Using the Overstock Method for Tariff Avoidance
Please note that even as this method is used price increases are applied even though there is no real increase to production costs which leads to further profit for the corporations operating in this manner.
Openly being discussed in business today are exceptions involving a combination of inventory management tricks, tariff mitigation avoidance strategies and exploiting logistical inefficiencies that some American, Canadian, and Mexican companies use to navigate cross-border trade and warehousing challenges. Let's break down the key components of this process:
Some companies deliberately overproduce or stockpile goods beyond immediate demand. This is done to create a backlog in warehousing stock, which can then help them sidestep or reduce the impact of tariffs. Under certain trade agreements, especially in the context of the United States-Mexico-Canada Agreement (USMCA) or previous NAFTA provisions, companies might be able to avoid tariffs if goods are deemed to be "in transit" or "on hold" at the border or warehouse. By maintaining larger-than-necessary inventories, businesses can shift stock into customs zones or bonded warehouses, effectively making the stock eligible for tariff exemptions.
Why it works: The idea is that by increasing production beyond immediate needs, the goods can stay in warehouses, where they are technically not being imported into the market until they are needed. This allows companies to keep goods in a quasi-neutral state in terms of tariffs, sometimes getting favorable treatment in trade agreements where tariffs are only applied once goods enter active commerce.
Many companies utilize a two-tier warehousing system to manage their goods. Here's how it works:
Primary smaller warehouses: Goods are initially sent to smaller, local warehouses. These facilities often lack the space and infrastructure to handle large volumes of products efficiently. They also have limited shipping capabilities and may not be set up for immediate international shipping. Because of these limitations, the stock is designated as "backlogged"—in other words, it’s held in reserve and not immediately dispatched or sold.
Larger distribution centers: The backlogged goods are then transferred to larger warehouses that are better equipped to manage and ship products on a larger scale. These larger facilities may also be strategically located near major transportation hubs, such as ports or border crossings, to facilitate quicker global distribution.
Why it works: This system allows companies to stagger the actual movement of goods, so they don’t risk running into logistical issues or having to pay additional costs related to shipping and tariffs prematurely. Additionally, it helps manage the physical limitations of warehouse space in the short term.
One of the key reasons companies employ these methods is to manage tariffs under trade agreements. In the case of NAFTA or USMCA, there are specific rules of origin that companies must follow to avoid paying tariffs on goods imported into the U.S., Canada, or Mexico. These rules often stipulate that goods must undergo a certain amount of local production or assembly to qualify for tariff-free status.
By strategically placing goods in warehouses and managing stock in a manner that delays their active importation, companies can sometimes avoid triggering tariff applications or the imposition of additional import duties. This also allows them to respond more flexibly to changes in trade policies or to avoid costly disruptions due to unforeseen tariff increases.
While this process can offer tariff advantages, it is not without challenges:
Increased storage and logistics costs: Overproducing and creating backlogs can lead to increased warehousing costs. Storing excess inventory can also result in longer inventory holding periods, which ties up capital and reduces liquidity for businesses.
Operational inefficiencies: Managing the movement of goods between smaller primary warehouses and larger distribution centers can be logistically complex. It requires a coordinated effort and robust inventory management systems to ensure that the right products are where they need to be when they need to be shipped.
Risk of obsolescence: Storing goods for extended periods can increase the risk that products will become outdated, especially in industries like technology or fashion. If products are not moved quickly enough, they may no longer be in demand when they reach the larger warehouse or distribution point.
In summary, the practice of intentionally overproducing goods, creating backlogs, and using a tiered warehousing system to delay shipment and avoid tariffs is a strategy employed by some companies in North America to optimize their supply chain and mitigate the financial impact of tariffs. While this strategy offers certain benefits, such as avoiding tariff duties and managing inventory more flexibly, it also introduces logistical challenges and higher operational costs. Companies must weigh these trade-offs carefully and implement efficient systems to ensure that the process remains cost-effective and compliant with trade regulations.