How To Use Your Manufacturing Contract To REDUCE Your Tariffs

How to Use Your Manufacturing Agreement to Reduce Your U.S. Tariffs

In THE Guide for LEGALLY Avoiding Today's and Tomorrow's U.S. Tariffs, we outlined what we called "just about every viable legal strategy to avoid or reduce tariffs."

Today, we're adding one more important strategy to that list.

This method is more complex and riskier than most of the others. In fact, we originally planned to cover it in a separate post right after publishing "THE Guide" But then the tariffs hit, client demand went through the roof, and this topic slipped through the cracks—until now.

This post focuses on China, where the current standard tariff rate on many products is 145%. While that rate may drop in the future, few expect it to fall below 40% anytime soon. But all of the principles outlined here apply just as well—though with smaller savings potential—to imports from any other tariffed country.

In this post, we'll show how your manufacturing agreement can and should be used as a tool to legally reduce your U.S. tariffs. By properly separating out non-dutiable costs—such as IP licensing, tooling, service fees, and post-sale rebates—you can significantly lower your customs value and reduce what you owe.

We'll also cover common compliance pitfalls, explain how U.S. Customs evaluates supporting documentation, and highlight why improperly bundled costs can lead to unnecessary overpayment or even penalties. Finally, we'll leave you with a practical checklist your team can use to implement these strategies with confidence.

Your China Manufacturing Contract Can Reduce Your U.S. Tariffs

If your China manufacturing agreements bundle intellectual property (IP) licensing, mold/tooling fees, product sourcing and other commissions, transportation costs, product design fees and costs, manufacturing consultation fees and costs, marketing fees and costs, or rebates directly into your product cost, you are unnecessarily inflating your customs value. This can mean paying significantly more in tariffs than necessary. If your product is hit by a 145 percent tariff, every misclassification or missed opportunity to separate these costs can be enormously expensive.

The good news? You can rectify this entirely legally—if you know how.

The bad news? Far too many businesses get this wrong, resulting in costly penalties and lost opportunities for savings.

What is "Customs Value" and How Is It Calculated?

Most countries, including the U.S., base tariffs on "transaction value"—essentially, the price actually paid for the goods when exported to the country of importation.

However, customs value isn't just what's on your invoice. Importers must add certain statutory additions, such as:

• Assists (like molds and buyer-provided materials)
• Royalties and license fees (when a condition of sale)
• Commissions related directly to the sale
• Proceeds from subsequent resale paid back to the seller

But not every cost linked to the transaction is automatically dutiable. Costs such as IP licensing, marketing support, molds/tooling, and rebates can often be legally excluded if structured and documented properly.

Why a Full-On China Manufacturing Agreement Is Essential

Since we began this blog, we've repeatedly emphasized the need for comprehensive manufacturing agreements with your overseas suppliers. This is because almost every time a company encounters issues with an overseas supplier, it turns out they either lack a formal manufacturing agreement or they have accepted an agreement drafted by their supplier without benefit of their own manufacturing lawyer having reviewed it

In most Asian jurisdictions, including China, if your contract doesn't explicitly prohibit a harmful act, your manufacturer can probably do exactly that. Therefore, having a detailed, well-structured contract isn't just smart—it's absolutely critical.

But with the new tariffs, it can also be a major cost saver and more than pay for itself, most likely after the first product shipment.

POs and Invoices Aren't Enough

Many companies try to define transaction value using only purchase orders (POs) and commercial invoices. However, these rarely tell the whole story—and U.S. Customs authorities know it. If U.S. Customs suspect hidden payments or undisclosed costs, they'll dig deeper, examining things like:

• Supplier agreements
• Royalty or licensing contracts
• Intercompany payment trails
• Bank records
• Emails and even WhatsApp messages

If they discover undisclosed payments, they can retroactively recalculate your duties, impose penalties, and trigger broader audits of past import transactions.

