Too Good to be True

Tariffs, forced labor & customs fraud.

There’s an old saying in the legal profession that clients can have legal advice that is excellent, fast, and cheap, but only if they’re willing to pick two. You can get expert counsel delivered in no time, but it’s going to cost you. If you want first rate guidance at a steep discount, that might be feasible provided you’re willing to hang out at the back of the queue, while better-paying and more urgent work takes precedence. If you want fast advice without incurring significant cost, well, buyer beware.

The same might be said for avoiding tariffs, avoiding forced labor in the supply chain, and avoiding customs fraud. All of these important objectives are possible to achieve, but probably not more than two at a time.

It’s hard to believe that almost four months have elapsed since the last FLT post. Many thanks to loyal readers who reached out to confirm I was still breathing! What a time to be in trade. It is a peculiar experience to have your particular area of subject matter expertise thrust to the forefront of global attention. Of course my world is dominated by the relentless waves of tariff actions. This is what I do. But in fact it’s not just my world—the world has been consumed by tariffs, or so it seems.

I have a white board in my office on which I’ve scrawled the phrase:

I’M SORRY, NO. THAT WOULD BE CUSTOMS FRAUD.

This is followed by a series of hash marks, one for each time I’ve had to say this to a company sorting out how to mitigate tariff impact. Prior to February 2025, I’d never uttered that phrase in the context of delivering legal advice. My white board now has ten hash marks.

As it turns out, there really are five stages of grief (denial, anger, bargaining, depression, and acceptance), and these stages aptly describe the process by which businesses come to terms with a high-tariff environment. For those companies that are inclined to consult their lawyer about such matters, such consultations typically occur between stages two (anger) and three (bargaining).

Invariably, someone within or outside the organization has the ambition to “solve” the tariff problem. Maybe it’s an enterprising employee who has successfully helped the company save money for years, and who now fears their legacy as a logistics wizard is imperiled by the transit-adjacent expenses (duties) that they fear will be construed as their fault. Or perhaps its an executive who, with eyes on a bonus linked to the company’s financial performance, turns to her team and says “who can make this problem to go away.” More likely, it’s a foreign supplier who says “we find better tariff code” or “we email new invoice” or “we fix problem, let us import”.

The art of rendering good legal advice on tariffs involves helping companies understand the risks and opportunities associated with tariff solutions. Invariably, this means working toward acceptance. It requires accepting that tariffs are real, not illusory, that they have been imposed above your paygrade, and that the best opportunity available to any importer is the same as it always was: to be extremely meticulous in following the rules, and to look for lawful ways (there are typically at least a few) to compete and save around the margins. Stated differently, if a tariff solution sounds too good to be true, it probably is.

Because it’s been a solid 95 years since any major world economy went full throttle on tariffs, it’s fair to say that no one is experienced at thinking through the ethical ramifications of mitigating tariff impact. But make no mistake about it, there are ethical questions to consider.

Through the flurry of tariff activity, one prominent economic message broke through more easily than just about every other, which is that tariffs are taxes that will cause prices to go up. Those price increases may or may not be pernicious (that is to say, truly inflationary), but the logic of tariffs = taxes = price increases is pretty easy to get the head around.

But price increases are only one of three direct economic consequences of tariffs. In many cases, companies don’t feel at liberty to pass along tariff price increases at full value to their customers. In the event that they cannot (or will not) increase prices, that brings the second direct economic consequence of tariffs into view, which is accepting a lower profit margin. All companies engaged in importing goods earn some profit from doing so. In a high-tariff environment, some of that profit will no doubt devolve into tariff payments.

Given the obviously unsavory nature of both raising prices and reducing profit, the third direct economic consequence of tariffs starts to look more attractive: negotiating to pay the foreign manufacturer less for the goods. Because tariffs are assessed on the basis of the amount paid to the foreign manufacturer, this can actually often seem like a win-win. If yesterday, a widget was imported for $10 with no tariffs, and today 25% tariffs are imposed, the cost to import the widget will now be $12.50. That is, unless the foreign manufacturer will agree to a price of $8, in which case the cost of importation can remain unchanged (because $8 x 1.25 = $10). And so we observe the third economic consequence of tariffs: downward price pressure on foreign manufacturers.

