Tariff Engineering: The Art Of Designing Away Your Tax Liability
- David Abam
- Aug 1
- 15 min read
Intro:
Picture this: It is mid-March 2025, you are a principal consultant at McKinsey and Co., who specialises in reducing the tax burden on imported goods for multinationals. Typically, this would be a downtime for you where you are able to take a few days off and focus on passion projects; however, your phone rings, it's Kevin Parekh, the CFO of Apple. He has just spoken with various terms and has received the bill for the imports of iPhones, computers, and other devices ahead of the Easter holiday season, should there be an additional 26% tariff on India, and 125% on China, as threatened by the president, an additional $500 million. “We cannot afford to shoulder these costs, and we do not wish to pass them on to our consumers in terms of higher prices,” Kevin says, “We need an emergency solution, and we would encourage bold and somewhat crazy ideas. After a brief pause, you say, “Rent as many empty cargo planes as you can get your hands on, put your products in them, and fly them here.” 3 weeks later, you read the news that Apple flew 600 tonnes, about $2bn worth of iPhones to beat the tariffs before they come into effect. This would be the first of many instances in whereby you would be sought after for your knowledge and expertise in the world of Tariff Engineering.
In this piece, I will discuss the world of Tariff engineering, setting out clearly who initially pays the tariffs and who ends up bearing the brunt of it. I would then give a brief history as to its origins and explore why it's necessary now, with the pause on US tariff threats coming to an end today and the record of trade deals being announced.
I will then discuss the methods and strategies in a broad sense that businesses opt for in order to reduce their import costs and tax liability. I will then go deeper with more industry/sector-specific examples of Tariff engineering, the problem, and what the chosen workaround was enacted.
I will then highlight, in my opinion, the most ingenious example of Tariff Engineering that deserves its own section.
I will then consider the ethical considerations, seeing as it is a very legal concept, and also discuss areas where it skews to illegality.
Finally, I will then give an overview of what companies that have to pay these tariffs could do to reduce their liability. This should be one of my shorter pieces.
Tariff Engineering: Meaning, Origins, and Present Relevance
Before explaining what Tariff Engineering is, it is important to explain what Tariffs are; A tariff or import tax is a duty imposed by a national government, customs territory, or supranational union on imports of goods and is paid by the importer. It is important to stress that the person who is importing/receiving the goods is the person who pays the tariff. Put differently, if Apple is importing iPhones from China to the US, whatever fees, taxes, and import taxes are levied on those imports at the port would be paid by Apple. This should be considered when news outlets within America tell the narrative that the U.S. has collected over $120 billion, since Liberation Day in tariffs. Although this is factually correct, it is a half-truth, as a little bit of research, thinking, or even common sense shows that this is an indirect tax on the American populace. Depending on the company, industry, or management, some companies might “eat the tariffs,” whereby they do not pass on or offset the cost in a different way; however, what typically happens is that the company just passes on the higher cost to the customer through lower quality items or, more typically, higher prices.
Tariff Engineering is the corporate art of redesigning a product’s supply chain, components, or “paper identity” so it lands in a customs category with a lower (or zero) duty rate. In most jurisdictions, including the United States, it is legal so long as firms tell the truth to customs officers and do not mis-declare value, origin, or classification. Courts have repeatedly ruled that importers may “avail themselves of any legal duties to reduce the taxes they owe,” provided the engineering happens before the goods cross the border. Put simply, it is a legal way of altering a product being imported to ensure that the importer pays the least amount of taxes on that product. Companies pay a lot of money for those with expertise in this, as you may be saving them millions at worst and billions at best.
