As the Trump administration raises import barriers with new tariffs this year, legal loopholes to circumvent them are regaining attention.
Despite some complexity, companies worldwide are reportedly adjusting their supply chains, recognizing that utilizing U.S. customs regulations enacted nearly 40 years ago can significantly reduce tariffs.
U.S. economic media outlet CNBC reported on Monday that the First Sale Rule, a provision in U.S. customs law dating back to 1988, has gained renewed popularity as a legal tax-saving strategy. This rule allows importers to base their customs valuation on the initial sale price, excluding intermediate distribution margins. For instance, if a Chinese manufacturer sells a T-shirt to a Hong Kong distributor for 5 USD, who then sells it to a U.S. retailer for 10 USD, and a U.S. consumer ultimately buys it for 40 USD, the U.S. retailer would normally pay duties based on the import price of 10 USD. However, by utilizing the First Sale Rule, the U.S. retailer can pay duties based on the first transaction price of 5 USD.
Brian Gleicher, a senior attorney at trade law firm Miller & Chevalier (M&C), noted the rule’s longstanding existence and current widespread interest. Sid Paruthi, a partner at U.S. consulting firm Moss Adams, referred to when U.S. President Donald Trump began a trade war against China during his first term in 2018. “When the first administration had 25% tariffs (on China), that’s when we started getting calls. Now with the new tariffs, the first sale rule has started coming up again,” Paruthi stated.
Although the First Sale Rule offers substantial tariff savings, it was not frequently used due to its stringent conditions and extensive paperwork. According to M&C, only 2.4% of U.S. imports utilized this provision in 2009. To qualify, imports must undergo at least two independent sales processes involving overseas producers and intermediaries. The tariff declarant must prove that the independent sales processes occurred between unrelated parties and that these transactions were conducted for export to the U.S. Additionally, documentation proving the first transaction price is required.
CNBC highlighted the challenge importers face in obtaining initial transaction prices, as both producers and distributors often withhold this information, citing trade secrets.
Rich Taylor, a consultant in the Chinese hub of Ningbo who has been advising Fortune 500 companies since Trump’s first term, emphasized to CNBC that “there has to be a level of trust between all parties” to reduce tariffs. He argued that all means must be mobilized to attract consumers, warning that companies slow to adopt the First Sale Rule are likely to fall behind competitors.
CNBC suggested that while most companies can benefit from this rule, products with a large difference between manufacturing costs and retail prices, such as luxury goods and high-end consumer products, could receive greater benefits. Italian luxury brand Moncler stated in its earnings announcement on April 16 that it gained significant profit from utilizing the First Sale Rule. Swiss pharmaceutical company Kuros Biosciences announced in its earnings presentation on May 13 that it is considering supply chain relocation to utilize the First Sale Rule. U.S. barbecue equipment manufacturer Traeger and U.S. online manufacturing platform Fictiv both mentioned the rule positively in recent earnings calls.
CNBC pointed out that the First Sale Rule appears to conflict with the Trump administration’s tariff policies and manufacturing revival strategies. The White House did not respond to CNBC’s request for comment.
