, corruption, pollution, etc., in exchange for reduced tariffs and greater access to markets for their exports.

Because countries use tariffs as a tool, they can change as frequently as government priorities do. For the importer, this requires constant vigilance. Policy changes can profoundly impact profitability and change the competitive balance in the marketplace.

Get your calculators ready

Navigating the complex tariff schedules can be a daunting task. If you fail to identify the product correctly, you can face penalties and fines, perhaps even loss of import privileges.

Inaccurately identifying the country of origin can have serious consequences.

Even the tiniest discrepancies in the description of the product can cause huge differences in the duties charged.

Let’s say you are an Italian shoe manufacturer and would like to import running shoes to the United States. In this case, the tariff rate is based upon the value of the shoes.

If our shoes are worth more than $6.50 but not over $12.00, then we can use the harmonized tariff schedule and look up code 6402.91.8005 – “Tennis shoes, basketball shoes, gym shoes, training shoes and the like”. There is no special tariff rate for Italy or the European Union, so we know we will be charged the default rate of $0.90 / pair + 20% of the value of the shoes.

If those same shoes came from Colombia, the rate would be $0.54 / pair + 12% of the value of the shoes. And if they were made in Morocco they can be imported duty-free.

To further complicate matters, if the value of the shoes exceed $12.00 they must be imported on code 6402.91.9005 and the tariffs are slightly lower.

This creates the following bizarre scenario:

If the shoes are valued at $12.00, the tariff per pair is $3.30 bringing the cost per pair to $15.30. If the manufacturer should implement a 2% price increase to $12.24, the tariff per pair is only $2.45, so the cost per pair becomes $14.69!

Get to know the rules even better than U.S. Customs

We advise our clients to get a binding opinion from the U.S. Customs and Border Protection agency before importing a product into the U.S. This opinion will provide some clarity in terms of tariffs, and eliminate surprises at the border that could adversely affect the bottom line.

To our amazement, we found that the changing rules sometimes confuse the very agency tasked with enforcing them.

One of our clients is an importer of tahini, a sesame seed based product. They identified a particular strain of the seed, grown in Ethiopia, which has the taste they sought.

They contracted with a factory in Israel to manufacture the product and began importing tahini duty-free under the free trade agreement between Israel and the United States. This arrangement allowed them to contain their costs, while introducing their product to the U.S. market.

In July of 2014, we began negotiations with a factory in Ethiopia to manufacture the product closer to the source, thus eliminating the cost of transporting the seeds to Israel.

When we sought guidance from Customs and Border Protection, our first response was that the import, classified under 2008.19.9090, would not qualify for any trade preference, and as such would be charged the default tariff of 17.9% (much too high to make it economically feasible).

However, the rules on this were confusing at best.

In the past, importing tahini from Ethiopia could be done duty-free, since it was covered under the General System of Preferences (GSP). Unfortunately, the GSP was allowed to expire on July 31, 2013.

Products from Ethiopia also qualify for special duty-free treatment under the African Growth and Opportunity Act (AGOA). However, tahini was not among the products that were included in AGOA. Careful research uncovered an obscure paragraph in the rules which stated:

“Imports of GSP-eligible imports for beneficiary countries of the African Growth and Opportunity Act (AGOA) will continue to be eligible for duty-free entry, notwithstanding the lapse in GSP authorization, pursuant to the provisions in the statute governing the AGOA program”

We presented this citation to the agency and received a binding opinion that no tariff would be charged.

The moral of the story is that careful research and diligence is the only way to guarantee that your imports will be treated fairly and the proper tariffs applied.

What products could your business potentially reduce tariffs on with some more research? Do you have any stories to share on the topic of tariff rules?

The post What you need to know about tariff rules to avoid getting overcharged for your imports appeared first on Trade Ready.

When President Obama announced in April that the U.S. State Department would finally be taking Cuba off the list of state sponsors of terrorism, it set in motion a sense of optimism that diplomatic relations and trade would soon go back to normal with the Caribbean island country.

