How Companies Are Mastering the Art of “Tariff Engineering”

Article Highlights:

• Tariff engineering is a strategic approach to modifying various elements of a product to secure a lower tariff rate. 
• One longstanding strategy businesses leverage to lower their tariff responsibility is to manipulate the manufacturing processes of their imports in order to alter the official COO. While this can be done in a number of ways, it generally requires a collaboration between sourcing, design, and engineering. 
• Businesses are now attempting to argue that the COO of specific imports should be changed to a different country—one that they believe represents the last location of substantial transformation. These organizations invariably argue that the COO be changed to a nation with a lower tariff rate. 

The U.S. and China’s recent trade agreement represents a significant deescalation in the ongoing conflict between the two economic superpowers, as well as a crucial reprieve for many American businesses facing prohibitively high import taxes. But while triple-digit tariff rates and the decoupling it would have likely triggered are off the table—for now, at least—that hardly means that the plethora of tariffs still very much in effect can be easily dismissed. 

Even after lowering tariffs on China from 145% to 30%, the U.S. government still maintains its highest average tariff rate—17.8%—since 1934, according to Yale’s Budget Lab. For American manufacturers that source from global supply chains, that means that developing and implementing effective tariff mitigation strategies is still an operational imperative. One approach businesses are taking to lower their import duties without initiating a monumental shift to their manufacturing and production processes—by, say, embracing onshoring and returning manufacturing to the U.S.—is something called “tariff engineering.” 

A dynamic and multifaceted strategy, tariff engineering can be thought of as a single destination—get your organization to lower import costs—with a range of different routes to get there. 

What Is Tariff Engineering?

A fancy term for a straightforward concept, tariff engineering is a strategic approach to modifying various elements of a product to secure a lower tariff rate. Examples of tariff engineering include:

• Modifying a product so that it fits into a different Harmonized Tariff Schedule classification.
• Altering the manufacturing process to change the country of origin (COO).
• Lobbying Customs and Border Protection directly to argue that an import’s last location of substantial transformation is a country with a lower tariff rate. 

While tariff engineering has been around for decades or longer, it’s seen its profile rise rapidly over the past six months. As the Trump administration has transformed the global trade landscape and turned tariffs into a dominant feature of sourcing, procurement, and supply chain management, many importers are seeking out all manner of mitigation tactics. 

Tariff engineering can be particularly appealing because it represents a measured response to rising import costs. Instead of restructuring supply chains, onshoring production, or relocating manufacturing to a country with a lower tariff rate that’s highly provisional, importers can deploy tariff engineering to make small but meaningful adjustments. These strategic actions around the edges of manufacturing operations often have an outsized impact on the transport costs for goods. 

Tariff engineering can be particularly appealing because it represents a measured response to rising import costs.

It’s also worth noting that, while there are historical examples of this strategy, it remains a relatively novel, open-ended practice for which no playbook exists. This allows sourcing professionals to leverage creativity, ingenuity, and resourcefulness to modify their supply chains and production processes to achieve more favorable import conditions. 

Manufacturing Modifications

One longstanding strategy businesses leverage to lower their tariff responsibility is to manipulate the manufacturing processes of their imports in order to alter the official COO. While this can be done in a number of ways, it’s generally not something that sourcing and procurement professionals can execute on their own. Rather, it requires a collaboration between sourcing, design, and engineering. Working cooperatively, these team members can look for opportunities to modify the manufacturing sequence; carry out subtle changes to product design; or work to qualify for a new HTS classification associated with a lower tariff rate. 

When adjusting manufacturing processes to lower duty responsibilities, it’s important for teams to run an ongoing cost-benefit analysis. As the first half of 2025 has forcefully demonstrated, global trade is a highly dynamic landscape that can evolve quickly—and then evolve again. Organizations should consider context and potential future outcomes carefully before making consequential changes to their products and the manufacturing behind them. Because even the most prohibitively high import taxes may only be temporary trade obstacles. 

Arguing for “Commercial Viability” in Lower-Tariff Country

In the U.S., Customs and Border Protection relies on the principle of substantial transformation to determine the country of origin (COO) of a product and its associated import taxes. As we’ve discussed elsewhere, this principle stipulates that for imports manufactured across multiple countries, the last nation where a “substantial transformation” to the good took place is considered the COO. If you’re wondering what constitutes a substantial transformation, the U.S. International Trade Administration provides a useful definition. “Substantial transformation means that the good underwent a fundamental change in form, appearance, nature, or character,” the agency explains. In addition, the change “adds to the good’s value at an amount or percentage that is significant, compared to the value which the good (or its components or materials) had when exported from the country where it was first made or grown.”

