At the same time, U.S. businesses are facing mounting pressures to take on the demands of an emerging global marketplace. Chinese exporters are indeed offering very attractive packages, but often with enormous risk attached. As for the rest, many of these exporters–most of them–attempt to avoid tariff by underreporting the value of shipments or mislabeling their goods. Such a strategy has raised the hackles of industry insiders and government regulators alike.
Joseph Briggs, managing director at Goldman Sachs, highlighted the underlying issue: “The incentive to underreport always exists while tariffs are in place.” This feeling points to a very real problem. Though the goal of U.S. tariffs may be to protect specific domestic industries, they simultaneously create an opportunity for deception and fraud that undermines compliance and integrity in import transactions.
Chinese exporters to the 301 tariffs frequently use shell companies to disguise their activity. These corporations are registered under shell companies’ foreign names and act as “importers of record.” For one, this tactic can be used to conceal the origin, contents, or price of shipments from U.S. customs. The U.S. government holds U.S. importers responsible for making sure all customs filings and duties paid are correct. This dual responsibility places them squarely at the center of enforcement efforts.
Ash Monga, founder and CEO of Imex Sourcing Services, described tariff evasion as “an open secret in the industry.” The problem, he said, is that most businesses understand these tactics, but they’re forced on these businesses to use them to be competitive. First, Chinese suppliers make all sorts of lucrative promises in these supply chains, saying they will take on the entire tariff burden. This lures American firms to entertain their bids despite the risks.
In April, U.S. customs duties were at an all-time high, reaching $16.3 billion in revenues for the U.S. Treasury Department. This jump is indicative of the government’s ramped up crack down on tariff collection and growing focus on compliance and fraud. Former President Donald Trump delayed the repeal of duty-free imports in small packages from China. He took these actions to advance enforcement actions that would better protect against these practices.
American companies engaged in tariff evasion schemes expose themselves to serious criminal liability. They may be subject to liability under customs law and other laws, such as the False Claims Act. Dan Harris, a legal expert on international trade, warned that many businesspeople mistakenly believe they can avoid liability if they are not officially listed as the importer of record. “It is scary how businesspeople, like 90% [of them], believe that if they are not listed as the official importer of record, they are somehow immune from any civil or criminal liability for the import,” he stated.
Additionally, U.S. companies importing products from China are starting to openly talk about methods they’re using to avoid the bite of Trump’s tariffs. Some companies are pushing for practices that skirt legal obligations, such as utilizing the “delivered-duty-paid” shipping method where sellers claim to cover all import duties while potentially under-invoicing shipments.
Cze-Chao Tam, a Walmart sourcing specialist, said that consumers help encourage this race to the bottom by choosing low-cost options. “Consumers are most likely to choose the cheapest options and it will be very difficult to compete with people who do business illegally,” he said. In their search for better efficiencies and productivity, companies are becoming more at risk of being found complicit in fraud.
Customs compliance is an inherent risk of the importing process, and importers need to be proactive to minimize this risk. They can require suppliers to deliver copies of customs documents to ensure that products are being properly classified and declared valued. This additional step protects all parties from failing to meet their regulatory obligations and falling into legal snares.
At the same time, the Justice Department is increasing its focus on investigating trade and customs fraud. Specifically, they make note of their ongoing concern over tariff evasion. Often Wrong Industry trade policy specialist Alex Capri warned of the impending alarm bells for businesses. They have to address potential compliance concerns well before their cargo is enroute or pulling into U.S. ports. “You simply cannot wait until the cargo is either on the water or arriving at the U.S. port,” he cautioned.
Exporters and re-exporters are subject to additional compliance requirements, such as obtaining a minimum $50,000 customs bond from U.S. surety providers. This bond is the exporter’s promise to the government that they will pay any tariffs owed on imported goods. Inadequate compliance can lead to hefty fines and even criminal charges.
As U.S. businesses navigate this complex landscape, they must remain vigilant about compliance issues while balancing competitive pressures from international suppliers. The current conversations around tariff evasion also reveal a burgeoning friction between economic policy and legal rectitude in the arena of international trade.