How to Legally Avoid Tariffs: The Critical Rules Every Shoe Brand Should Know

With trade tensions remaining high just days before the latest round of tariffs are expected to hit $300 billion in Chinese imports, hundreds of shoe companies are scrambling for new strategies to circumvent higher costs.

While several supposed tactics — including transshipment, “country of origin” and “first sale” — are making headlines, experts from the American Apparel & Footwear Association (AAFA) and Footwear Distributors & Retailers of America (FDRA) are steadfast in their belief that the most effective way to avoid rising China levies is to find new sourcing countries.

“People will explore the legal and illegal tools to mitigate new tariffs and see if it’s worth it,” explained Matt Priest, FDRA’s president and CEO. “For the most part, it’s not and you just need to move out of China.”

For footwear production, Vietnam has so far emerged as the most popular alternative sourcing hot spot with Indonesia, Cambodia, India and Italy rising in importance over time.

But where a full upheaval of one’s supply chain is not feasible, the FDRA and AAFA have encouraged their members to rethink how they assemble their products — by way of the “country of origin” rule. In effect, brands can continue to go to China for certain, essential shoe materials but assemble the shoe elsewhere and make that location (with its low or nonexistent tariffs) the country of origin.

“Country of origin is based on where the shoe becomes a shoe,” said Nate Herman, AAFA’s SVP for supply chain. “For example, you take an unformed upper and a sole and the sewing thread [that is used] to stitch them together and ship all of those to another country, say Cambodia, and they stitch them together there, and the ‘country of origin’ becomes Cambodia.”

Such a process is legal — although there can be some gray area around what constitutes a complete or incomplete shoe when materials are shipped from one country to another for assembly. Even so, Priest said, the FDRA has already started coaching its members on how to start the more gradual process of “elongating their supply chains” across China and rising sourcing hot spots like Vietnam that already have significant manufacturing infrastructure.

While using such strategies — changing the sourcing location altogether or using the country of origin rule to elongate one’s supply chain — get brands around paying steep China tariffs, other tactics such as “first sale” can also help brands mitigate costs, trade organizations noted.

In short, footwear brands often use agents to help them buy products from Chinese factories. The agent charges a mark-up on those products, and brands often pay duties and tariffs on that price. If companies are willing to take extra measures and are diligent about their bookkeeping, they may be able to activate the “first sale” rule to pay duties on that lower first cost.

Still, the process is complicated and involves a level of diligence some brands had previously viewed as not worthwhile.

“A lot of companies in the past, decided it’s not worth the money and the time to do it,” Herman said. “But with the 25% of additional duty, more companies will say it’s worth the time and the money to do it. Obviously, it doesn’t protect you from the tariffs, but it lowers your base cost.”

Meanwhile, the illegal process of transshipment — manufacturing goods in one country, shipping them elsewhere and swapping the labels to suggest they were made in the latter region — is one measure the AAFA and FDRA say they and their thousands of footwear and apparel members are firmly against. Both organizations even warn that an uptick in the use of this strategy may actually make costs even higher for the industry. (It was confirmed last week that the U.S. Department of Homeland Security had already inspected and fined a number of companies for evading tariffs by routing goods through Cambodia.)

“As new tariffs incentivize some [bad apples to engage in transshipping], U.S. Customs is going to increase their enforcement to prevent it — they’ve already announced they’re going to do that,” Herman explained. “Which means that our members who are doing the right thing will have additional costs to demonstrate three times over that they’re compliant and doing the right thing. They are getting hit with 25%, plus this additional enforcement [cost].”

Over the past few months, members of the footwear and apparel industries have stepped up in droves to fight President Donald Trump’s use of threatened and enacted tariffs against China.  Steven Madden Ltd. CEO Ed Rosenfeld and fashion designer Marc Fisher were among the executives who testified before the Office of the United States Trade Representative over the past week about a proposed 25% levy on $300 billion worth of Chinese goods. Dubbed the “fourth tranche” of tariffs, it will impact nearly every category of goods imported from China. (Last year, Trump imposed a tariff hike of 25% on $200 billion worth of Chinese products, while Beijing retaliated with duties of 5% to 25% on $60 billion in U.S. imports.)

President Trump and China leader Xi Jinping are set to meet this week on the sidelines of the G20 summit in Osaka, Japan, for a high-stakes talk.

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