Brands and retailers doing business in the U.S. are continuing to bob and weave in response to ongoing tariff-related blows. And it’s impacting who they’ll do business with, and how.
Take Delivered Duty Paid. While brands and retailers had been leaning into DDP more as a way to offload the headaches associated with tariff payments and compliance, some have made a 180 over concerns that their partners’ actions could land them in hot water. To insulate themselves from risk, these companies are now refusing to operate on DDP terms for any seller that’s not based in the U.S.
While the government can’t hold the brand or retailer liable for duties on DDP goods, it can absolutely go after these companies related to the fraudulent activity—even if they’re not the importers of record. And there’s precedent for it.
“What’s happening now reminds me of the initiatives 20 years ago on right to make entry and valuation. We saw the government, in some cases, use [U.S. code] 1592 to go after parties that were not the importer of record,” said Vincent Iacopella, executive vice president of strategic growth, and president of government and trade relations for customs and logistics company Alba Wheels Up.
Ultimately, he said anything that would impact the tariff amount collected on any given garment—like importer of record and rules of origin—is under the microscope right now.
“These are revenue driven issues—revenue for Treasury and CBP [U.S. Customs and Border Protection] collection, and then cost for the U.S. importer,” Iacopella said. “And then DDP is the same. Why would they scrutinize DDP? It’s because they’re going to enforce value and origin.”
With that in mind, Iacopella shared insights on the factors impacting the use of Incoterms, the potential changes on the horizon for importer of record regulations and why rules of origin in pending trade deals could prove to be much more “pervasive” than even the Uyghur Forced Labor Prevention Act (UFLPA).
HGI: Let’s start with DDP. Brands and retailers doing business in the U.S. had been using DDP at a higher rate than prior to the Liberation Day announcement but now we’re hearing there’s been an about face—at least for sellers that don’t have U.S.-based operations. What’s changed?
Vincent Iacopella: We saw a lot of importers going to DDP. One, there was legitimate legal opportunities to declare a cost closer to the first cost that might save some tariffs.
Two, you saw since April till now a lot of importers say, ‘You know what? Let the seller deal with the tariff.’ And it’s very tempting to say, ‘Ah, you see, it is possible to make the foreign companies pay the tariff,’ but they’re just putting it in the unit price. They’re not eating it.
The third part of that is that the U.S. buyer—whether it’s an importer or retailer or both—didn’t want to be on the hook for the liability associated with determining origin and value. So, to your point, I came out of some meetings in June in D.C. and it was really clear that Customs and Border Protection were going to focus heavily on origin and value, because those things affect the revenue the government collects for the new tariffs.
So, let’s go to where we are now. Various parts of the government have said—they could be customs, DHS, or other parts—that they will be looking at the company that is causing the sale, who is the ultimate consignee. So right now, under law, you can only give a penalty for duties to an importer of record. Under U.S. Code 1592, you can go after other parties in the transaction that are not the importer based on certain things happening [like] a misstatement of fact or some sort of misrepresentation. While you cannot make the U.S. entity responsible for duties and taxes, there will be an effort coming to hold those parties responsible for compliance. Now, having said that, the degree to which that will be done and the degree they’re able to do that is yet to be seen. But we know that there’s going to be a focus on that outside of the importer.
HGI: Is there precedent for this?
We saw this 20 years ago, 25 years ago, when there was right to make entry, when there were intellectual property issues on apparel and other things, we saw the government in some cases use 1592 to go after parties that were not the importer of record so this is not a new thing. The examples that I was exposed to, where 1592 was used to go after companies that were not the importer, that was a difficult argument [and] the government was not winning all these cases. But I think we’re in a much different environment right now.
HGI: What’s different about the situation now? Is it just technology or something else?
VI: With the focus on enforcement and for the role that global trade policy, tariffs and revenue are playing as part of our national policy. I think it was always important but it’s obviously a huge priority for our government. And then the technology is huge, too. I mean if the private sector is using a technology, you know the government is too. I think we can definitely expect heightened enforcement for DDP.
As far as the discussions about disallowing the non-resident importer, these have been circulating in Congress for several years but it’s different this time.
“I think we can definitely expect heightened enforcement for DDP.”
—Vincent Iacopella, Alba Wheels Up
HGI: So now that there will be greater scrutiny, companies are thinking twice about Incoterms?
VI: You mentioned something really important, which I think is the really big takeaway here. So everybody’s running toward DDP, and now people are saying, ‘I don’t even want to be the ultimate consignee on the DDP on the documentation,’ and they’re running away from DDP. And this thing about having a U.S. agent, for many companies the factory would have to have a U.S. importer set up in the United States to become U.S. importer of record. And many companies that are or were importers want to buy from that domestic entity in the United States so they’re not a party to the import transaction. So, when you hear that people don’t want to do DDP, I believe it’s coming out of that. The discussions are, ‘Even though I’m not the importer of record on a DDP transaction, do I have liability as recipient of the goods? Do I have liability in causing the international sale? If I’m buying from a domestic company that has inventory, whether they’re affiliated with the manufacturer or not, is that one step away?’ I think that’s probably the context of people not wanting to do DDP.
HGI: Not only is there greater scrutiny now on potential fraud but there’s also the transshipment penalty, which many are taking to mean a potential rule of origin. How does that fit into this discussion?
VI: The Customs and Border Protection has whole teams on apparel and elsewhere looking at unit value. They have ways to measure within different variances if a value is largely outside of their data set norms. This is not really a new thing. This is something, especially on DDP, customs is used to targeting.
