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A Case Study on Tariffs – Sparkfun

FactoryFor SparkFun, the story of tariffs is a story about managing uncertainty, and doing everything we can to keep losses to a minimum as we transition from 1-5 percent to 25 percent tariffs on a significant number of our components. For us, it’s not a story about manufacturing in America, or the threat of recession, our current president or China’s increasing global influence.

Today, this story is about the short term: the three or six or nine months it will take for our business to fully transition to a massive increase on our cost of goods. Ultimately, we will have to pass the cost on to our customers in some way, shape or form, but the challenge we face is how much, when and who.

Getting an answer to the question of how much we should raise prices in response to the increase in our cost of goods is a big, hairy, intricate problem to solve with seemingly infinite dependencies. This blog post is about how SparkFun’s business works within an incredibly complex global market, and the huge task of managing the chain of uncertainty imposed by these new tariffs.

How Tariffs Work

Tariffs are applied by U.S. Customs and Border Protection agents at the ports where a shipment enters the United States. For us, that’s Denver International Airport. We get most of our shipments by air, since our orders are rarely the size and weight that would make ocean transport more cost efficient (thanks to all the small parts and pieces we order in small quantities). Each item falls into a certain classification as published in the U.S. International Trade Commission’s Harmonized Tariff Schedule, and their handy little search tool helps businesses like ours look up those classifications and determine the tariffs imposed on those goods.

When goods from suppliers arrive in port, the customs agent applies tariffs through our international shipper based on the classifications our suppliers list on the commercial invoice for that shipment. Our suppliers include the U.S. classification in the bill of lading based on their knowledge of U.S. tariff schedules. We pay tariffs through our international shipper when we are billed by them.

Occasionally, our suppliers don’t include the right classification for the goods they ship to us. When that happens, a customs agent calls our shipper, who then calls us at SparkFun to either verify the classification or provide a new one.

In an era when discrepancies in tariff charges between classifications amount to only 1 or 2 percent difference, we can afford to rely on our supplier’s judgment to classify goods properly. Now that the tariffs represent 25 percent on some goods, proper classification becomes a larger compliance and due diligence issue, as U.S. Customs and Border Protection increases the level of scrutiny to prevent companies from evading new tariff costs. For SparkFun, this means a significant increase in the time spent checking supplier classification of goods.

An additional uncertainty also lies in any discrepancies between how SparkFun anticipates its products will be classified and how our suppliers, shippers and customs agents classify them. This is more of a planning problem as we start to assess and project costs as a result of tariffs into the future.

 

Full article at Sparkfun’s website here.

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