Though Cuba did see a significant uptick in American tourists following the news, and U.S. airliner Jet Blue added Cuba to its flight routes, reopening of trade relations with the U.S. remains a prospect some worry is becoming less likely with every passing day.

What’s the hold-up with reopening trade?

Lifting the trade embargo on Cuba – put in place as a limited measure in October 1960, and imposed in full in February 1962 – requires the support of the Republican-controlled Congress. House Speaker John Boehner has already said he opposes the measure.

President Obama has the power to use executive authority to loosen trade restrictions, but has not yet moved on this point.

However, advocates of open U.S.-Cuba trade are concerned that if trade isn’t re-established between the two countries by the Obama administration, there’s a very real chance that come the next presidential election in 2016, the issue might be closed for years.

As it stands, there are several bills floating in Congress to re-open trade with Cuba. One such bill is sponsored by the independent Senator Angus King from Maine and Republican Senator Jerry Moran from Kansas.

However, two measures which aim to make travel to Cuba tougher have been tacked onto a new appropriations bill which will likely be passed.

Political issues still pose significant roadblocks

The U.S. is seeking to ensure that its diplomats will have freedom of movement throughout Cuba, and will not be detained by authorities. Cuba is pushing for the U.S. to back away from initiatives to push democracy within the island nation, as the government is concerned these undermine support for the regime.

The U.S. is also concerned that Cuba has continued to crack down and imprison dissidents; there had been some hope that removing Cuba from the terror sponsor list would encourage the Cuban regime to be less harsh on critics of the government.

On Cuba’s end, the continuing existence of Guantanamo Bay, located at the southeast end of Cuba, still irks the government there, as the military prison which houses suspected terrorists captured by the U.S. was not established with the consent of Havana.

But what seems to be irking U.S. politicians more than anything else is the perceived lack of reciprocity in goodwill gestures by the Cuban government.

The U.S. feels as if it’s doing the Caribbean nation a tremendous service in paving the way for normalization of relations, which has not been rewarded from the Cuban side.

For instance, the U.S. has also authorized ferries to travel to Cuba from Florida – but these ferries can’t sail until they receive Cuban clearance – which they have not thus far.

Use of American credit cards is also limited in this way. Though the U.S. government has authorized the use of these cards in Cuba, Americans visiting the country can’t use them as of yet, because Cuba’s government has not yet authorized this form of payment.

Possible $1.9 billion implication of US-Cuba trade

Should the U.S. and Cuba resume full trade regulations, economic prospects are rosy: the U.S. economy is expected to grow by US$1.9 billion and create up to 6,000 jobs in tourism and food exports, CEO Randy Shumway of Cicero Group, a financial PR and public affairs firm, wrote for Zions Bank.

Cuba has also made inroads to privatization, with an estimated 450,000 Cubans working in the private sector today (the country has a population of 11 million). The Mariel free trade zone includes a port, a Special Development Zone that will offer competitive customs and tax incentives, and a terminal, all with the aim of improving production and exports.

U.S. exports are also likely to increase, should trade ever get to the normalized stage. But not every business has benefited from this slight move towards trade with Cuba.

U.S. food exporters have seen sales drop by around nearly 50%; sales in the first quarter of 2014 were at US$160 million, but fell to US$83 million in the first quarter of 2015, Food Dive reported.

If nothing else, President Obama’s move towards normalizing relations with Cuba takes the stigma out of looking to Cuba for foreign investment.

Akerman LLP international lawyer Pedro Freyre told Bloomberg May 29,

Cuba will no longer carry the stigma associated with being designated as a ‘terrorist state,’ and this in and of itself lowers the perceived risk, and on a practical level, removes a number of regulatory barriers related to export, reporting, and compliance restrictions.

Do you think we will see normalized trade between these two nations in the near future? Will reopened trade between the nations be good for both countries?

The post Optimistic about US – Cuba Trade? Not so fast! appeared first on Trade Ready.