American businesses are running out of ways to avoid tariff pain

CoRPORATE America’s profit engine has been remarkably robust over the past few years, even amid stubborn inflation and elevated interest rates. Faced with Donald Trump’s assault on global trade, however, it is starting to sputter. Companies from General Motors, a carmaker, to Nike, a sportswear brand, have seen their profits plummet owing to Mr Trump’s levies on imports. Goldman Sachs, a bank, reckons that American businesses are absorbing around three-fifths of the cost of the duties.

More bad news came on July 31st, as the president announced a fresh barrage of tariffs on many of America’s trading partners, along with new measures to prevent companies from dodging the duties. Bosses, who seem reluctant to pass the cost of tariffs on to already stretched consumers, are running out of ways to avoid the pain.

Stockpiling has so far helped. American imports of aluminium, steel and cars, for example, rose to an annualised $400bn in the first quarter of the year, well above trend, as companies raced to get ahead of new duties. Eventually, however, this inventory will be depleted. And holding it comes at a cost. Mattel, maker of Barbies, saw its free cashflow in the second quarter fall by around a fifth, year on year, as it stocked up.

Companies have also been tinkering with their supply chains. The boss of GE Healthcare, a maker of medical equipment, recently noted that his firm manufactures ultrasound probes in four locations around the world, and can choose where it ships to America from based on whichever has the most favourable tariff rate. The company will also begin making an orthopaedic product in Utah that it previously produced only in China. General Motors is similarly planning to increase car production at an underutilised factory in Indiana, hiring temporary workers to man the shifts. Yet for many companies, building more manufacturing capacity in America is likely to take years. Mr Trump’s volatile policymaking has also sapped many bosses of the confidence needed to make big changes to their production footprints.

Then there are the craftier tactics to soften the blow from higher tariffs. Firms have been poring over the Harmonised Tariff Schedule (HTS), a 4,439-page rulebook on customs duties, searching for ways to reclassify where goods come from, how they are made and what they are used for in order to secure lower levies. Requests for rulings by America’s customs agency have surged this year. Take Dermasil, a facial cleanser made with ingredients from various countries which are blended in Malaysia or Vietnam, then sent to China for bottling, before being shipped to America. In June Dermasil’s maker successfully petitioned to allow the cleanser to be labelled as a product of Malaysia or Vietnam, rather than China, thus lowering the applicable tariff. Wagner Spray Tech, a purveyor of paint sprayers, likewise successfully protested the classification of heat guns it imports into America.

Some attempted workarounds have been particularly creative. The Nairobi Protocol, a trade agreement from the 1950s, allows importers to bring in goods used by handicapped people duty-free. Already this year more companies have applied for dispensation under the protocol than in all of 2024. One importer attempted to use the rule to bring in steel handrails from Taiwan that aid in getting out of beds and baths; another sought an exemption for bowls and spoons for feeding babies. Neither was successful.

The Trump administration seems eager to clamp down on such manoeuvres. It has said that it plans to modify parts of the HTS, leaving companies with less wriggle room. It is also introducing an additional 40% duty on products that use “circumvention schemes” to enter America via third countries with lower duties, which it plans to watch closely. For American businesses, there are ever fewer places to hide from the president’s punitive tariffs. ■