THE Guide for LEGALLY Avoiding Today’s and Tomorrow’s U.S. Tariffs

THE Guide for Legally United States Tariffs

1. The Volatile Trade Landscape – A Real-World Challenge

Imagine a small U.S. manufacturing company that depends on certain parts or material inputs that can only be sourced from China. Since returning to office, President Trump has announced new tariffs that have added a 25% cost to their raw materials. This is the harsh reality that countless U.S. businesses are struggling to deal with.

The trade relationship between the U.S. and China, Mexico, Canada, and the EU is more volatile than ever. What started as relatively targeted measures that affected about $380 billion of imports has metastasized into an ever shifting maze of tariffs that will impacting over a trillion dollars of trade. Many more American companies are getting caught in the crossfire of the trade war and now face significantly rising costs that threaten profits, market share, and even survival.

a. Navigating the Complex World of the Trump Tariffs: Legal Strategies That Work

This guide discusses just about every viable legal strategy to avoid or reduce tariffs, from widely used methods to overlooked techniques that could make a difference. We’ve included every approach we’ve seen or thought of, but if you know of others, feel free to share in the comments.

Before diving into specific tactics, a critical reminder: tariff avoidance must always be legal, and this guide focuses solely on compliant, legally sound methods to minimize tariff exposure.

b. Recent Tariff Changes: IEEPA and Beyond – Understanding the Escalation

On March 4, new tariffs issued ostensibly under authority of the International Emergency Economic Powers Act (IEEPA) took effect on imports from Canada and Mexico, adding a 25% duty, except for energy and energy resources from Canada, which face a 10% duty. These followed a 30-day pause after the initial IEEPA announcement. These tariffs on Canadian and Mexican goods have again been paused for USMCA-origin goods, but President Trump assures us that these tariffs (and additional tariffs) will be back on April 1.

For China, IEEPA tariffs began on February 4 at 10% and doubled to 20% on March 4. These IEEPA tariffs stack on top of existing duties and special tariffs, further increasing costs. Most China products now face a 45% tariff.

According to the latest reports, a new round of “reciprocal” tariffs is expected to take effect on April 2, impacting trade with every country worldwide. These tariffs are designed to mirror the trade barriers that U.S. exports face in foreign markets. The administration plans to evaluate each trading partner’s tariffs, non-tariff barriers, and other trade practices to establish corresponding U.S. tariff rates. On April 2, countries will receive their specific tariff designations and will have the opportunity to negotiate reductions by addressing the identified trade imbalances.

c. Understanding IEEPA Tariffs

The legal justification declared for the IEEPA tariffs against Mexico and Canada is the national security emergency related to fentanyl, synthetic opioids, drug trafficking and illegal immigration concerns. This is different from the previous Section 301 tariffs against China, which were imposed to counter certain alleged unfair trade practices related to China’s intellectual property practices.  But regardless of whether national security under IEEPA or unfair trade practices under Section 301 is cited, these are just fig leafs of legal justification that provide a plausible basis for the President to flex his considerable discretionary executive authority to impose tariffs on a wider range of goods.

d. U.S. Trade Policy and Enforcement: Navigating Regulatory Scrutiny

U.S. trade policy remains unpredictable, with tariff rates and product coverage shifting with little notice. This uncertainty is compounded by the fact that U.S. Customs and Border Protection (CBP) has ramped up enforcement, scrutinizing not just imports from China but also those from any countries suspected of transshipment and those widely viewed as China proxies. This heightened scrutiny underscores the need for meticulous compliance and proactive risk management.

2. A Strategy for an Unpredictable Trade Future: Diversification and Resilience

Manufacturing relocation remains one of the most effective strategies for avoiding China tariffs, but it does not eliminate tariff risk altogether. The U.S. is signaling that tariffs could expand to Mexico, Canada, Europe, and Asia, making long-term manufacturing decisions more uncertain than ever.  Any product from any country is a potential tariff target.

