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The roll-out of President Trump’s tariff regime has ignited an international response, with markets reeling, inflation risks escalating, and projections for a recession increasing. China’s tariff rate has been increased to 145%, while most other countries remain under a 90-day pause on most high tariffs. As the world waits and sees where the trade policy will land, corporate directors are moving swiftly to support their management teams in identifying strategies to reduce their immediate economic losses. To do so, large multinationals with global supply chains are leveraging tariff engineering to modify products or their classification to reduce import duties.
Key takeaways:
- Tariff engineering helps companies legally minimize import duties by making strategic product modifications and supply chain adjustments
- Businesses can reduce costs by optimizing product design, sourcing strategies, and tariff classifications under the U.S. International Trade Commission’s Harmonized Tariff Schedule (HTS) and World Customs Organization’s Harmonized System (HS)
- To be successful, tariff engineering requires collaboration between product designers, legal teams, and logistics professionals to ensure strategies are innovative and compliant
- Board members will have to pay close attention to these strategies given their associated ethical, reputational, and legal risks
How does tariff engineering work?
Very simply, tariffs are import taxes imposed by governments on goods entering a country; they are calculated as a percentage of the product’s value (ad valorem) or a fixed amount per unit (specific duties). As we see in the U.S., governments deploy tariffs in the hope of protecting domestic industries, regulating trade, and generating revenue. The tariff rate depends on a product’s classification under the World Customs Organization’s (WCO) Harmonized System (HS), an international framework categorizing 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.
Given the massive scale of tariffs globally, there is much to be gained by lowering a company’s economic exposure. See Exhibit 1 below.
The key factors that influence the tariff percentage:
- Classification. The HS assigns different duty rates based on product characteristics
- Country of origin. Tariffs vary depending on trade agreements or restrictions on a country-by-country basis
- Declared value. Import duties are often calculated as a percentage of the item’s customs value
- Product form. Some goods incur lower tariffs when imported as components rather than finished products
Key strategies for tariff engineering
To pull off tariff engineering strategies, corporate boards will have to ensure engagement across the enterprise – product design, legal, logistics, operations – to ensure both innovative strategies and compliance with trade regulations.
- Material substitution. Using alternative materials that qualify for lower tariff rates
- Component-based imports. Importing products in disassembled form when individual parts are taxed at lower rates than finished goods
- Manufacturing location adjustments. Shifting production or final assembly to countries with favorable trade agreements or lower duties
- Product classification optimization. Structuring goods to fit within HTS codes that carry reduced tariff burdens while maintaining compliance
- Value-based tariff planning. Managing declared customs values within legal guidelines to minimize duties
- Re-pricing. Companies look to reprice certain components of their product to reduce tariff exposure
How have large global companies used tariff engineering?
With roots in the late 19th century, tariff engineering is not new. With a landmark case in 1881, Merritt vs. Welsh, established that importers could legally alter product characteristics to avoid higher duties. Since then, we have seen major global brands adjust their operations and strategies to improve cost efficiencies.
