There are more questions than answers when it comes to the proposed reciprocal tariffs and what we know about the stipulations in the preliminary trade deals. Top of the list is how the tariffs will be applied—in addition to existing duties or as a replacement—and the scope, impact and effectiveness of potential rule of origin clauses.
To get some clarity, Edward Hertzman, founder of Hertzman Global Intelligence, sat down with Munir Mashooqullah, founder of M5 Groupe, a network of 10 leading supply chain companies; Jason Kra, PhD, president of Li & Fung’s wholesale and distribution business in the US; and Steve Lamar, president and CEO of the American Apparel & Footwear Association trade group.
The discussion, during HGI’s Tariffs: 90 Days Later—What We Know & Where it Leaves Us call, provides insight into how to read the tea leaves as news reports come out, definitions for some of the terms that have been flying around, information on how this environment is fueling fraud, and clues as to how long the tariffs might last.
The following has been excerpted and condensed for the July 16 call. Watch the entire Tariffs: 90 Days Later—What We Know & Where it Leaves Us call here.
Edward Hertzman: Preliminary trade deals are happening—though there’s reports that those rates might not be accurate. What have we learned from what’s been announced so far?
Steve Lamar: I think what’s really important is for folks to just really focus on what’s knowable, what actually emerges from the government in the form of either executive orders or proclamations, what customs posts in terms of federal register notices, customs messages. Those are the things around which business decisions should be made. The rest of the stuff gives you kind of clues and hints and indications, but you may find that you’re basing something on a tweet that a particular country gets X percent tariff rate, and then it turns out that the details don’t back that up in the way that you expected it to be.
EH: There’s confusion about whether these rates will be applied in addition to the existing duties and tariffs. People are calling this stacking. Can you explain?
SL: Stacking refers to this concept of how the new tariffs will be applied, and quite simply, will these new reciprocal tariffs or baseline tariffs be applied on top of the existing MFN [Most Favored Nation] tariffs that are already in place, and have been in place for 95 years. Will they replace them, or will they be sort of the greater of the two? So, if let’s say, the rate is 20 percent in an agreement and the product has an MFN rate of 17 percent. Is it 17 percent plus 20, or the 20 kind of replaces the 17? It’s getting a lot of discussion in the [U.S.] Administration. I think we’ll have to see again what the details look like when these agreements are finally announced, whether the Administration agrees that these should not be stacked or not.
EH: What is rule of origin? What is transshipment? And is the U.S. even prepared to enforce these rules?
SL: You know we’re asking the U.S. government the same question, and they don’t have any answers yet.
Transshipment is the concept of: you make [a product] in country A, you ship it to country B, you slap a label on it, and now you say it’s a good of country B. That’s illegal. I don’t think that’s what this transshipment concept is that the president was referring to in his Truth Social post. No one on the outside really knows for sure.
There’s a lot of press reports out there that these new trade agreements that are being negotiated may incorporate new rules of origin for these new tariff rates that are being talked about. We talked about this 19 percent from Indonesia, and some people may be like, ‘Great 19 percent. That’s so much better than what it was before. I’ll take it.’ But then, what happens if you can’t meet the requirements to qualify for that 19 percent? If you can’t meet the rules to attain that tariff rate because you don’t know how customs is going to enforce it, or you don’t have enough time to move your supply chain so you can be in compliance with it, that 19 percent may sort of be a paper benefit, something that doesn’t really apply to you. And that’s why we—and I would include [U.S. Customs and Border Protection] here as well—are going to need time for these details to take effect before these new supply chain requirements are actually implemented.
We do have an analog in that we have the Uyghur Forced Labor Prevention Act, which basically says, if you make something in a country and it uses inputs from this region from another country, that’s not going to be allowed into the United States. Customs already has a very, very difficult time enforcing that provision, understanding what that provision means. They’ve not done a very good job of communicating evidentiary standards, for example, on that. So, if you take that concept and apply it to a much larger scale and scope, I think customs is going to have a difficult problem from the outset. The industry is as well because people have done a really good job, for example, of diversifying from China at the tier one level, but when you get to tier 2 and tier 3, that diversification isn’t nearly as robust.
EH: We’re hearing reports that orders are being canceled. Is this the case?