But while the U.S. federal government has tried to put forth a clear, concrete definition of substantial transformation, this definition still leaves a fair amount open to interpretation. Businesses are now attempting to use that ambiguity to their advantage by arguing that the COO of specific imports should be changed to a different country—one that they believe represents the last location of substantial transformation. And it goes without saying, perhaps, that these organizations invariably argue that the COO be changed to a nation with a lower tariff rate. That doesn’t mean, however, that they aren’t mounting legitimate arguments, as many organizations are asserting that the nation where their product reaches “commercial viability” should be deemed the COO, even if it undergoes subsequent manufacturing steps elsewhere. 

This commercial viability argument represents a proactive effort to lobby CBP to change its COO determination. And to make their case as credible as possible, businesses are submitting technical documentation outlining manufacturing steps, product specifications, and other materials in an effort to reduce tariff responsibilities for their company. 

And to make their case as credible as possible, businesses are submitting technical documentation outlining manufacturing steps, product specifications, and other materials in an effort to reduce tariff responsibilities for their company. 

Semiconductor Firms Reclassifying COO

The past few years have seen some significant developments in the way that the COO of semiconductors are classified by the countries importing them. In the past, it was widely accepted that the assembly, testing, and packaging (ATP) facility would determine a semiconductor’s COO, because it served as the final location of substantial transformation.

More recently, however, some of the world’s largest chip importers are starting to assign tariff responsibility for chips differently. In April, China’s General Administration of Customs (GACC) changed its rules governing how import taxes are levied on foreign semiconductors. Instead of using the last country where a substantial transformation took place—almost always an ATP facility—China declared that it would start using “country of diffusion” to determine import taxes. As we explained in a recent article, country of diffusion “refers to the country where the wafer used in the semiconductor was fabricated.” And while no official policy changes have been announced, a growing body of anecdotal evidence suggests that CBP is also beginning to shift to country of diffusion when determining tariffs for imported semiconductors. 

While this might seem like a shift in trade regulations at the governmental level, it also functions as a window of opportunity for savvy businesses. Many companies that import semiconductors into the U.S.—or export them to China—are now working to get the COO of those chips reclassified. For example, U.S. semiconductor manufacturers like Nvidia and Qualcomm—fabless firms that outsource much of their fabrication processes to TSMC and other foreign foundries—can use this new rule to their advantage. Because China now designates COO based on country of diffusion, rather than the last location of substantial transformation, these chipmakers can argue that semiconductors exported to China are eligible for Taiwan’s tariff rates—rather than the much higher taxes levied on American imports. 

Data Visibility Is the Engine for Effective Tariff Engineering 

For many businesses that source from global supply chains, the status quo is no longer tenable. Despite striking provisional agreements with some nations in recent months, the Trump administration still presides over a restrictive trade regime that currently imposes the highest average U.S. tariff rate in nearly a century. To keep their transport costs down and protect their profits, U.S. firms are doing whatever they can—exploring novel strategies, working the margins, experimenting with unconventional measures. This new atmosphere of resourcefulness has precipitated the rise of tariff engineering—a unique phenomenon that we very well may one day look back on as a peculiar artifact of this global trade era.

In the meantime, though, businesses interested in availing themselves of tariff engineering need maximum supply chain visibility and all the data and intelligence it comes with. Robust visibility can help businesses understand all the options available to them, including avenues for COO optimization; potential changes to their manufacturing processes; and the supply chain evidence necessary to mount an argument based on a product’s commercial viability. 

Supply chain risk management (SCRM) platform Z2Data gives users access to actionable, in-depth supply chain visibility in a number of different ways:

• Sub-tier intelligence that uses millions of data points to establish verified supply chain relationships connecting direct suppliers and parts with sub-tier entities.
• Comprehensive supply chain mapping that allows users to access detailed visualizations of a product’s manufacturing path.
• Granular intelligence on semiconductors, including manufacturers, fabrication sites, sub-tier suppliers, and risk analysis. 

With the information and insights provided by Z2Data, tariff engineering is just one of a broad range of strategies organizations can deploy to optimize their supply chains and lower their logistics costs. To learn more about the platform and how it can help organizations navigate the current tariff landscape with strategic precision, schedule a free demo with one of our product experts.