The roots of tariff engineering stretch back to the late 19th century. A defining moment came in the 1908 U.S. Supreme Court case United States v. Citroen, where the court upheld the right of importers to legally alter their goods to qualify for a lower tariff rate. As long as the product is a "commercial reality" at the point of import, not a deceitful workaround, tariff engineering is fair game. This principle has since been reaffirmed by courts, including in Merritt v. Welsh (1892) and more recently in the long-running Ford Transit Connect van case. While Ford initially won a ruling that supported its classification strategy, the appeals court eventually sided with U.S. Customs and Border Protection (CBP), highlighting that intended use matters as much as physical form. The golden rule: modifications must be substantive and commercially valid, not cosmetic or temporary hacks to trick the system.
It regains its relevance in this constantly reformation of global trade, where there are more tariffs and trade deals that push more for nationalism than globalism. It was very prevalent in April during the famous Liberation Day, when Trump unilaterally enacted tariffs on every other trading partner. Since then, he has paused the trade for 30 days initially, then another 90 days to ensure that trade negotiations are carried out and achieved. Seeing that the US has brokered trade deals with their biggest trading partners, Canada, Mexico, Japan and the EU to say the least, it might be worth putting some weight to the words of the Commerce Secretary Howard Lutnick, when discussing if President Trump would not grant any further extensions to countries wishing to negotiate trade deals ahead of the Aug. 1 deadline. “No extensions, no more grace periods. Aug. 1, the tariffs are set,” Lutnick said in an interview on “Fox News Sunday.” As of the time of writing, the US does not yet have a deal with China; however, I posit that if there are no broad extensions on the tariffs to be put in place, an exception would be made for China alone, extending the trade war truce until a deal is negotiated, signed, and ratified. That being said, these new deals have a minimum of at least 10% when the historic averages were around 3-5%; as such, businesses would need to carry out measures to reduce their liability and maintain their profit levels, which is called Tariff Engineering.
Methods And Strategies:
The tariff levied on a product when imported is dependent on and calculated using 4 major metrics. As such, the tariff engineering occurs within these metrics.
Classification: How it is classified is through the World Customs Organization’s (WCO) Harmonized System (HS), an international framework categorising goods based on materials, composition, function, and intended use. The system is used by more than 200 countries and economies as a basis for their customs tariffs and for the collection of trade information. The HS assigns different duty rates based on product characteristics. Goods are taxed differently depending on how they're defined under the Harmonised System (HS); thus, by slightly modifying a product's features or components, companies can shift it into a category with a lower duty. For example, some brands disassemble handbags and ship the parts separately to qualify under a cheaper “components” code rather than a “finished leather goods” code.
Product Form: Some goods incur lower tariffs if imported in parts than in the final form. Put simply, if a Leather-smith imports tanned leather, bamboo, plastic, gold aglets, gold padlocks, and foot studs, with schematics of its construction process, it would incur a lower tariff rate than importing a Hermes Birkin Bag. This is because the tariff is levied on the components and not the final assembly. Going back to the AMD & ASML example, rather than having the reassembly occur within the UK, in this case, would import the disassembled system, pay a tariff on the components of the lithography machine, and have the specialist reassemble it in their factories in the US, which should ideally greatly limit the tariff on the machine.
Declared Value: Or Ad Valorem tariffs, are the most common type of tariffs and are calculated as a percentage of the product’s declared value. These tariffs apply uniformly, regardless of the unit quantity, and tend to be used for more complex or finished goods. For companies importing goods, declaring the true and fair market value of imported goods is essential. Underreporting values to reduce tariff costs is illegal and considered customs fraud. In this instance, companies have to ensure that when declaring goods, they do not cross the thin line between tariff engineering, which is legal, and tariff evasion, which is illegal. A common approach to this is called the First Sale rule, which is a customs valuation rule allowing an importer to base the declared value of goods on the price paid in the first sale of a multi-tier supply chain (e.g., manufacturer → wholesaler → importer), rather than the final sale price. It often results in a lower declared value and, therefore, a lower tariff. A common example of this is a company that is buying a part from a U.S. distributor who sourced it from a factory in Vietnam; they may be able to use the factory price instead of the distributor’s markup when calculating tariff costs.