Rather than assuming any one country is a safe haven, companies should try to adopt a diversified strategy that balances reshoring, nearshoring, and offshore production. Compliance with substantial transformation rules, country-of-origin regulations, and trade agreement requirements will be critical in the coming years.

a. Substantial Transformation: Determining Country of Origin and Ensuring Compliance

Regardless of where your manufacturing takes place, it is important that you ensure your operations satisfy legal country-of-origin requirements. Simply shipping Chinese components to another country for minor assembly or finishing will not suffice to avoid Section 301 tariffs.

U.S. Customs and Border Protection (CBP) applies the substantial transformation doctrine to determine whether a manufacturing process in a given country fundamentally changes a product’s character, name, or use—resulting in a new and different article of commerce. This determination is highly fact-specific and varies significantly by product category. There is no simple formula of how much cost/ weight of the product is needed to achieve a substantial transformation.

b. Processes That Generally Qualify as Substantial Transformation

• Chemical reactions creating new compounds
• Complex assembly integrating numerous components into a sophisticated product
• Manufacturing processes that require specialized knowledge and equipment or significantly increase a product’s value

c. Processes That Generally Do Not Qualify as Substantial Transformation

• Simple assembly operations
• Mere finishing, packaging, or labeling
• Dilution or mixing that doesn’t change essential character

Given the complexity of these determinations, obtaining a binding ruling from CBP before making major supply chain changes is a prudent and strategic step. While the process requires disclosing detailed production information and may take several months, the legal certainty it provides can prevent costly missteps.

d. Partial Manufacturing and Illegal Transshipment: Navigating the Legal Minefield

Even if certain components continue to be sourced from China, a finished product may qualify as non-Chinese if subsequent manufacturing operations constitute substantial transformation. This allows businesses to maintain relationships with trusted Chinese suppliers for certain inputs while avoiding tariffs on the final product that is now processed outside of China.

However, far too many companies have come to us under the mistaken belief that simply moving production from China to another country (e.g., Thailand, Cambodia, Mexico, etc.) automatically exempts them from U.S. tariffs. That is not the case. Relocating assembly alone does not change a product’s country of origin—it must undergo a fundamental transformation to qualify for tariff exemptions. Without this, businesses risk significant penalties and retroactive tariffs.

Our international trade lawyers have prevented multiple companies from facing steep fines and unexpected tariffs after they incorrectly assumed that because their Chinese manufacturer’s product was shipped from Vietnam or Cambodia, it was no longer considered “Made in China” under U.S. trade law. This assumption is a major compliance risk.

To avoid costly penalties, businesses must ensure their manufacturing relocation is legitimate and not merely a cover for illegal transshipment—where Chinese products are rerouted through third countries with minimal or no actual manufacturing to disguise their origin.

e. You Must Get This Right

Tariff compliance is not something to guess at. You must have a qualified expert conduct your substantial transformation and tariff due diligence before committing to a new production plan. Failing to do so can result in severe financial and legal consequences, including the following:

• Fines up to 400% of duties owed
• Exclusion from U.S. government contracts
• Criminal prosecution, with severe penalties and jail time

f. The False Claims Act and Whistleblower Risk: Understanding Legal Liabilities

Companies engaged in illegal transshipment or false country-of-origin declarations not only face steep customs penalties but also serious liability under the False Claims Act (FCA).

Whistleblowers, incentivized by substantial financial rewards, can initiate FCA lawsuits, exposing companies to significant legal and financial consequences. The penalties for FCA violations can be severe, often far exceeding the original tariff liabilities. Our law firm successfully brought an FCA action to the United States Government, which resulted in a $62 million settlement payment—from which our clients received a substantial share.

3. Strategic Partnerships and Manufacturing Arrangements

a. Contract Manufacturing in Tariff-Free or Low-Tariff Locations

Contract manufacturing offers a flexible approach to relocating production without the capital investment and management challenges of building new facilities. Businesses contract with manufacturers in strategic locations to produce goods according to specifications, outsourcing production operations and tariff exposure.

