The long and short of Trump’s tariffs

It could have been worse. For the UK, the tariffs announced by President Trump last week seemed to suggest there was still mileage in the special relationship.  

British exporters did not escape the blanket 10% baseline tariffs imposed on all goods from outside the US. But they did avoid higher rates applied elsewhere – from 15% on Norway and 20% for the EU, to 34% on China (before further increases announced since), and 49% for Cambodia.  

The tariffs were billed as “reciprocal”, with the White House citing a “highly unbalanced” trading relationship between the US and its partners.  

“While World Trade Organization (WTO) Members agreed to bind their tariff rates on a most-favored-nation (MFN) basis, and thereby provide their best tariff rates to all WTO Members, they did not agree to bind their tariff rates at similarly low levels or to apply tariff rates on a reciprocal basis,” Trump’s executive order complains. 

MFN tariff rates vary widely, it continued. The US tariff on passenger vehicle imports is 2.5%, for example, compared to 10% in the EU, 15% in China and 70% in India. 

However, the tariffs imposed in return bear little relation to these rates, nor even the wide range of non-tariff barriers identified. These included everything from licensing restrictions, “unnecessarily trade restrictive standards” and inadequate intellectual property protections, to domestic economic policies, such as value added taxes.  

Instead, the equation provided by the Trump administration shows tariffs were calculated by dividing the US trade deficit with the country in question by US imports from that country. This, rather than any particular affection for the UK, explains its escape from higher rates.: Britain has long had a substantial trade deficit with the US, rather than the other way around.  

By seeking to eliminate its own trade deficit with trading partners, Trump’s administration hopes to revive domestic production. According to US Trade Representative Jamieson Greer, the tariffs heralded a “manufacturing renaissance” for the country. Others are less hopeful, warning of a “self-inflicted economic Armageddon”. 

If the more dire predictions come true, few businesses will entirely escape the consequences, no matter where they trade. In the meantime, however, those exporting to the US face a more immediate challenge.  

The most urgent task facing businesses selling to the US is ensuring they pay the correct rate. They cannot simply assume a tariff of 10%.  

First, the baseline will be added to existing tariffs, which vary for different goods. As Section 3C of the President’s Executive Order makes clear: “The rates of duty established by this order are in addition to any other duties, fees, taxes, exactions, or charges applicable to such imported articles.”  

The exception is the 25% tariff on cars, steel, aluminium and a others put in place earlier this year, which remains at the same level. That much is now relatively clear. 

Ensuring businesses correctly identify goods’ origins on US import declarations is potentially more complex. Businesses need to know the source of components and raw materials of their product and the rules for determining origin. The latter are set out by the WTO and applicable trade treaties and vary by product.  

Just because the final assembly takes place in the UK doesn’t mean a product or good originated in the country for customs purposes (and therefore only faces a tariff of 10%). If it includes inputs from outside the UK (from China, for example), a business may need to show its production has changed the good’s tariff code under the Harmonized System used to classify goods for international trade. Alternatively, it could have to show its manufacturing in the UK is responsible for a particular proportion of the goods’ final value. 

Navigating product-specific rules of origin will be challenging for businesses not used to interpreting these trade regulations. For businesses that don’t have visibility of their supply chains, it will be impossible. 

Even when businesses are confident of their products’ origin, it’s vital they can evidence this for US customs. The burden is on the importer to prove the origin. If customs aren’t satisfied, businesses can find their goods held at the border, preventing them from being sold at home or abroad. Making an incorrect declaration of origin, meanwhile, leaves the business open to charges of tax evasion. 

Once businesses know the tariffs their goods will attract, they can consider mitigation strategies.  

In the longer-term that may mean evaluating the direct and indirect impact of tariffs on their sales in US, UK and elsewhere. The implications and impact of the new US regime are wide ranging:  

• UK exporters to the US may have an advantage against exporters from elsewhere, such as the EU, facing higher tariffs 
• Where they compete with domestic US producers, their goods will now be more expensive and less competitive  
• At home, UK businesses potentially face new competition from overseas exporters hit harder by tariffs and looking for new markets for their products. Vietnam, for example, now faces US tariffs of 46% but has a free trade agreement with the UK 

How these impacts play out will take time to become clear. The UK government still hopes to reach a trade agreement with the US, and whilst other countries’ responses in terms of retaliatory tariffs have yet to be seen. It will also be important to see if the current exemptions from tariffs, which include crude oil, pharmaceuticals and semiconductors, persist in the long term.  

For some international businesses with operations in the US, the first sale US customs valuation rule could provide some relief. It allows duties to be paid on the price of the first sale by the original seller in a chain of transactions, rather than the last sale before import into the US. By ensuring the tariff is applied to a lower value than the final sale price, the payable duty will be lower.  

However, strict conditions apply to this rule and where these cannot be met, duty optimisation strategies are likely to require more drastic steps. These will include reviewing markets, suppliers, production bases, and international expansion plans.  

Consequently, most businesses are likely to wait for the dust to settle before committing themselves. Until then, however, it is worth considering their options under a range of likely scenarios.  

Even if, and perhaps especially if, economic Armageddon is coming to the US, businesses will want to be ready.