Structuring Your Manufacturing Agreement for Maximum Tariff Efficiency

A robust manufacturing agreement should explicitly identify what's included and excluded from the product price. Here's typically how you should separate costs:

Your agreement should also be in both English and the local language of your manufacturer's country. This enhances both enforceability and compliance credibility, especially crucial in jurisdictions like China. See Why Your China Manufacturing Agreements Should Almost ALWAYS Be in Chinese.

Working with Factories that Provide Design and Manufacturing Services

Many factories in China and elsewhere offer comprehensive design and manufacturing services, bundling everything from concept development, tooling, manufacturing, packaging, and sometimes even shipping. Even those factories that do not handle door to door shipping of your product, will often handle getting it from their factory to the local port. While these turnkey services can streamline your supply chain, they can also complicate your tariff obligations significantly if not structured correctly.

If your factory provides combined services, you should clearly and appropriately separate the costs of each service within the manufacturing agreement. Clearly itemizing design, development, tooling, and transport costs separately from the product's actual unit price is essential. Failing to do so will almost certainly cause U.S. Customs to view your entire package as dutiable, inflating tariffs substantially. Always clarify in writing exactly which costs pertain to the product itself and which are for separate non-dutiable services.

The Tariff Savings by Getting IT Right

The Tariff Savings from Getting It Right

Let's say you're importing smart thermostats from a factory in Shenzhen, with the following cost breakdown:

• Base Product: $18.00
• Royalty (brand): $1.50
• Mold/Tooling Amortization: $0.50
• Marketing Support: $0.50
• Local Transport Costs: $0.25

If you bundle all of these into your unit price, you end up with a declared customs value of $20.75. At a 25% tariff, you would pay $5.19 per unit in duties.

But if you structure your manufacturing deal properly, you can legally separate out:

• The $1.50 royalty through a standalone IP licensing agreement
• Mold/tooling costs via a separate invoice and amortization schedule
• Marketing support as a separate service line
• Transport costs excluded as non-dutiable

This reduces your dutiable customs value to $18.00, lowering your tariff to $4.50 per unit. That's a savings of $0.69 per unit, or $345,000 across a 500,000-unit shipment.

Now, apply the same structure under a 145% tariff rate, and your total savings skyrocket to around $2 million—all completely legal and compliant under U.S. customs law.

The Costs of Getting IT Wrong

The consequences of sloppy or incomplete structuring aren't just financial—they can be operationally disruptive and legally serious:

• Retroactive duty assessments: U.S. Customs can audit and reassess duties going back up to five years
• Penalty actions: Violations can trigger penalties under 19 U.S.C. § 1592 for material misstatements
• Port holds and shipment delays: Customs may detain goods, disrupting your supply chain
• Loss of trusted importer status: Programs like CTPAT require consistent compliance
• Internal disruption: Finance, compliance, and sourcing teams are often forced to scramble to fix documentation gaps

Customs agents are trained to identify indirect payments and hidden costs tied to imported goods. If your contracts, invoices, wire transfers, and POs don't tell a consistent story, Customs will not give you the benefit of the doubt.

Illegal Practices Are Booming—And the Crackdown Is Happening

Across China, tens of thousands of logistics companies are offering so-called "double clearance and tax-inclusive" services. These providers help manufacturers disguise the true value or origin of goods—often using dual invoicing schemes (one for customs, another for internal accounting) or breaking up invoices to reclassify goods as "services" to evade tariffs. This practice has become so widespread, it's now an open secret in the industry.

Chinese social media is full of ads promising delivery of heavily tariffed items—like refrigerators and air conditioners—for pennies on the dollar, thanks to these shady invoicing tactics. And this isn't just anecdotal. A recent Nikkei exposé titled China's formidable logistics sector challenges Trump tariff enforcers: One-stop services help merchants sidestep duties, including by undervaluing goods, has been widely circulated, detailing how these "one-stop services" help merchants sidestep duties through undervaluation and false documentation.

