China Tariffs Could Spell Double Trouble for Importers—Here’s How
Date: Friday, September 27, 2019
Source: Sourcing Journal
While brands and retailers are scrambling to figure out how to cover the cost of new tariffs, mulling whether to raise prices or reduce staff when the former is undoubtedly met with resistance, many are overlooking another critical cost: increased customs bonds.
Importers bringing goods into the United States have to prove to U.S. Customs and Border Protection that they can cover the costs of duties, taxes and any other fees associated with an import shipment valued at more than $2,500. The bulk of those bonds are continuous or annual bonds, which must cover 10 percent of all duties paid to Customs for the year.
The problem now is that with new punitive tariffs, the costs for those bonds are increasing—which also means companies’ borrowing power will be decreasing. And in the face of a possible recession, the position could prove unfavorable for many.
If a company imports $50 million in first cost from China and pays $5 million in duties a year, it needs to secure a Customs bond valued at $500,000 to cover the 10 percent of those duty costs. With new 15 percent Tranche 4 tariffs in place, and a 5 percent increase on already-in-place Tranche 1, 2 and 3 tariffs set to take effect on Oct. 15, raising those tariffs to 30 percent, companies will have to head back to the bank to increase their bond collateral in line with the tariff hikes.
When faced with new 15 percent tariffs, the same company importing $50 million worth of goods from China face paying $12.5 million in duties (15 percent of $50 million is $7.5 million, plus the $5 million in duties it was paying already). That means the company would have to secure a new bond valued at $1.3 million (because customs bonds are rounded off to the next hundred thousand), up from the $500,000 bond that previously sufficed.
“Customs is now making you get a new bond because the rolling average is increased,” explained Salvatore J. Stile II, president of Alba Wheels Up International Inc., one of the largest leading customs brokerage companies.
And that’s on top of whatever existing bond may have been in place. If a company’s duties on imports increase from $5 million a year to $12.5 million, it can’t simply get another $750,000 bond to cover the difference; a new $1.3 million bond is what Customs requires, according to Stile.
“What happens then is a stacking issue,” Stile explained. Until the goods tied to the initial bond are liquidated—liquidation is the final phase of importing, which can take up to 314 days as Customs assesses the correct amount of duty owed for goods brought in—those old bonds have to remain in place.
That means a company in the aforementioned scenario could hold a bond worth $500,000 and $1.3 million at the same time, adding up to a total of $1.8 million counted against its borrowing ability. “The old bond is technically cancelled, but your collateral remains in effect because, until those entries liquidate, the bond companies are still responsible for them.”
For companies that were bringing in goods duty free—or even at a more manageable duty rate—from China prior to the tariffs, the change has been jarring. And Customs wants these bonds increased in as little as 30 days.
“A lot of companies are facing a squeeze because they had to get additional borrowing from the bank,” Stile said, adding that if there’s a recession on our hands, companies may need more money to get out of an unforeseen bind, and banks may be less inclined to lend, or at the very least, stricter about how—and to whom—they’re doling out additional funds.
Really, for retail, challenges are coming from all sides: tariffs are up, which could send prices climbing and consumer spending down, and a recession would only exacerbate the damage.
“I’ve seen a lot of $100 million [importer] companies that are in a bind because they’re already taking a hit and they’re not getting an increase from the retailers and it’s another nail in the coffin,” Stile said. “They’re flipping out.”
Where to go from here
According to Stile, who also consults with high-value hedge funds and private equity firms on market conditions, brands and retailers need to run forecast reports of their rolling average duty costs and add a “little cushion” to that when securing new Customs bonds.
“If you’re too conservative on the new bond amount that you think you’re going to need, you may have to start all over with the collateral,” he said.
“If Customs sends a letter out saying you need a $1.1 million bond, get a $1.3 million bond…if Trump adds another 10 percent tariff and you’ve underestimated, you’re probably going to be stuck needing another increase,” Stile concluded.
“That’s why it’s very important to do planning for the things that may happen.”