When tariffs disrupt supply chains, companies face an important decision of how best to weather the storm. Tariffs can be majorly disruptive and increase complexity, including rising costs, sourcing and supplier challenges and increased compliance hurdles. For many businesses, tariffs will strain working capital and may even cause undesired customer or supplier turnover. These disruptions are further complicated when the entities are affiliated, further requiring and transfer pricing considerations.
When companies are faced with new tariffs or increases to existing ones, there are three main routes to consider – recovery, deferral or mitigation. More specifically, the mechanisms that can be strategically implemented are using bonded warehouses, the Customs Reconciliation Program or setting up a foreign trade zone (FTZs). All of these have the potential to reduce financial strain, improve cost efficiency and will allow businesses to manage tariff costs more effectively while maintaining operational flexibility.
Unfortunately, most drawback or recovery programs are currently unavailable for the latest tariffs of the current administration. Owners should be mindful that these solutions require thoughtful consideration and planning for what’s best for their business.
Option 1 – Bonded Warehouses
A bonded warehouse is a storage facility authorized by customs authorities where imported goods can be stored without paying duties until they are withdrawn for sale or use. In short, businesses can use bonded warehouses to manage tariff exposure, defer payments and optimize cash flow.
How It Works
- Companies import goods into a bonded warehouse without paying import duties upfront
- Duties are only paid when the goods leave the warehouse for domestic sale or consumption
- If the goods are exported directly from the warehouse, no duties are required, as they never officially enter the domestic market
Key Benefits
- Duty Deferral: Businesses can delay duty payments until goods are actually sold, reducing financial burden
- No Duty on Re-Exports: If the goods are exported from the bonded warehouse, no duties are due
- Inventory Management: If working capital is available and customer demand supports it, companies can stockpile goods for future demand without immediate duty costs
Challenges and Considerations
- Storage Time Limits: Some jurisdictions limit how long goods can remain in a bonded warehouse (e.g., 5 years in the U.S.)
- Regulatory Compliance: Businesses must maintain accurate records and comply with customs procedures, including transporting goods meant for sale outside the US in a “bonded” manner (wrapped up and sealed), with registered vehicles for bonded transportation
- Security Requirements: Bonded warehouses are subject to customs supervision and must meet strict security standards
Companies can also allocate space for bonded storage and keep the remainder as non-bonded inventory storage. However, this requires strict documentation and security to ensure products do not cross over inappropriately, creating an unnecessary cost burden if only a small percentage of stock applies to this distinction.
Option 2 – Customs Reconciliation Program
The Customs Reconciliation Program is a compliance tool offered by U.S. Customs and Border Protection (CBP) as a way to estimate the product price as it crosses the border, then finalize/reconcile the product price at a later date. Many multinationals with multiple cross-border products will use this program, where the product price of imported goods can be estimated and paid as they cross the US border, then the company has 21 months to finalize the pricing and pay the remainder of the duties. In short, businesses can use the Customs Reconciliation Program to manage tariff exposure, optimize cash flow and, particularly in a period of rapid tariff environment changes, potentially save significant dollars upon completion of a thorough transfer pricing analysis. Some common use cases are:
- Transfer pricing adjustments between related entities
- Assists (e.g., tools, molds, design services provided free to foreign suppliers)
- Royalty payments or license fees applied post-import
- Unconfirmed INCOTERMS or freight cost finalization
- Provisional pricing agreements
How It Works
- File an Entry with Estimated Data: When certain data (e.g., value, assists or final costs) is unknown at the time of import, the importer flags the entry for reconciliation using the Reconciliation Flag in the Automated Commercial Environment (ACE)
- Enter Goods and Pay Duties Based on Estimates: The goods clear customs under the estimated values and duties are paid. However, the entry remains “open” on the flagged issues
- Gather Final Data Post-Import: Over time, the importer finalizes information related to transfer pricing, assists, freight costs or valuation components that were incomplete at entry