Country of Origin: Tariffs vary depending on trade agreements or restrictions on a country-by-country basis. For example, post Liberation Day, the U.K. has successfully secured a trade deal with the U.S. whereby its tariff rates are only 10% (down from the proposed 27.5%). However, the EU has been able to negotiate only a 15% tariff rate with the US, even though it is a much larger trading partner than the UK. If 5% is marginal enough that you may scoff at it, consider this: Advanced Semiconductor Materials Lithography (ASML) is a Dutch tech company that makes the most advanced lithography machines that are crucial to the manufacturing of semiconductor chips. Its Extreme Ultraviolet (EUV) machine costs between $380 million - $400 million. That means that if AMD decides to purchase one of these machines for their foundry business, and the company ships it from Denmark, the import tax bill is between $57 million and $60 million; however, if they ship it from the UK, their import tax bill will be between $38 million and $40 million. That 5% translates to an extra $20 million, or put another way, it would cost AMD an extra $20 million just to ship it from Denmark. If a company can shift the “substantial transformation” step, that is, the point at which the item becomes a new product, to a country with a lower tariff rate, it can reduce costs significantly. Applying it to the current AMD example, what they would do is disassemble the machine as much as possible, ship it to the UK, alongside fly out specialists from ASML, reassemble it in the UK, and then ship it to the US from there. Although this process is more cumbersome, and I may not be able to give exact numbers as to what it could cost, I can say with almost absolute certainty that the endeavour would not cost $20 million. While this can be done in a number of ways, it’s generally not something that sourcing and procurement professionals can execute on their own. Rather, it requires a collaboration between sourcing, design, and engineering. Working cooperatively, these team members can look for opportunities to modify the manufacturing sequence; carry out subtle changes to product design; or work to qualify for a new HTS classification associated with a lower tariff rate.
There are other tariff engineering practices that do not follow from the above-mentioned metrics but are still very effective in aiding companies to reduce their tax liability.
Lobbying: A tested and approved method used by companies to create laws or pass policies beneficial to them and their industry. Companies or trade groups can theoretically ask the Office of the U.S. Trade Representative (USTR) for exemptions from duties through what are known as Section 301 requests. These exemptions and reprieve do have their drawbacks, such as the lack of transparency around those case-by-case decisions, prompting some lawmakers to criticise what they saw as USTR's ability to "pick winners and losers," according to the Congressional Research Service. A 2024 study found companies that made substantial investments in connections to Republicans before and during the first Trump administration were more likely to secure tariff exemptions, while the reverse was true of those who contributed to Democrats. It is less gamble, more pay-to-play. This guarantees that bigger companies that have the capacity to and choose to donate more are more effective in their lobbying and Section 301 requests.
Bonded Warehousing: Bonded warehousing is a technique that can be used to delay the payment of tariffs. The tariffs are still due, but their payment can be delayed. As a part of this technique, the goods are stored in a bonded warehouse specified by the government. The duty does not have to be paid when the goods are imported. Instead, the duty has to be paid when the goods leave the warehouse. Since the goods leave the warehouse only when they are sold, this strategy allows the importer to delay payment of duty. The benefit of this is not having a warehouse of unsold inventory that a tax has already been paid on. Furthermore, if you pay duties on goods that are later re-exported, you may be eligible for a partial refund.
Sector Specific Examples
Tech Hardware:
Smartphones & Laptops: In 2019, Apple chartered cargo jets to fly iPhones into the U.S. before a new handset duty kicked in, saving an estimated $150 million in one weekend.
Data‑centre gear: Server makers moved last‑stage assembly to Taiwan or Mexico so racks clear customs as “non‑China” origin, bypassing the 25 % List 4 tariffs.
Unique move: “Firmware by FedEx.” Several networking firms now ship bare boards, then email encrypted firmware keys once the chassis clears customs, turning a dutiable “finished router” into a lower‑rate “printed circuit assembly.”