Many countries still export products to the United States tariff-free or with low tariffs, including (for now anyway), the following:

• Mexico and Canada:
  • Advantages: Nearshoring advantages, proximity to the U.S. market, established manufacturing infrastructure.
  • Disadvantages: Susceptible to new U.S. tariffs, increasing labor costs compared to other regions.
• Vietnam, Thailand, and Malaysia:
  • Advantages: Lower labor costs, growing manufacturing capabilities, strategic location in Southeast Asia.
  • Disadvantages: Increasing U.S. scrutiny, potential supply chain vulnerabilities, evolving regulatory environments. These countries are near to full capacity, making it hard to find
• India, Indonesia, and the Philippines:
  • Advantages: Large labor pools, growing domestic markets, potential for cost savings.
  • Disadvantages: Potential infrastructure challenges, logistical complexities, varying levels of regulatory compliance.
• Taiwan and South Korea:
  • Advantages: Advanced manufacturing capabilities, technological expertise, strong intellectual property protection.
  • Disadvantages: Higher costs compared to other Asian countries, potential geopolitical risks.

Given the U.S. government’s stated intent to impose new tariffs, including potential tariffs against the EU, Canada, and Mexico, reciprocal tariffs against all countries, and expanded tariffs on aluminum and steel, many companies are delaying shifting manufacturing operations until greater clarity on U.S. tariff policies emerges.

b. Contract Manufacturing Models and Considerations: Tailoring Solutions

The structure of contract manufacturing arrangements varies based on business needs:

• Full outsourcing
• Partial outsourcing
• Modular manufacturing

c. Key Factors for Successful Contract Manufacturing

• Clearly defined agreements
• Production specifications and pricing
• Quality control measures
• Intellectual property protection
• Compliance with U.S. import regulations
• Ownership of tools, molds, and equipment
• Dispute resolution mechanisms
• Regular audits of manufacturing practices

In Manufacturing in China: Minimizing Your Risks by Doing Things Right and Overseas Manufacturing Contracts (OEM, CM and ODM) we wrote extensively on how to improve your odds of problem-free outsourcing.

d. Trade-Off Manufacturing: An Innovative Exchange: Exploring Reciprocal Arrangements

A less common but increasingly relevant approach to international production is trade-off manufacturing, involving reciprocal production arrangements between companies in different countries. For example, a U.S. company might manufacture products for a Chinese company to sell in the United States, while the Chinese company manufactures the U.S. company’s products for sale in China or other markets. Both companies maintain their own distribution and sales channels, exchanging manufacturing services to optimize costs and navigate tariff barriers. We started seeing an increase in these arrangements during COVID.

e. Key Advantages of Trade-Off Manufacturing: Strategic Benefits

• Tariff Avoidance
• Capital Efficiency
• Intellectual Property Control
• Shipping Cost Reduction
• Specialized Expertise

f. Considerations for Implementing Trade-Off Manufacturing: Key Agreements

• Comprehensive agreements
• Production specifications and quality standards
• Knowledge transfer and technology exchange protocols
• Intellectual property protections and legal safeguards
• Regulatory compliance and import/export requirements
• Equivalent value of exchanged services to avoid transfer pricing concerns

4. Joint Ventures: Shared Investment, Shared Benefit, Shared Risk

Joint ventures (JVs) can balance contract manufacturing and wholly owned subsidiaries, allowing partners to share investment and risk while leveraging complementary strengths. For example, a U.S. company’s product design and market access can be paired with a foreign partner’s manufacturing expertise and facilities, creating a mutually beneficial operation.

However, many JVs fail due to unresolved issues not formalized in writing before establishment. The root cause of most failed JVs is a lack of clear agreements on governance, decision-making authority, financial contributions, intellectual property ownership, and exit strategies. Without these foundational elements, disputes arise, and one partner often exits at a significant loss.

a. Types of Joint Ventures: Structuring Partnerships

• Equity Joint Ventures: Partners form a new legal entity, contributing capital and sharing profits.
• Contractual Joint Ventures: Collaboration structured through contracts, offering flexibility.
• Strategic Alliances: Looser cooperation on specific projects while maintaining separate operations.