Therein lies the ethical challenge associated with mitigating tariff impact: there is only so much froth you can scrape off the top of the manufacturer’s latte. And the higher the tariffs, the less feasible that becomes. I’ve recently heard folks suppose and speculate that foreign manufacturers in their industry are actually sitting on pretty fat profit margins, maybe 20, 30, 40 or even 50 (!) percent. Faced with two unattractive economic consequences—raising your prices or absorbing a hit to your profit—it’s easy for a narrative like this to take root.

But the reality is, there are true costs to making goods, and these costs cannot simply be waved away. From a customs perspective, we think of such costs of production as existing across four categories: materials, labor, overhead and profit. If it costs $10 to make a good for export to the United States, a significant percentage of that cost is irreducible from a customs standpoint. A manufacturer must acquire materials to use in production. It will incur overhead expenses as a result of being in business. It might be willing to accept a lower profit, or even to operate at a small loss for a period of time. But if the profit margin isn’t large enough to absorb the requested reduction in cost, that leaves only one additional area to squeeze for savings: labor.

The New York Times published a piece last week detailing the experience of apparel manufacturers in Guangzhou, the heart of China’s garment industry. A gentleman factory owner interviewed for the piece noted that his profit margin was about $1 for every garment sold on Amazon, a number that had been reduced to “just 50 cents” in the wake of the tariffs.

“[H]e felt he could not cut his employees’ pay, Mr. Liu said, as workers at a labor market crowded past his motorbike, which he had parked on the sidewalk with a dress sample draped over the handlebars.

“You can’t sell anything to the United States right now,” Mr. Liu said. “The tariffs are too high.”

And so we have Exhibit A of an ethical Chinese manufacturer. If Mr. Liu’s clients are unwilling to increase prices to their customers, and are unwilling to absorb the impact of the tariffs from their profit margins, the only options for Mr. Liu are to absorb tariffs in his profit margin (which he has, to a point), or make his workers go without pay—something he has ruled out.

Will all Chinese factory owners proceed so honorably? The Times also notes that “[i]n one Guangzhou neighborhood, foreign luxury cars — Mercedes-Benzes, BMWs and Cadillacs — were parked outside factories that pay workers about $60 a day to churn out clothing sold on apps like Shein and Amazon.” It is perhaps not too uncharitable to doubt that every foreign-luxury-car-driving factory owner will be so principled.

Wages and worker productivity are certainly on everyone’s mind. The Times cites “nine factory owners and managers in Guangzhou” who said in interviews that they were “considering relocating their operations, some to provinces like Hubei, 600 miles away, where they could pay workers lower wages.”

And so we reach the trilemma. Suppose a Chinese supplier offers to solve the trilemma: “You can pay no tariffs. Trust us, we handle import, customs no problem. Of course we pay employees.” If it sounds too good to be true, it is. You can only pick two.

To eliminate tariff impact at the time of importation without forcing workers to forego wages—particularly at a 145-170% tariff rate currently in effect on many goods from China—there is a meaningful risk that someone will have engaged in customs fraud. My personal favorite customs fraud I’ve encountered in the wild involved taking the commercial invoice, moving the decimal two spaces to the left, and voila: a customs invoice, with a 99% discount!

By the same token, if you categorically rule out customs fraud and still want to eliminate tariff impact at the time of import by getting the foreign manufacturer to accept a massive price reduction, it’s worth grappling with the ethical ramifications. There’s a good chance that the most vulnerable workers in the supply chain will be footing the bill.

And if you rule out both customs fraud and worker exploitation, then it’s probably time to make peace with tariffs. Acceptance: it’s better than depression.