- Volvo. The Swedish luxury brand owned by China’s Geely, started to import the Chinese-made EX30 electric vehicle into the U.S. By classifying the vehicle under a leasing program, Volvo can apply a $7,500 tax credit, effectively lowering the vehicle’s price and mitigating tariff costs. Volvo is eligible for tariff refunds under a law that awards them to firms with U.S. manufacturing operations, such as its plant in South Carolina
- Columbia Sportswear. Has modified the design of shirts by adding a small pocket below the waistline. In doing so, they can be classified under a tariff category with lower import duties. In accordance with the HTS, this specific design reduces the duty rate from 26.9% to 16%
- Converse (Nike). Converse has started adding a thin layer of felt to the soles of its Chuck Taylor All-Star sneakers, which enables them to be classified as slippers rather than athletic shoes. This reclassification reduces the import duty from 20% to 6%
- Ford. With its small passenger minivan, the Transit Connect, used for bakery deliveries and construction crews, classified the vehicle as a “car,” which at the time brought a 2.5% duty as opposed to a truck with a 25% duty. Ultimately, the U.S. government sued Ford for misclassifying the vehicle from 2009-2013, and the company agreed to pay a $365 million settlement
- Marvel. In 2003, Marvel successfully argued that its X-Men action figures are non-human toys rather than dolls, which reduced the tariff rate from 12% to 6.8%
- Roche. Swiss pharmaceutical company Roche has just announced in late April 2025 a $50 billion investment in U.S. manufacturing facilities to mitigate potential tariffs. This move aims to create over 12,00 jobs and shift production domestically. Switzerland has a 10% tariff, which is on track to rise to 31% when the 90-day pause President Trump announced earlier this month comes to an end
- Coca-Cola. Has suggested it may switch from aluminum to plastic packaging to avoid the additional tariff-related costs, which will also impact their ability to achieve packaging sustainability targets
Where do exemptions fit in?
While not a form of tariff engineering, as part of a comprehensive strategy to reduce exposure to tariffs, many have been aggressively advocating the Trump Administration for exemptions. So far, the most notable examples include:
- Apple. Has successfully negotiated an exemption for smartphones and laptops, which limits their exposure to the 145% import duty on Chinese products. Since the exemption was announced, Apple’s stock has risen
- Writing open letters. Companies are publicly expressing concern for the implications of both price increases and lessened availability of essential items, like baby products, if the current tariff regime isn’t altered
- Industry Associations. Auto-related industry associations have been engaging with the administration for more exceptions and exclusions, especially on low-value components
What are the legal considerations and risks?
Tariff engineering strategies must be carefully implemented to ensure compliance with trade regulations and that ethical business practices are upheld. To support management teams in oversight, a number of legal and ethical factors must be considered:
- 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
Actions boards can take:
- Evaluate risks for all tariff engineering strategies given the myriad of material, reputational, ethical, and compliance considerations
- Improve due diligence across the supply chain and enhance supply chain traceability through a strategy, Know Your Supply Chain program (KYSC)
- Engage with management teams to understand tariff engineering strategy, with options for short-term policy shifts and long-term recessive economic conditions
- Pull in expertise from across the global enterprise to ensure coordination – legal, product development, supply chain, sustainability, etc.
- Pressure test policy and economic scenarios to improve contingency plans
Questions for the boardroom:
- What examples of tariff engineering have worked most effectively for our peer group? Where has it borne negative reputational and financial impacts?
- How do we most effectively understand our tariff exposure? How robust is our Know Your Supply Chain (KYSC) program?
- How can we improve our models for different political scenarios to determine potential end-games for U.S. trade policy and consider strategic contingencies for each?
- What are the sustainability and environmental impacts of our tariff engineering strategy?
- Which lever is our best to pull given the range of tariff engineering approaches – component substitution, product reclassification, production location adjustments, value-based planning, re-pricing, etc.? Why is that so? What are the pitfalls of each?
Additional Telesto resources:
- Board series: Tariff endgame, calculated or chaotic?
- Board series: Know your supplier – Diversification risk amidst escalating trade wars?
- Board series: How can companies stay ahead of political risk under Trump 2.0?
- Atlas, equips your organization’s corporate directors and leaders with the insights and knowledge necessary to stay up to date, mitigate risks, and seize business opportunities associated with sustainability, climate, and ESG
- Prism, our ESG benchmarking tool, helps your organization to rapidly strengthen its sustainability, climate, and ESG performance and disclosures through in-depth benchmarking of industry peers and identification of gaps and areas of distinction
- Recently released by Telesto Strategy’s CEO & Founder, Alex Kruzel, The Courage to Continue: Stay the Course on Sustainability to Secure our Future, explores the connection between corporate priorities and President Trump’s national security agenda