According to U.S. Customs and Border Protection (CBP), tariff evasion in 2023 alone was about $130 billion, much of it involving underreporting, mislabeling, or re-routing through countries like Vietnam and Cambodia. These tactics may seem clever, but they are clearly illegal—and the consequences can be severe.

We've had clients ask us about these services—sometimes sheepishly. Our answer is always the same: this is not a gray area. It is customs fraud.

More interestingly, a growing number of clients are now approaching us to report their competitors who are engaging in these schemes. Many are also asking how to pursue legal action based on unfair trade practices. We expect a surge in private party lawsuits in the next 6–12 months. For law-abiding companies, these actions could become both strategic and financially rewarding.

Our law firm has been involved in various actions in this space, and, quite frankly we love them. See e.g. Illegal Transshipping/False Country of Origin — Help Us Help You Get Rich. One notable example involved a $62.5 million settlement paid by Univar, following a case in which our firm assisted our clients in presenting evidence of illegal transshipping to U.S. authorities. As a result, both our clients and our firm received a share of the recovery. This case highlights just how real and substantial the incentives can be for companies that choose to report violations or pursue private litigation for lost profits.

If your company is tempted to take these shortcuts—or if you suspect your competitors are—now is the time to speak with your international trade counsel.

Your 2025 Customs Structuring Checklist

If you're serious about reducing your U.S. tariffs legally, your contracts need to do more than cover the basics. They must be carefully structured to support both compliance and tariff efficiency. Use this checklist to ensure your agreements are working for—not against—you at the border.

1. Manufacturing Agreement

A strong manufacturing agreement is the foundation of effective tariff structuring.

• Signed by both parties
• Clearly separates product pricing from:
  • Royalties and IP licensing fees
  • Tooling and mold costs
  • Design, consulting, marketing, and other service fees
• Includes clear ownership and amortization terms for molds/tooling
• States that the product price excludes non-dutiable services
• Drafted in both English and the supplier's local language (e.g., Chinese)

2. IP Licensing Agreement

Proper handling of IP licensing can keep significant costs out of your customs value.

• Separate from the manufacturing agreement
• Clearly states that licensing fees are not a condition of sale
• Independent payment terms and schedule
• Drafted in both English and the manufacturer's local language

3. Tooling and Molds

Tooling costs are often misclassified—this ensures they're treated correctly.

• Not included in the per-unit product price
• Separate invoices or a documented amortization schedule
• Clear documentation of buyer ownership

4. Service Costs (Design, Consulting, Transport, Marketing, etc.)

Service costs should be treated as separate, non-dutiable expenses.

• Covered under a distinct services contract
• Invoiced separately from goods
• Payment terms unlinked to the sale of products
• Specific services clearly defined in writing

5. Rebates, Clawbacks, and Discounts

These can reduce customs value—if structured and applied correctly.

• Defined clearly in the agreement
• Applied consistently across all documents and shipments
• Only reduce declared value if realized at the time of sale and properly documented

6. Document Alignment and Audit Readiness

Customs will scrutinize inconsistencies—your paperwork should be airtight.

• All documentation (invoices, contracts, POs, wire records, etc.) should align
• No contradictions between documents
• Any side agreements are fully disclosed and available in case of audit
• Messaging and payment trails (emails, chats, bank records) reflect the same deal structure

7. Internal Compliance Protocols

Even the best contracts can fall apart without proper internal coordination.

• Finance, legal, and sourcing teams should be aligned
• International trade counsel should review all contracts that impact customs value
• Periodic internal audits of transaction structures and supporting documents

Smart Structuring is Your Strategic Advantage

Legally reducing your customs value isn't about finding loopholes. It's about understanding the laws and rules, and ensuring that your contracts and documentation are fully aligned with all legal requirements. When structured correctly, this approach protects your business and gives you a meaningful competitive edge.

Done properly, it brings your costs down, keeps you in good standing with Customs, and helps you stay ahead—shipment after shipment after shipment.