- File the Reconciliation Entry: Within a set time frame (typically 12-21 months), the importer files a reconciliation entry with the corrected or final data. This may result in:
- No change,
- Additional duties owed, or
- Refunds (if overpaid initially)
- CBP Review and Final Liquidation: CBP reviews the reconciliation entry and if everything is compliant, it liquidates the entry, officially closing it
Key Benefits
- Valuation Flexibility: Enables importers to comply with CBP deadlines even when full cost data is unavailable (e.g., for transfer pricing or year-end adjustments)
- Cash Flow Optimization: Helps avoid overpayment of duties by deferring payment until actual costs are known
- Compliance Safety Net: Reduces the risk of penalties for misstatements in declared value or classification due to data uncertainty at entry
- Strategic Alignment: Supports complex international pricing structures, especially for multinationals and related-party transactions
- Customs Record Consistency: Provides a formal framework to reconcile entries, supporting internal audit and trade compliance programs
Challenges and Considerations
- Complex Documentation Requirements: Requires detailed record-keeping, audit trails and structured reconciliation processes
- Resource Demanding: Ongoing effort is required from finance, tax, supply chain and trade compliance teams to ensure and maintain compliance
- Technology & System Capabilities: ACE integration, ERP compatibility and data traceability must be tight to avoid errors
- Time Sensitivity: Reconciliation entries must be filed within CBP’s designated time frame – typically no later than 21 months of the entry summary date
- Customs Bond Coverage: Importers need a continuous bond large enough to cover potential duty differences
- CBP Inspection: Reconciliations may be audited; errors or patterns of misstatement can result in penalties
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Option 3 – Foreign Trade Zones (FTZs)
A foreign trade zone (FTZ) is a designated geographic area where imported goods can be stored, processed or manufactured without incurring customs duties until they enter the domestic market. FTZs are commonly used by manufacturers, distributors and exporters to optimize duty management.
How It Works
- Goods enter the FTZ without immediate duty payments
- Companies can store, process, assemble or manufacture goods within the FTZ
- Duties are only paid when goods leave the FTZ for domestic consumption
- If goods are re-exported from the FTZ, no import duties are required
Key Benefits
- Duty Elimination on Exports: Goods exported from the FTZ never incur import duties
- Duty Reduction on Components: If a company manufactures products in an FTZ, duties may be assessed at the rate of the finished product rather than on each individual component—potentially reducing overall tariff costs
- Supply Chain Flexibility: FTZs allow businesses to test new markets, store inventory and process goods without immediate tax obligations
Challenges and Considerations
- Approval Process: Companies must obtain FTZ designation and comply with customs regulations. This approval process can be lengthy, typically between 10-12 months
- Operational Costs: Managing an FTZ requires additional administrative oversight and reporting
- Security and Compliance: FTZs are subject to government monitoring to prevent abuse
Comparison Shopping: Choosing the Right Strategy
For companies dealing with tariff uncertainty, utilizing one or more of these strategies can be powerful cost-saving or cash flow management tools.
| Strategy | Best For | Key Benefit | Main Challenge |
| Bonded Warehouse | Companies importing goods for future use or export | Defers duties until goods are sold | Storage time limits |
| Customs Reconciliation Program | Importers with uncertain or fluctuating import values | Defers final duty payments until confirmed actual values, improving compliance and cash flow | Strict documentation and timely reconciliation filings |
| FTZ | Manufacturers, distributors and exporters | Eliminates duties on exports & reduces tariffs on components | Approval timeline & compliance costs |
By implementing one or more of these strategies, businesses can minimize tariff exposure, improve cash flow and stay competitive in an unpredictable global trade environment. Each option provides different advantages based on business needs and companies need to evaluate several key criteria to ensure whatever strategy is employed gives them a long-term solution in support of the business.
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Have questions and need answers? Our tariff experts are happy to help. Contact Withum’s Manufacturing and Distribution Services Team today.
