That all-important last screw

Many readers of this journal may have already felt a direct impact from the rapidly escalating trade war, as distributors like Digi-Key have started passing the cost of tariffs directly to customers located in the US. Being on the front lines myself, I already have a couple of war stories to share in case they might be helpful.

Tariff codes (also known as HS codes – essentially a numbering system to describe every imaginable product) are often ambiguous. While one should always endeavour to pick the most appropriate code, multi-featured devices often fit several tariff code descriptions. For example, I’ve seen a Raspberry Pi classified as everything from a computer to a circuit board, which can have significantly different tariff outcomes for certain jurisdictions. Thus, it pays to study the tariff lists to try and find a tariff code that accurately represents your product, that is also not taxed. My observation is that the more ‘finished’ a good is, the less likely it is to be taxed by the US. So, circuit boards and components are taxed, but as of writing, certain toys, A/V appliances, video games, and mobile phones are not.

You may have also heard news commentators quip that it’s futile for a single country to engage in a trade war. This is because the 1974 Kyoto Convention specifies that the country of origin can be set by the last country where a product’s HS code has changed – known as the ‘substantial transformation criterion’. So, even if 99% of the value-add could occur in country A, as long as the last 1% value-add in country B legitimately changes the HS code of the product, the country of origin is B.

This is why ‘last screw’ operations are getting so much attention now. China can still produce the circuit boards and plastic case for a typical consumer electronic product, but the country where these get screwed together – a simple, low-value operation – can be legitimately claimed as the country of origin under these rules. Ironically, the tariff policy, as implemented, makes it extremely unattractive to move ‘last screw’ operations into the US, because taxes are highest on the parts, components, and tools necessary to implement a last-screw operation.

If you’re planning a new product, I’d encourage taking a deeper look at these trade rules, as tweaking your product’s function or packaging, or perhaps a small adjustment to your supply chain, could significantly alter the cost structure for your product.

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