Industry leaders are 'freaking out' about tariffs and clamoring for warehouses in this loophole-friendly Mexican border town
- President Donald Trump's trade war will slap 25% tariffs on some $325 billion worth of imports from China.
- Retailers and manufacturers aren't prepared to move all of their business activities out of China. Instead, they're learning how tariff-mitigation strategies can minimize the impact of that 25% hit.
- Two of the most popular tactics are giving rise to a huge warehousing industry in Tijuana, Mexico.
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Even as the US President Donald Trump's trade war with China ramps up, some manufacturers and retailers are not moving their factories out of China.Instead, some are taking advantage of a little-known tax law called the "first sale rule" that allows companies to significantly undercut how much they pay in tariffs. Other e-commerce players are directly shipping to US homes from Mexican warehouses, where they can evade tariffs on goods that cost less than $800.
"You buy things from China, you import them into Mexico," Manuel Diaz, the managing director of SEKO Logistics México, a Chicago-based global logistics firm, told Business Insider. "Sometimes, you ship your goods to Tijuana, they're very safe and you maintain your storage there. So, it's becoming a very popular market."
This 31-year-old tariff rule helps retailers pay less money in tariffs - but few know about it and some find it "taboo"The first sale doctrine was quietly established in a 1988 court case. Lawyers from international trade law firm Sandler, Travis & Rosenberg argued that, if goods were purchased in one country for one price before going to their final destination and being sold for a higher price, tariffs levied on the good should reflect the first, cheaper amount.
The case was groundbreaking, but the law isn't widely known. Others believe the first sale rule is "taboo" despite its total legality. Just 2.4% of all US imports use the first sale doctrine, according to the most recent US International Trade Commission report."It's interesting, when we talk to companies about it they're like, 'What? I've never heard about this. How come I've never heard about it?'," Nicole Bivens Collinson, who heads Sandler, Travis & Rosenberg's international trade and government relations practice, told Business Insider. "It's because a lot of the products that have been imported in the United States are what we call a nuisance tariff - 2%, 3%, 4% or they're duty free," said Collinson, who is also the managing principal of Sandler, Travis & Rosenberg's Washington, DC, office. "Now, suddenly they have a 25% tariff on them and people are freaking out."
The first sale doctrine works like this: let's say you have a blouse to produce in China. Rather than directly importing that blouse from your manufacturer in China, you can arrange for an importer who is located elsewhere, like in Mexico or Hong Kong, to buy the blouse for less money, say $7.Then, you buy that blouse for $10 from your middle man and import it into the US.
If that blouse has, say, a 25% tariff on it, you'd normally pay a $2.50 tariff for it. But thanks to the first sale doctrine, the tariff charge is only $1.75. That's because you're paying the tariff on the first, lower-priced sale of the item - between yourself and your middle man, for example.
For the economics to work out, your company needs to have huge amounts of product and already be using a variety of importers to coordinate your supply chain, the South China Morning Post reported. Otherwise, companies are hiring - and paying for - an importer in a country where they didn't already have one.
The first sale doctrine strategy is also complicated to pull off without an accounting, law, logistics, or another sort of firm to broker these transactions and ensure trust on all sides."This requires cooperation and trust between the buyers and the manufacturers because you don't want to get in a situation where now the buyers know, 'Hey, that's really only $7 and I'm paying $10,'" Collinson said. "So, there has to be a level of trust ... You try to create these walls that protect each other, protecting both the manufacturer, protecting the buyer."
Diaz said Tijuana is "getting popular" among those using the first sale doctrine.
Retailers can also get around tariffs if they ship in piecemeal
Another mitigation tactic to get around tariffs doesn't require a legal degree to understand - most travelers take advantage of it every time they come back to the US.Travelers bringing goods to the US don't have to pay duties, as long as what they're bringing in has a value of less than $800.
And under section 321 of the Code of Federal Regulations, companies based in the US can send individual packages valued under $800 from countries like Mexico or Canada - with no duties at all. It just must be a direct shipment to one person's house, and no more than one shipment a day to their home.
"There's additional costs associated with that obviously because you're not able to truck over a 25-foot container for all these," Collinson said. "You've got to box them up and then you have to pay for UPS or whomever to ship the individual boxes."E-commerce players, in particular, are starting to ramp up usage of that law, said Collinson and Diaz.
Tijuana is the perfect setting for both methods
Mexico has long been a hub for US companies, thanks to cheap labor costs, its proximity to populous California and Texas, and robust manufacturing infrastructure.
It's also growing as a US importer more generally, according to US Census Bureau data. Imports from Mexico have jumped 15.2% since Trump took office, compared to an increase of 0.7% from Canada and a decrease of 2.1% from China.Even before Trump's trade war, logistics in Mexico were more cost-effective than in China or Hong Kong, according to an IVEMSA report. The cost of shipping a container from China to the US was roughly $7,000 in 2014, compared to $2,800 from Mexico. Industrial leases in China cost three times that of Mexico's.
"Tijuana has become - I'm going to say this in a good way - it's become like the backyard, the very positive and good backyard, of American business," Diaz said.
Warehouse workers in Tijuana cost $2 to $4 an hour instead of $18 to $24 in neighboring California, Diaz said. Real estate is much cheaper, too; storing a pallet costs $6 to $8 in Tijuana rather than $15 to $22 north of the border.Trump's trade war is creating jobs after all - but they appear to be in Tijuana warehouses. Diaz emphasized that Americans still win in the end.
"The most important thing is that that doesn't mean that you're taking jobs to Mexico, because the real revenue is still distribution, it's still the patents and the trading brands and the royalties of the brands," Diaz said. "So, you take your cheapest cost, which is the warehousing and logistics, you do it in Mexico and you save a lot of money. It makes a lot of sense."Are you a logistics professional who works with cross-border trade in Mexico? Share your insights with me at email@example.com.
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