Strategic planning under new tariffs

Almost every day, there is new information about the customs dispute. This makes it more challenging than ever for decision-makers to develop long-term business strategies. To help guide managers through these times, 10 definitions should bring some clarity to strategic planning under new tariffs. Furthermore, MAFO asked the expert Omar Elkhatib, Senior Manager Government Relations at The Vision Council, for tips on how to deal with the uncertain situation (interview here).

1 Country of origin

Most of the new tariffs are tied to the origin of the merchandise. There are exceptions to these product-wide tariffs, such as Section 232 on aluminum, steel, cars, and more. But especially for eyewear products, it is important where the products were made, as those products are often put together by components sourced from numerous suppliers around the world.

2 Determining the country of origin

To determine a product’s country of origin, all inputs – raw materials, components, and subassemblies – must be assessed for their role in the final product.

The key question is whether a part has undergone substantial transformation to become a new and different article. This is judged mainly by changes in character and use, as changes in name carry little weight.

3 Change in character and use

A change in character depends on whether the input, on its own, achieves the same outcome as the finished product. If not, the input’s character has likely changed by becoming part of something “bigger.”

This is very similar with use. The part as a part can be used as a part. The finished product can be used as a finished product. But once integrated, the original use of the part fades, replaced by the new use of the final product. Ultimately, three key factors must be considered: name, character, and use.

4 The crux with Section 301

However, since 2018, customs agencies have taken a more and more subjective view on assembly, lacking clear standards for what qualifies as “meaningful” versus “simple” work. Companies arguing their manufacturing is not simple often cite factors like value, workforce size, tooling, or assembly complexity. However, final decisions rest with the agency, which decisions are subject to judicial review if the importer chooses to challenge it. Customs and Border protection has become more vigilant in enforcing country of origin issues due to companies shifting operations out of China to avoid Section 301 duties.

Ironically, these duties encouraged the move, yet products assembled elsewhere might still originate in China under US country of origin law, thus triggering the extra duties on Chinese origin goods. Therefore, companies must remain cautious: Customs may reject third-country assembly claims and declare the product Chinese – even if it never entered China.

5 Substantial transformation

The situation changes if substantial transformation is confirmed, but the criteria are strict. Companies should proceed cautiously and thoroughly analyze the issue. Below are two illustrative (non-binding) examples related to eyewear:

Example 1 | Plano sunglasses

A company sources frames from Country X and plano lenses from Country Y, then assembles them into sunglasses in Country Z. Historically, customs considered this a substantial transformation, making Country Z the origin. 

The transformation changed the name, character, and use of the components into a new commercial product. But with the current strict stance on origin under Section 301, it is unclear if this would still qualify.

In contrast, if you swap the example with prescription lenses, customs typically find no substantial transformation.

Example 2 | Eyeglass frames

A company in Country Z uses raw materials (like acetate sheets and hinges) to make frames. This would likely qualify as a substantial transformation. In contrast, if the company imports pre-cut frame parts and only assembles them, Customs may view it as simple assembly without a substantial transformation, meaning no change in origin.

6 Special case: Mexico and Canada

Mexico and Canada follow USMCA-specific origin rules, so the substantial transformation test does not apply for determining product origin under the agreement. However, Customs ruled that while USMCA rules determine trade eligibility, substantial transformation still applies for assessing China 301 duties. As a result, a product can be duty-free under USMCA and marked “Made in Mexico” or “Canada,” yet still face China 301 tariffs if it contains Chinese content that does not undergo a substantial transformation.

7 Legitimate appraisal value

Duties are based on the appraised value of imported goods, typically using an FOB (free on board) price. While it may seem appealing to reduce that value, only certain non-dutiable charges – like freight or insurance under CIF (cost, insurance, and freight) or CIP (carriage and insurance paid) terms – can be deducted if properly documented. Under DDP (delivered duty paid) terms, the duty portion can also be excluded. In all scenarios, costs like packing, assists, royalties, or commissions must be included, even if billed separately, if those costs were not already built into the price charged to the importer.

Some vendors are trying to separately invoice tooling, packaging, and more in an attempt to reduce duty liability, but those inquiries are a red flag. Even though it is perfectly legal to do that, companies need to include those elements of value when they declare the value at the time of entry. Failure to do so results in a misdeclaration of the good’s value, and usually an underpayment of duty, both of which are violations of the Customs laws. Therefore, it makes things a lot more difficult to do it that way.

In short, certain non-dutiable elements can be backed out if documented properly, but dutiable components must always be reported – even if billed separately.

8 First sale rule

The first sale rule allows U.S. importers to declare the lower price from a foreign manufacturer (Z) to a foreign middleman (Y), instead of the higher resale price from foreign middleman Y to the U.S. importer (X), if both Y and Z are outside the U.S. and the sale is for direct export to the U.S. To qualify, the first sale must be legitimate, the production must be triggered by the U.S. order, and all dutiable charges (e.g., packing, royalties) must be included. Furthermore, related parties must prove the price was not influenced by their relationship.

However, a common hurdle is obtaining the manufacturer’s invoice, especially if the middleman is unrelated to the importer and reluctant to disclose costs. While the rule can lower duties, it requires strict documentation and full compliance with legal standards.

9 Drawback

The U.S. drawback program lets importers reclaim up to 99% of duties paid on imported goods if those goods or products are later exported, either unused or after manufacturing. Though paperwork-heavy, recent tariff hikes – especially related to China – have increased interest. Some tariffs qualify for drawback (like China 301 and the “reciprocal” tariffs being assessed against all countries), while others (IEEPA on China, Mexico and Canada, Section 232) do not. Participation often requires a drawback broker and thorough record-keeping.

However, accelerated payment options are available, and the offering of timely refunds during application processing might make the program worthwhile despite its complexity.

10 Front-loading inventory

The 90-day pause, which expires on July 7th for most countries and on August 7th for China, offers companies a chance to consider front-loading inventory to lock in the current duty before rates potentially rise very high. However, these rates might be negotiated down, and no one can predict outcomes.

The Vision Council will share updates as negotiations progress. Companies should weigh the benefits but also account for rising freight costs and limited shipping capacity, as many others may do the same.