Munir Mashooqullah: I think, to be cautious. There’s no cancellation, as such. If something hasn’t been placed, it’s been paused and shopped around but shopped around in what context? Where does one take that? And who are you in that food chain? If you make a very good brand label yoga pant, you probably have a better chance than somebody who ships to the deepest discounter in United States. So, it’s about price sensitivity also. And also, when you move around, it’s not that easy.
And it’s not that everybody’s waiting for a new customer in a country, which all of a sudden becomes favorable. So, let’s say, if you are Jordan or Egypt, there’s already a line there, and they’ll choose because they’ll have duty free plus the tariff.
When it comes to these cancellations that’s not happened as yet. But there are some pauses, and the pauses are to negotiate at this moment. In certain cases where we do not even know with half a dozen countries what the duty or additional tariff is going to be, and in some countries where we’ve heard like Bangladesh or Cambodia, that those rates are not executable because they were already selling at a price point to the ultimate buyers or to an importer who had high licensing fees, so it’s not digestible. So, there is a lot of chaos right now and I think we’ll have to see the next 3 weeks.
EH: We are hearing crazy examples of underinvoicing and excessive LDP fraud. What are you hearing?
MM: Before, it was a game between 16 percent and 34 percent, and the rules applied to everybody and the differential was such that it’s not seen. But today, if you’re a direct importer or retailer, and a wholesaler with a license fee can give you something 20 percent cheaper than what was just going to be your basic FOB cost, doesn’t matter how ineffective your sourcing department is, something’s wrong. And the impunity by which managers, sourcing executives and owners are allowing this discounting to go 70 to 80 percent of FOB is pitiful.
This is going to blow up. And there only needs to be one rule which can come in—and people are working on it—that a third-party broker cannot file for your duties and release the goods, and then you send a new invoice directly to the vendor.
This is going to blow up, and when this blows up there’s going to be an interesting situation of companies—even those who’ve sold, there could be clauses in the companies who’ve sold that you had fraudulent practices in your supply chain. And there has to be some differentiation now between legitimate and allegedly illegitimate companies who actually are right now marketing big brands. And one needs to be careful instead of being lured into this by teams and greed.
EH: Do you have any idea when the reciprocal tariffs could be applied?
SL: I’m going to give you the same answer that anyone in the Administration gives me: I don’t want to get out in front of the President.
The knowledge we’re working with is that we have three dates right now. We’ve got August 1st, which is the current date that the reciprocal snapbacks happen and everything else. So again, don’t look at the dates as mentioned in those letters. Look at the dates, as mentioned in the executive order that the president put out last week.
The second date is August 12th, which again is reflected in an executive order. That’s when the China snapback occurs, or that’s the deadline for the next things to happen. And we got some indication yesterday from [U.S. Treasury] Secretary Bessent that that date may be a little wobbly.
The other big one is September 30th, which is when the AGOA and Haiti trade programs currently expire. Again, will those things be renewed or not? … I would have those plans in place, so what happens if it gets moved back 30 more days to allow for more negotiations to occur for example?
EH: I know you don’t have a crystal ball, but low long do you think the tariffs will last?
SL: I think it’s the new norm for the foreseeable future. Look, there’s a concept that we sort of take as an article of faith that tariffs are bad economics, but they’re good politics… There’s some data to this as well is that when people campaign in support of tariffs, they tend to win elections, whether they end up voting that way or not, or end up doing policies that way or not. But when they talk in terms of ‘We should put a tariff on those imports, because those other people are going to be paying the tariffs.’ That’s kind of the rhetoric that tends to attract populist support. We are definitely in a newer, higher tariff environment. I think that’s one of the more certain things that’s out there.
It’s possible it will be temporary, but I wouldn’t plan on it.
I’ll give you pieces of evidence. MFN tariffs have been around a long, long time. The section 301 tariffs that President Trump initiated again with respect to a number of products. But just China. They’ve been around for about 8 years… If we look at all the revenues that have been collected under the section 301 tariff authority, most of that occurred under President Biden’s watch than under President Trump’s watch. So far, these new tariffs on top of the existing tariffs have raised about $100 billion in this fiscal year. The U.S. government has a hard time giving money back.
We could see inflation numbers come up. There’s a number of legal challenges that may create headwinds for some of these tariffs, but I think even in those cases, there’s a number of plan B’s and plan C, and maybe even plan D’s to keep these tariffs in place or replace them. So, it’s sad to say, but I think you should buckle in and expect these to be here for a while.
