What is Tariff Engineering? Strategies to Minimize Import Duties

Tariffs can have a significant impact on the landed cost of a product, and anyone working with supply chains is learning what these step costs can do to their bottom line. To stay competitive, many importers turn to a practice known as tariff engineering, which is structuring the way a product is classified, manufactured, or sourced in order to reduce the duties paid at the border. While misclassification can lead to fraud, tariff engineering is a legitimate strategy that works to limit exposure to high tariffs.

In this blog, we’ll explore what tariff engineering means and review some of the most common strategies companies use. By the end, you’ll understand how thoughtful supply chain planning can turn tariff liability into some cost savings. 

What is Tariff Engineering?

Tariff engineering is the practice of designing, sourcing, or classifying a product in a way that legally reduces the amount of duties owed when it enters a country. The goal of tariff engineering is to minimize the amount you pay in tariffs without breaking any laws. Companies do this by understanding the tariff schedules that apply to their products and then structuring their supply chains or product attributes accordingly.

It’s important to separate tariff engineering from misclassification or avoidance. Misclassification involves deliberately declaring the wrong HS (Harmonized System) code, which is illegal and can result in fines or penalties. Tariff engineering, on the other hand, works within the legal framework by making real, measurable changes to a product or its supply chain so that it legitimately qualifies for a lower duty rate.

For example, a company may adjust where final assembly takes place so that the country of origin shifts, or it may slightly modify a product’s material composition so that it falls under a different HS category with a lower tariff. In both cases, the product still meets customs requirements; it’s just been engineered to do so in a more cost-efficient way.

Common Strategies for Tariff Engineering

While the concept of tariff engineering sounds straightforward, the ways that you can legally reduce the amount of tariffs you pay can vary widely.  The strategy chosen often depends on the type of product, the markets it’s being shipped to, and the complexity of the supply chain. Some approaches focus on where the product is made, while others involve adjusting its materials or features to qualify under a more favorable tariff classification.

At its core, tariff engineering is about understanding how customs authorities determine tariff rates and then aligning product design, sourcing, or assembly in a way that fits within those rules. 

Below are some of the most common methods companies use to engineer their tariffs while remaining fully compliant.

Changing Country of Origin

Country of origin rules determine where the product was manufactured at. By shifting final assembly or a substantial transformation step to a different country, a company can often take advantage of lower tariffs. For instance, parts may be manufactured in China, but if final assembly occurs in Thailand and meets the country-of-origin requirements, the product may qualify as Thai-made, avoiding higher U.S. tariffs on Chinese goods.

Adjusting Materials or Composition

The materials that make up a product directly affect its HS classification and duty rate. For electromechanical products, even small changes in material selection can shift a product into a different tariff category. For example, changing a housing from steel to an engineered plastic might not only reduce weight and cost but also reclassify the product under an HS code with a lower tariff.

While these changes can reduce the BOM cost, they can also influence how customs authorities classify the product. By carefully evaluating design requirements and material options, companies can select alternatives that maintain functionality while qualifying for more favorable tariff treatment.

Leveraging HS Code Classifications

Every product imported into the U.S. (and most other countries) is classified under the Harmonized System (HS) of codes. Different codes can carry significantly different duty rates. A company may redesign packaging, adjust product features, or highlight specific functions to ensure the product is categorized under a legitimate but lower-duty HS code. This doesn’t mean arbitrarily picking a new code; it requires a compliant, defensible classification that customs will accept.

Optimize the Product Design

Even subtle changes in design can affect tariff treatment. Adding or removing a component, altering dimensions, or changing the intended use can place a product in a different classification. For example, adding a minor electronic feature to a household item could reclassify it as an electronic appliance or a smart gadget, which may have a more favorable duty rate than its original category.

An Example of Tariff Engineering in Practice

To see how tariff engineering works in the real world, let’s consider a company that sells an espresso machine to the U.S. market.

Scenario A: Higher Tariff Exposure

The company manufactures and assembles all components in China. When the machine is imported into the U.S., they are classified under an HS code with a 55% tariff on Chinese-origin products. This significantly increases the landed cost per unit, cutting into profit margins.

Scenario B: Tariff Engineering Applied

To reduce this cost, the company keeps component production in China but moves final assembly and packaging to Thailand. Because the final substantial transformation takes place in Thailand, the country of origin is now considered Thai. Under U.S. trade rules, the headphones are classified as Thai-origin, where the tariff rate drops to just 19%.

Result: Significant Cost Savings

While this example assumes that no other costs are incurred with switching production from China to Thailand, it shows how you can reduce your costs with tariff engineering. And in this case, the solution was leveraging the China +1 strategy. By applying tariff engineering, the company remains fully compliant with customs regulations while making its product more competitive in the U.S. market.

This simple example shows how a thoughtful adjustment to the supply chain can completely change the tariff outcome. Whether through shifting production, altering materials, or reclassifying under a different HS code, companies can use tariff engineering to reduce duty exposure without compromising compliance.

Risks and Considerations

While tariff engineering can provide meaningful savings, it’s not without its challenges. Companies need to weigh the benefits of lower duty rates against the potential risks and added complexity.

Legal and Compliance Boundaries

There’s a fine line between tariff engineering and misclassification. Customs authorities require that any change in materials, design, or country of origin be legitimate and well-documented. Misrepresenting a product’s classification or origin can lead to penalties, shipment delays, and reputational damage.

Documentation and Proof

If a company shifts the country of origin by moving final assembly, it must be able to prove that “substantial transformation” occurred in that location. Similarly, if material or design changes alter the HS code, engineering drawings, bills of materials, and production records must support the classification. Without proper documentation, the savings can be quickly offset by disputes or rejections at customs.

Impact on Supply Chain and Operations

Engineering a product to reduce tariffs may require new suppliers, facilities, or processes. These changes can introduce risks such as longer lead times, added logistics costs, or challenges in maintaining quality standards. A company must ensure that tariff savings outweigh the operational impact.

Strategic Trade-offs

In some cases, a material substitution or design change may lower tariffs but affect performance, durability, or customer perception. Companies must evaluate whether the savings are worth the trade-off, especially in industries like consumer electronics or mechanical assemblies where reliability is critical.

Conclusion

Tariff engineering is a powerful strategy for companies looking to manage costs when policies are changing. By carefully considering factors such as country of origin, material selection, product design, and HS code classification, businesses can reduce their duty exposure while staying fully compliant with customs regulations.

The key is to approach tariff engineering strategically, balancing cost savings against documentation requirements, supply chain complexity, and product performance. When done correctly, it can transform tariffs from a fixed expense into a variable that companies can actively manage.

For brands that rely on global manufacturing, tariff engineering should be viewed not as a one-time fix but as an ongoing part of supply chain planning. With the right approach, you can achieve significant savings and create a competitive edge in markets where every percentage point of cost matters.