I would say there was language in the executive order from last [July 31] about transshipment. That’s already fraud. That’s what was confusing. I think that the trade is waiting for further definitions about transshipment to come out, to define what was really the intent there.
But fast forward to what they could be doing on transshipment, awaiting further clarification from the government, is that they might treat some of these other Asian markets like some of the provisions that are in USMCA [United States-Mexico-Canada Agreement], meaning country of origin may not make the product eligible for preferences. So, do I have Chinese inputs? What percentage do I have? If I have Chinese inputs into Vietnamese manufacturing, do I still pay the Vietnam rate? And I think the administration has to define that going forward.
There’s other talk about using the ownership of the factory, if there’s Chinese ownership of the factory in Vietnam or elsewhere, I don’t know about elsewhere yet, if there’s ownership in Vietnam, does that trigger the higher duty rate? Or would that be the China rate?
I think ownership is very, very pervasive. I think that if it is ownership, that’s going to cause quite a bit of disruption out there.
HGI: It’s going to cause a lot of disruption. Because brands and retailers had been leaning into production companies that have operations in different regions and different countries to create agility and a competitive advantage. So, this would have a big impact.
VI: One of the reasons you don’t see a lot of activity—even though there’s these pauses on the China tariff and there’s these temporary delays of implementation of some of the tariffs—is that people are reluctant to move. Why should I pick a supplier in Vietnam and then find out later that supplier might have Chinese ownership? And then I’m going to be paying a higher rate anyway. The private sector really needs to know what the whole picture looks like and the cost is going to be in each country. Is it just Vietnam or are we going to look at that in Thailand and Cambodia?
And by the way, I think having a minimum value content like USMCA is troublesome but manageable. The ownership issue is so pervasive [because] what about the ownership in a lot of the Mexican factories? What about the ownership in Latin America, in Central American garment factories, in Honduras, which have a lot of foreign ownership? It’s going to be hard to measure, hard to enforce.
HGI: Let’s talk about enforcement. I guess U.S. companies are used to some of this with UFLPA.
VI: I’m glad you said UFLPA, because there is mention of an entity list in the executive order from [July 31] and it talks about transshipment. What that tells me is that everything we talked about—the DDP enforcement, the future definitions of transshipment, whether it’s ownership, whether it’s minimum value content—you’re going to have to vet these partners. You have to vet the origin of the goods. You have to vet the foreign content. I see it looking like UFLPA based on what we know so far in that there is going to be a burden to know your content. There’s going to be a burden to go way past the first tier. You may have a burden to show what the ownership is on that entity [or] the ownership of every tier of the supply chain. You’d have to employ a tool exactly like for forced labor.
HGI: It’s one thing if there’s an entity list. If there’s not a specific list, or if it extends beyond a specific list to a country or a region, then we’re talking about tracking and tracing.
VI: To add something else on to that. We have an entity list in UFLPA too. There are potential risks on forced labor that get flagged legitimately by customs outside of the [Withhold Release Order]. What I’m saying is, is the entity list going to be definitive, or is it going to be where you have the entity list, but then you might have shipment disruption or holds verifying whether there’s Chinese content, in general? That’s going to be probably more evident when they come out with the guidelines, like they did on UFLPA.
HGI: If it does extend beyond a specific entity list, are we going to be reliant on paperwork to show the origin of raw materials because that’s easy to fake. It happens already.
VI: If you look at UFLPA, CBP put guidance out that says this is what’s expected to be compliant on a continuous, systemic basis, which is mapping the chain, doing a risk assessment on the parties below the first tier in an everyday practice, and then in the event of a detention, you have to do it on that particular shipment. So, the devil is going to be in the details of the guidance coming out. Then also we have the regional aspect of UFLPA, where anything from the region was assumed, and you have to prove the negative. So how these enforcement rules are structured is going to dictate this question. I’m going to punt and say that you’re going to need to know—for either this reason, with or without an entity list, similar to UFLPA—all the way down to the billable material, because if it says Chinese content, Chinese content is Chinese content, whether the person who sold it to me put that Chinese content in there, or whether they bought fabric from another party to make the t-shirt and that fabric had Chinese content all the way down to the yarns, down to fibers. So, how do you do that? I mean, you saw that in UFLPA. So, I see a similarity that the importer might have to de-risk in a similar way.
“[In June,] it was really clear that Customs and Border Protection were going to focus heavily on origin and value, because those things affect the revenue the government collects for the new tariffs.”
—Vincent Iacopella, Alba Wheels Up
HGI: Well, it’s interesting, because the industry has been having this traceability and mapping conversation for a long time without a lot of progress. And between this and the sustainability legislation, they’re really going to have to do it.
VI: It’s almost like the capability on the traceability preceded the use case, even though there was a use case on UFLPA and there’s a tremendous use case on section 232, on steel and aluminum. Now, it’s almost like enforcement is catching it up.
HGI: If we’re talking about real enforcement right now, that’s going to have ripple effects beyond just the bad actors.
This will affect companies that are not committing fraud. This is going to affect all companies that are trading and enforcement, depending on how targeted enforcement is going to be, is something that’s pervasive. I would hope that with the heightened enforcement, that there was trusted space, whether it’s CTPAT [the Customs-Trade Partnership Against Terrorism program] or something else, where highly compliant companies that are investing in automated tools should get some benefit from it. They should be a lower risk if they show their process, if they’re open, if they’re using a tool.
It’s targeted to go after bad actors. But even companies that are doing things 100 percent right now have to prove more definitively that five tiers down in Vietnam, they don’t have Chinese inputs or potentially have Chinese inputs. So, they have to know that even though they’re a compliant company, there’s going to be a lot of highly compliant companies that might be perceived as a risk.