Regardless of structure, success hinges on upfront clarity. Without a well-drafted agreement addressing potential conflicts, even promising ventures can unravel.

b. Key Issues to Resolve Before Forming a Joint Venture: Essential Agreements

• Governance & Decision-Making
• Financial Contributions & Profit-Sharing
• Exit Strategy
• Intellectual Property Protection
• Regulatory Compliance
• Cultural & Operational Alignment

c. A Strategic Application: U.S.-China Joint Ventures in Tariff-Free Locations: Leveraging Partnerships

One relevant use of JVs is for U.S. companies partnering with existing Chinese manufacturers to establish production in tariff-advantaged locations. This model allows businesses to:

• Leverage manufacturing relationships while creating a new origin for U.S.-bound products.
• Benefit from the Chinese partner’s expertise.
• Maintain market access and avoid Section 301 tariffs.

However, success depends on careful structuring and clear contractual safeguards.

5. Licensing and Technology Transfer to Empower Local Production

Licensing offers a cost-effective alternative to relocating production, allowing businesses to leverage intellectual property, technology, or branding without direct manufacturing investment. Instead of establishing their own facilities, U.S. companies can authorize third parties, typically in tariff-advantaged locations, to manufacture products according to their specifications. In return, the U.S. company receives royalties or licensing fees while maintaining strategic oversight.

a. Different types of Licensing Arrangements

Manufacturing licenses permit a third party to produce specific products under detailed specifications and quality standards.

Technology licenses grant access to proprietary processes, formulations, or technical know-how, enabling the licensee to handle production independently.

Trademark licenses allow partners to use branding while maintaining strict quality control, a critical factor for consumer products where brand reputation is key.

Many licensing agreements combine these elements into comprehensive arrangements that cover production, marketing, and distribution rights.

b. Key Considerations for Effective Licensing

To successfully implement a licensing strategy while protecting intellectual property, businesses must structure agreements carefully. Essential factors include:

• Clearly defined scope of licensed rights
• Rigorous quality control requirements with regular audits
• Performance metrics and minimum production standards
• Territorial limitations and market restrictions
• Royalty structures that fairly compensate for the value provided

c. Why Licensing Works

Licensing is particularly effective for products with strong intellectual property protection, established brand recognition, or complex technical requirements that create barriers to unauthorized production. Compared to direct manufacturing investment, it offers a faster and lower-risk path to market while maintaining control over critical aspects of product design and quality. For more on international licensing, check out The Benefits of International Licensing

6. Distribution Agreements to Expand Market Reach

Cross-border distribution agreements can provide a structured and strategic approach to market expansion. These agreements typically establish sales targets and include termination provisions if those targets are not met. Pairing a distribution agreement with a trademark licensing agreement can further protect your brand and intellectual property while maintaining control over market positioning.

A distribution arrangement provides a more controlled and lower-risk alternative to joint ventures. It allows for clearly defined sales expectations and enforceable consequences for unmet goals, ensuring that your Chinese partner remains incentivized to market and sell your products effectively. Additionally, this approach enables you to retain ownership of intellectual property while maintaining greater control over branding and marketing strategies. However, as with joint ventures, it is essential to carefully select and continuously monitor your distribution partner to ensure alignment with your business objectives.

This strategy is particularly effective for products with strong intellectual property protection, established brand value, or complex technical requirements that create barriers to unauthorized production. Compared to direct manufacturing investment, it allows for faster market entry while preserving control over critical aspects of product design and quality. For help in determining what should go into your international distribution contract, I urge you to read Managing China Distribution: Best Practices for Protecting Your Interests.

7. Product-Specific Strategies: Rethinking What You Import

a. Tariff Engineering

Tariff engineering is a legitimate and strategic approach to modifying products to qualify for more favorable tariff treatment. Successfully implementing tariff engineering requires a careful analysis of tariff schedules to identify opportunities for product modifications that could result in a different classification and, consequently, a lower duty rate.

