Supply Chain

Tariff Turmoil Spurs Need for Rigorous Vendor Screening

To the long list of massive administrative headaches multinational finance departments must start thinking about, we may now add trade compliance.
Brian PeccarelliOctober 12, 2018
Tariff Turmoil Spurs Need for Rigorous Vendor Screening

The escalating trade war between the United States and China, in which President Trump last month introduced tariffs on an additional $200 billion in Chinese imports, has spawned a boom in “creative” workarounds.

Among the tactics currently being deployed are so-called transshipments of Chinese products to places like Malaysia, Vietnam, Philippines, and Sri Lanka to be relabeled with a new country of origin and then exported to the United States. Likewise, shipments from the United States bound for China have already been reported being rerouted through Canada and Vietnam to avoid the tariffs.

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Problem is: It’s illegal. When importing into the United States, a series of customs laws make it illegal to import goods using a falsely labeled country of origin, sometimes equating the practice with smuggling, which can carry a prison sentence of as much as 20 years.

In some cases, U.S. courts have even held corporate officers personally liable. Other countries, concerned that they will become complicit in tariff-dodging transshipments, have announced new legislation to root out the practice. Canada, for example, implemented new anti-circumvention investigations that will allow border agents to stop companies involved in obfuscating a country of origin.

This has put a renewed onus on importers to place rigorous controls on their trade compliance measures to ensure that the current tariff pressures are not sparking any shortcuts in compliance. That means not only tightening up internal risk controls, but also keeping a close eye on third-party suppliers, which are often used as middlemen in the transshipment process.

Know Your Exposure

The first step in the process of tightening customs risk controls is inventory. Companies need to know exactly what goods they are importing from where and cross-reference that with the constantly changing list of goods subject to U.S., Chinese, European, and Canadian tariffs as well as retaliatory tariffs.

This exercise, while complicated, can be streamlined with technology. It should give companies a solid sense of the financial impact of the new tariffs on their total shipping costs. Any significant variation from that estimate would be a potential red flag for the company to investigate further.

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Companies should also conduct a thorough audit of the companies with which they are trading. Importantly, this list must include not only primary supplier and shipping-company relationships, but also their corresponding networks of third-party suppliers and consultants involved in the global supply chain.

As challenging as it can be to implement internal programs, third parties pose an even greater set of risks and risk management challenges. Multinational companies often work with hundreds of different third-party vendors, and they are often the weakest link in the compliance chain.

Manage for Today and Tomorrow

One of the major challenges in dealing with the current trade war is that the rules of the game keep changing. In fact, U.S. and Chinese trade officials were scheduled to meet to continue negotiating an alternative, but that meeting was canceled as part of China’s response to the Trump administration’s latest round of tariffs going into effect.

For those businesses that were hoping this whole thing was just an elaborate negotiation tactic, the reality is starting to set in that, regardless whether today’s tariffs are permanent, they must be dealt with today.

But the exercise of tightening up global customs compliance controls should not be limited just to today’s problem. Supply chain disruptions are nothing new. Whether they come from political agendas, natural disasters, or even just shifts in supply and demand, significant changes in suppliers, trade routes, and materials are a fact of business.

Smart business leaders will use this current disruption as an opportunity to review supply chain strategies and find cost savings. These can include establishing new supplier relationships in different parts of the world, searching for cost-saving opportunities that may be more attractive in light of the current tariffs, and streamlining compliance processes to deal with the inevitable changes that lie ahead.

The one clear fact that has emerged from the last several years of near-constant business disruption at the hands of new regulation, litigation, and innovation is that it is critical to be nimble. Companies that build the highest degree of flexibility and rigorous risk controls into their global supply chains will be in the best position to succeed no matter what the world throws at them.

Brian Peccarelli is co-chief operating officer of Thomson Reuters.

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