Automotive:
Rule‑of‑origin gymnastics: EV makers split battery packs across borders; cells made in Korea, module casing added in Vietnam, final assembly done in Canada. Under USMCA, the Canadian plant qualifies the car for a reduced duty.
Modular import: Luxury brands import SUVs without seats or infotainment screens (classed as “auto bodies”) then snap them in at a U.S. port warehouse, cutting the tariff from 25 % to 2.5 %.
Apparel, Footwear & Toys:
Fabric forward: Brands switch from cotton to man‑made fibres to exploit lower duty lines. After Trump’s 145% apparel tariff, several Chinese fast‑fashion retailers shipped “unfinished” dresses minus zippers, finishing them in bonded U.S. zones.
Toy trick: Game‑console makers bundle an HDMI cable and call the set a “video‑controller kit,” moving from the higher “toys” rate to the lower “electronics accessories” rate.
Accessories & Shoes:
Add‑a‑Chain: Luxury bag makers attach a removable metal chain so the HS code flips from “leather handbag” (16 %) to “jewellery case” (8 %). The chain costs fifty cents; the margin gain is 8 %.
Industrial & Energy Equipment
Section 301 detour: Turbine producers cut, weld, and re‑stamp large casings in Vietnam to shift origin away from China, qualifying for the “Most‑Favoured Nation” (MFN) rate.
Rare‑earth switch: Magnet suppliers send partially sintered blocks to Japan for final grinding, sidestepping the 25 % U.S. duty on Chinese rare earth materials that are used to make the magnets. Magnets are very crucial for EV motors.
Food & Agri-business
Pizza kit shuffle: U.S. chains import par‑baked crusts from Canada, tomato sauce from Mexico, and cheese domestically, avoiding higher duties on fully‑made frozen pizzas.
Whisky relay: Distillers age spirit in Scotland for 2 years, then finish another 2 years in Ireland; the “product of Ireland” label dodges a specific Scotch tariff.
Most Ingenious Example:
“Functional Re‑classification”: the LEGO Strategy. A U.S. toy maker disassembles its electronic drone into 12 pieces, each classified as “plastic parts of toys” at 0 % duty. Inside the free‑trade zone in California, workers clip the modules together, flash firmware, and ship the finished drone to retailers the same day. Customs rulings confirmed the approach in 2023. Why it wins:
Ultra‑low duty (zero) versus 25 % on complete drones.
Minimal capex: assembly stations cost <$100k.
Speed: compliance built into logistics, not engineering.
Yet, it skates perilously close to a “split shipment” violation if the pieces are clearly intended to form a single finished item; the company must document that each module has standalone resale value.
Ethical Considerations:
It has been established in the courts that tariff engineering is legal. However, beyond the legality of it, there are ethical and reputational considerations that need to be outlined. Tariff engineering strategies must be carefully implemented to ensure compliance with trade regulations and that ethical business practices are upheld. Such include:
Accurate HS Classification: Accurate classification. Products must be accurately classified under the HS. Otherwise, companies will be exposed to audits, fines, or legal action.
Country of origin compliance: Many tariff rates depend on rules of origin, especially in free trade agreements (FTAs). Incorrectly claiming preferential duty rates can lead to penalties.
Customs valuation rules: Declaring the true and fair market value of imported goods is essential. Underreporting values to reduce tariff costs is illegal and considered customs fraud.
Import documentation accuracy: To avoid regulatory scrutiny, all import paperwork, including bills of landing, commercial invoices, and certificates of origin, must match product descriptions and classifications
Regulatory changes and trade restrictions: Governments frequently update their tariff regimes and structures; businesses must stay informed and compliant. Stay up-to-date with online tariff trackers.