One common approach involves modifying a product’s physical characteristics or materials to alter its classification. For example, adjusting a product’s composition to change its essential character or functionality may shift it into a category not subject to Section 301 tariffs. Functional adjustments, such as adding or removing features to alter a product’s primary purpose, can also impact its tariff classification. Some businesses have strategically designed products so that final assembly constitutes a “substantial transformation,” allowing them to continue sourcing components from China that are not directly subject to tariffs. Another effective strategy is material substitution, replacing tariffed inputs with alternatives that serve the same function but fall under a different, lower-tariff classification.

Industries across various sectors have successfully applied tariff engineering strategies. Footwear companies have redesigned shoes with fabric uppers instead of leather to qualify for lower tariff rates. Electronics manufacturers have adjusted product functions to align with HTS codes that carry lower duties. Furniture producers have modified designs so that their products can be shipped as unassembled components, qualifying for different tariff classifications than finished goods.

While tariff engineering is widely accepted, it must be conducted within clear legal boundaries. Product modifications must serve a legitimate business purpose beyond merely avoiding tariffs, and any changes should be supported by thorough documentation of product development and engineering decisions. To ensure compliance, businesses should work with customs classification experts and consider obtaining binding rulings from CBP before implementing significant modifications.

b. HTS Reclassification

Many imports may qualify for more favorable tariff treatment without requiring physical changes to the product, simply through proper classification under the Harmonized Tariff Schedule (HTS). The HTS contains thousands of product categories, each governed by complex classification rules. Given this complexity, similar products are often classified differently, resulting in significant differences in tariff liability.

A thorough review of current classifications can reveal opportunities for legitimate reclassification under different HTS codes. This process often uncovers inconsistencies in how similar products are classified or ways to emphasize specific product characteristics that justify alternative classifications. Engaging customs classification experts can be invaluable, as they are familiar with classification precedents and strategies that may not be immediately apparent.

Certain techniques can further refine classification strategies. In some cases, breaking a product into separately classified components can reduce or eliminate Section 301 tariffs. Some products may qualify as “kits” under customs regulations, which can affect duty rates. Additionally, an essential character analysis—where classification is based on the component that defines a product’s primary function—can significantly impact tariff treatment, particularly for complex items.

To reduce risk and ensure compliance, businesses should consider obtaining binding rulings from U.S. Customs and Border Protection (CBP) before implementing new classifications. These rulings provide legal certainty regarding how specific products will be treated upon importation and protect against unexpected reclassifications during customs review. Maintaining detailed documentation of classification decisions, including technical specifications and expert opinions, further strengthens a company’s position in case of a dispute.

8. Advanced Customs and Trade Programs

Beyond manufacturing relocation and product strategies, several specialized customs programs provide opportunities to reduce tariff liability without changing where or what you import. These programs help businesses optimize duty costs, improve cash flow, and maintain compliance while navigating complex international trade regulations.

a. Duty Drawback: Reclaiming Paid Duties: Refund Opportunities

The duty drawback program, administered by U.S. Customs and Border Protection (CBP), allows importers to reclaim duties paid on imported goods that are later exported or destroyed under customs supervision. Duty drawback can be claimed on the original Section 301 tariffs on Chinese-origin goods, but cannot be claimed for any of the new tariffs announced this year.

There are several types of duty drawbacks:

• Direct identification drawback allows businesses to claim refunds on specific imported materials that are later exported, either in their original condition or as components of a finished product.
• Substitution drawback provides greater flexibility by allowing claims based on exports of similar domestic goods rather than the exact imported items, simplifying record-keeping while still enabling significant duty recovery.
• Rejected and unused merchandise drawback applies when imported goods are returned to the seller, destroyed, or exported without being used.

