In the 1960’s, just 8% of consumer goods sold in the US were made overseas. In 2020, that number was 60% and, although the trend may be slowing, it shows no sign of reversing anytime soon. The majority of the consumer goods that are imported are already in their finished form, packaged and ready for sale. For goods made in the USA, it is challenging for economists to calculate the average amount of foreign content that goes into the goods produced domestically and, unfortunately, many U.S. manufacturers don’t know exactly how much foreign content goes into their own products!
Most experienced exporters understand the different sets of rules at play when determining if a product is indeed USA-made. Generally speaking, if material or a set of components are “transformed” into a new item, this is where the new item is “made.” However, with each Free Trade Agreement (FTA), the rules will differ in terms of the percentage of originating material and/or the value-content requirement. To fully comply with these rules, the exporter must therefore collaborate with their suppliers, both international and domestic, to understand the amount of foreign content going into their finished goods. This effort falls under the category of Trade Compliance and, unfortunately, is often seen as a “cost” to doing business internationally.
Although most exporters understand the need to qualify their products under USMCA rules (to sell their goods duty-free into Canada and Mexico of course) and the rules of other FTA’s, there are additional benefits to having a deeper understanding of the supply chain. All too often I’ll meet with a company that assumes that the material purchased from a domestic vendor is of US origin even when certain items, like batteries, displays, speakers, semiconductor chips and small to medium-sized electric motors are almost always imported from abroad. When these items are imported, more often than not, import duties were paid by the supplier which are then added to the cost of the item and, therefore, indirectly paid for by their customers.
As most of you already know, if the finished good that contains the imported material or components is later exported as part of a new product, Duty Drawbacks would apply for most exports. There may also be a benefit to setting up a Foreign Trade Zone Subzone also which could eliminate the import duties paid on the product sold domestically as well (in addition to other benefits). Companies can also employ Tariff Engineering to determine if imported subassemblies would result in a reduction in duties than the sum of its components (taking labor costs into consideration) or how sourcing the inputs from different countries would affect the net duties paid.
Many, many more Wisconsin manufacturers who sell to OEM’s fail to quantify the “indirect” exports of their products by their customers. Indirect exports may allow the manufacturer to participate in Duty Drawbacks in addition to the possibility of reducing their tax liability on these sales by implementing an IC-DISC. Furthermore, if the OEM decided to move production overseas or, if competing product from outside the US flooded the domestic market causing harm to the manufacturer, Trade Adjustment Assistance would also be available to the company.
To learn more about these programs as well as the multitude of trade resources available at the state and federal level, please contact me to take advantage of the Wisconsin Go Global Initiative, a no-cost program available to any and all Wisconsin companies:
Special thanks to Sue Dragotta for contributing to this article.