Transparency with regulatory authorities: Ethical businesses ensure honest reporting to customs officials and avoid deceptive practices
Fair competition: Businesses should avoid tactics that distort market fairness or give them an unfair advantage through regulatory manipulation
Corporate reputation: Companies known for ethical trade build stronger and enduring relationships with regulators, partners, suppliers, and consumers
Furthermore, tariff engineering is eerily similar to tax avoidance in the fact that even though they both aim to pay the tax, they both use legal means and loopholes to reduce their tax liability. Ethically, my stance on taxes is predicated on how effective the tax paid is used. That means I do not mind paying a higher share of taxes, especially if I earn more; however, I need to see the direct impact of my taxes, and taxes collectively, on social services such as improved roads, public transport, healthy free meals in schools, and most importantly, an improved healthcare system. I come from and currently live in a country that has relatively high taxes without the subsequent visibility of an effective use of said taxes, or put more succinctly, a blatant mismanagement of the tax revenue accrued, thus I understand and empathise with those who do not wish to encourage such mismanagement by paying more than what they are legally mandated. However, my empathy is capped at multi-billion/trillion dollar organisations whose day-to-day businesses put a significant strain on public services such as roads, waste management, airports and most recently electricity grids, and they refuse to pay their share of the use, a constant example of this is Amazon who frequently makes tens of billions of dollars while paying absolutely nothing in taxes.
Note To Management:
If you are looking at your new import costs and wondering what tariff engineering strategy could work best, you need to know that there’s no one-size-fits-all tactic. The best method depends on the product, the country of origin, and the tariff schedule at the time. For tech firms, component tweaking may be key. For apparel makers, it might be fabric blend manipulation. The common denominator is this: companies with agile supply chains and legal muscle tend to gain the most from tariff engineering. Tariff engineering will remain a core playbook item so long as trade rules stay complex and politically charged. But as global scrutiny mounts, the winners will be the companies that pair clever design with transparent, defensible compliance.
However, here is a brief list of things that can be done proactively to prepare and mitigate the next bill.
Model scenarios now: August’s tariff cliff could swing landed costs by double digits. As such, it would be prudent to look through the new tariff codes and make comprehensive financial modelling to see what your new costs would be. This would allow you to know how much money to spend in your Tariff engineering endeavours to ensure their viability.
Audit classifications: Regulators will zero in on sudden HS‑code changes or origin shifts. This means that you need to conduct thorough audits to remain compliant.
Balance optics and savings: the cheapest route today may have the greatest cost on your brand and your reputation in the future, it may make you endearing now to both the administration and your customers to temporarily eat the tariffs but the should also be balanced with the true costs of it and how sustainable it is, the cheapest option may not be the best in the long run.
Invest in traceability tech: AI‑powered tariff simulators (e.g., Z2Data’s platform) can flag savings and compliance gaps before Customs does. The bigger focus is to zero in on your supply chain, ensuring that it is both efficient and flexible to allow change. Focus on standardising supply chain processes so there would be no delay or drop in quality when switching suppliers.
Conclusion:
In conclusion, Tariff Engineering has emerged as an indispensable strategy in our current era of economic nationalism and trade volatility. The case studies presented demonstrate how multinational corporations employ creative yet compliant methods to navigate escalating import duties while maintaining supply chain efficiency. These solutions highlight both corporate ingenuity and the growing complexities of international commerce.
Beyond mere compliance, questions arise regarding corporate responsibility and fair competition. While courts have consistently upheld the legality of tariff engineering, its widespread adoption risks provoking regulatory countermeasures and public skepticism. Organisations must carefully weigh short-term financial gains against long-term reputational capital and stakeholder trust.
As global trade frameworks continue to shift, tariff engineering transitions from an optional tactic to an operational necessity. Forward-thinking enterprises will institutionalise this expertise through cross-functional collaboration between legal procurement and engineering teams. Those who fail to develop these capabilities risk irreversible competitive disadvantages in an increasingly fragmented marketplace. The window for strategic adaptation is closing as governments grow more vigilant about these practices.
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