To maximize drawback benefits, businesses must implement systematic tracking of eligible transactions and maintain detailed documentation. Many companies integrate drawback tracking into their ERP systems or partner with licensed customs brokers to streamline claims. While the administrative burden is substantial, businesses can recover up to 99% of duties paid, making this a valuable option for companies with significant export operations.

b. The First Sale Rule

The First Sale Rule is an effective yet underutilized strategy for reducing duty liability. This rule allows duties to be assessed on the price paid in the first sale of a multi-tiered transaction rather than on the final price paid by the U.S. importer.

For example, a Chinese manufacturer may sell to a Hong Kong trading company, which then sells to a U.S. importer at a marked-up price. With proper documentation and structure, duties—including Section 301 tariffs—can be calculated on the lower first sale price rather than the final U.S. sale price.

To qualify, transactions must meet specific legal criteria:

• The first sale must be a bona fide transaction, not a paper arrangement.
• The goods must be clearly destined for U.S. export at the time of the first sale.
• The transaction must be conducted at arm’s length, meaning the pricing reflects fair market value, even between related parties.
• Comprehensive documentation of both transactions must be available for customs review.

Many businesses structure their global supply chains to take advantage of the First Sale Rule, often positioning intermediary entities in jurisdictions like Hong Kong or Singapore. When properly implemented, this strategy can withstand customs scrutiny while delivering substantial duty savings.

c. Foreign Trade Zones (FTZs)

d. Bonded Warehouses

Bonded warehouses provide businesses with a secure storage option for imported goods under customs supervision for up to five years without requiring immediate duty payments. They typically offer the following advantages:

• Duty Deferral – Import duties are postponed until the goods are withdrawn for U.S. consumption.
• Duty Elimination on Exports – No tariffs are owed on goods that are later exported.
• Processing Flexibility – Goods can be cleaned, repacked, sorted, or repaired within the warehouse without triggering duties.

While bonded warehouses are easier to establish than Foreign Trade Zones (FTZs), they offer more limited manufacturing capabilities. Businesses commonly use them to stage inventory, manage tariff fluctuations, or store seasonal goods without immediate duty obligations

9. Administrative and Exclusion Strategies

a. Tariff Exclusion Requests

The U.S. Trade Representative (USTR) periodically allows businesses to request exclusions from Section 301 tariffs for specific products. While these opportunities have been limited, they can provide significant cost relief for approved items. To improve their chances of success, businesses should present a compelling case by demonstrating that alternative sourcing options do not exist and by providing detailed economic impact assessments. Strong applications include evidence of how the tariffs affect both the company and the broader U.S. industry. Additionally, businesses can strengthen their requests by working with industry associations and government representatives to build broader support.

b. Protests and Administrative Appeals

When U.S. Customs and Border Protection (CBP) makes an unfavorable determination regarding classification, valuation, or origin, businesses have several options to challenge the decision. The most immediate remedy is filing a protest, which must be submitted within 180 days of liquidation. If the protest is unsuccessful, companies may pursue administrative appeals or escalate the matter to judicial review in the U.S. Court of International Trade. These legal avenues not only offer a chance to correct duty assessments but can also help establish precedents that benefit future imports.

c. Prior Disclosures

If a business discovers past customs compliance errors, voluntarily disclosing them before CBP initiates an investigation can significantly reduce potential penalties. To ensure a smooth disclosure process, companies should first conduct internal audits to identify and assess the issue. A successful prior disclosure includes full transparency, with all relevant details provided to CBP, as well as a plan for corrective measures to prevent similar violations in the future. By taking a proactive approach, businesses can mitigate risks, maintain compliance, and foster a cooperative relationship with customs authorities.

Conclusion

By leveraging specialized customs programs and legal trade strategies, businesses can significantly reduce tariff exposure while maintaining compliance. Whether through duty drawbacks, FTZs, bonded warehouses, or administrative appeals, companies that proactively optimize their import processes can achieve substantial cost savings and operational efficiencies in the face of evolving trade regulations.

Navigating the complexities of international trade and tariffs requires expert guidance. Our experienced international trade lawyers are ready to assist you in developing and implementing effective strategies to minimize your tariff exposure and ensure compliance.