Strategies for Reducing the Impact of EU Duties on Denim
When the European Union added an additional 26 percent duty on the import of women’s denim jeans from the U.S., the action caught many of the high-end denim manufacturers in the Los Angeles area off-guard.
As an optimist, I like to look for the silver lining in any situation. The silver lining in the EU denim duty is that several savvy companies are realizing that they can gain an advantage over competitors by understanding the rules of the game.
Duties are a significant portion of the landed cost of any apparel import. Having an understanding of the rules surrounding the duties will allow an importer to minimize duty costs and avoid surprises. With a 38 percent duty rate (the standard 12 percent duty was raised by 26 percent on May 1), denim manufacturers are scrambling to learn these rules.
The three main factors that impact the amount of duty an importer pays are value, classification and origin.
Value is normally based on the price paid by the importer to the manufacturer. Classification is determined by the design, fabric and other characteristics of a garment. Origin for most wearing apparel is determined by the country where the garment is sewn. Jeans sewn in the U.S., for example, are U.S. origin, regardless of where the fabric is woven or where the jeans are finished.
Understanding each of these factors will not only allow an importer to minimize the impact of the additional denim duties, it can also allow the importer to minimize the duties paid on any imported apparel product.
Below are a few strong>tegies used by apparel importers to save on duties by lowering the value or changing the classification or origin of a garment.
*“First Sale” is a long-established, yet little used, technique allowing companies to report a lower value on imports. The basic concept is for the manufacturer to set up a sales company as a middleman for its European transactions. The manufacturer sells to the middleman in the first sale, and the middleman sells to the distributor in the second sale. If set up properly, the distributor may be able to pay duty only on the first sale, although they will still pay the full price to the manufacturer.
*Understanding the technical details of classification may allow an importer to avoid paying the additional denim duties. The pants subject to the additional denim duty are defined as women’s or girls’ trousers made from denim fabric. The trick to avoiding the additional duties is understanding the definition of denim fabric. Denim is defined in a note to the tariff as:
Fabrics of yarns of different colors, of three-thread or four-thread twill, including broken twill, warp-faced, the warp yarns of which are of one and the same color and the weft yarns of which are unbleached, bleached, dyed grey or colored a lighter shade of the color of the warp yarns.
If the fabric used to make the pants does not meet this specific denim definition, then the pants are not subject to the additional denim duties. Many of the current styles of denim pants are using fabrics that are referred to as denim but don’t fit into this specific definition.
If a manufacturer describes, on the invoice, the pants as denim, chances are that customs will impose the additional duties without looking at the fabric to verify that the fabric is truly denim.
*One strategy used by at least one major Los Angeles denim brand was to change the country of origin to avoid paying the additional denim duties. By shifting the sewing from the U.S. to Mexico or another country, the origin of the jeans changes even if the jeans are returned to Los Angeles for finishing.
*Another origin strategy involves the use of EU fabric. Jeans made from fabric woven in the EU can benefit from a partial duty exemption for the cost of the EU fabric.
As Sir Francis Bacon said, “Knowledge is power.” Understanding how duties are determined can give you the power to control your duty expense.
Tom Gould is the president of Tom Gould Customs, a global compliance and trade consultancy in Los Angeles. His clients include retailers and importers and exporters of textiles, wearing apparel, footwear and consumer products. Tom’s new book, “Apparel Classification,” is a comprehensive guide that serves as a companion to his workshops and resource for apparel professionals.