US Tariffs: Keep Calm, Carry On

There’s been a lot of justified noise around the recent US tariff announcements. Global share markets have seen considerable volatility due to the resulting uncertainty, and exporters around the world are scrambling to assess the implications. From our perspective, the first message for New Zealand exporters to the US is simple. Don’t panic.

Tariffs: how do they work?

Tariffs are a tax on imported goods, charged as a percentage of the price a purchaser pays a foreign supplier. This means the cost of a tariff its typically borne by the importer, which in the US, is imposed and collected by U.S. Customs and Border Protection.

However, the extent to which your business feels the impact may depend on the terms of your US distribution arrangements. While the legal obligation to pay the tariff rests with the importer, US importers may seek to pass on the additional cost of tariffs by adjusting pricing structures, seeking supplier discounts, or invoking contractual clauses. If such mechanisms are in place, your business could bear some of the downstream effects.

Unless your arrangements do alter the legal position, New Zealand, importantly, faces one of the lowest average tariff rates globally. It’s likely that your US partners are under more immediate pressure from goods sourced from higher-risk jurisdictions like China or the EU.

That said, this is not a moment for complacency – it’s a moment for smart, strategic engagement.

Stay close to your networks

Start with your relationships. Now is a good time to check in with suppliers, distributors, and customers. What are they hearing? How are they thinking about responding? Are they planning to shift sourcing, stockpile or restructure product lines?

Understanding their strategic response will allow you to act in alignment, not at odds, with your partners. In volatile markets, the strength of your commercial relationships often determines how much insulation you have from sudden shocks or supply chain shifts.

Understand your contracts, but don’t overreact

Some will suggest jumping into renegotiation or rapidly redrafting supply agreements. That’s rarely the best first step. Instead, take stock – understand your current contractual rights and obligations. If your supply chain becomes disrupted, or if your distributor seeks to pass on additional costs, you’ll want to know where you stand and whether you have flexibility to adjust terms, pricing or volume.

As always, lead with the relationship. Contracts are there to support commercial outcomes, not dictate them.

Rules of origin: complex but critical

The primary area of interest is how the new tariffs will affect New Zealand exports, particularly those that incorporate globally sourced components. The answer lies in the rules of origin:

• For goods “wholly obtained”, meaning they have been grown, produced or manufactured solely in New Zealand, the position is generally straightforward: they are New Zealand origin goods, subject to the New Zealand-rated tariffs imposed by the US.
• For goods incorporating components from other countries, the country of origin and corresponding tariffs are dependent on several additional considerations.

The US uses the “substantial transformation” test to determine country of origin for non-preferential tariff purposes. This requires that a good undergo a fundamental change in name, character, or use in the country claiming origin. That transformation must also be economically meaningful – it must add value compared to the good (or its parts) as first exported from the origin country. Other considerations include the resources used for product design and development, the extent and nature of post-assembly inspection and testing procedures, and worker skill required during the manufacturing process. No one factor determines whether substantial transformation has occurred.

What does this look like in practice?

The below US decisions demonstrate how these considerations have previously been weighed and may allow you to grapple with the risk (or lack thereof) of the new tariffs due to manufacturing processes.

The Energizer Battery Decision

The court in this ruling looked into the manufacturing of a flashlight, which was comprised of about 50 different components. Despite being assembled in Vermont, the country of origin of the flashlight was determined to be China for the following reasons:

• The components that made up the flashlight did not lose their individual names; and
• The components had a ‘pre-determined end-use’ as parts for the flashlight and did not undergo a change in use due to the assembly/manufacturing process.

The court noting also that a change in character is unlikely to be found unless the components undergo a physical change.

The Fairplay Electric Cars Decision

The ruling in Fairplay Electric Cars illustrates an example of substantial transformation. Fairplay Electric Cars LLC manufactured electric cars incorporating both US and Chinese components. While a majority of the components were imported from China, the US was determined to be the country of origin for the following reasons:

• None of the imported components could function as an electric vehicle without the assembly with the US components, which was completed in the US; and
• The time and skill required for assembly (which was between 11 hours and 14.25 hours) was notable.

The Volvo Decision

In the Volvo decision, the complexity of the assembly undertaken in each relevant country was a key factor in determining the country of origin. In manufacturing cars, components from various countries were shipped to a factory in China, where specific components were assembled into subassemblies. These subassemblies were then shipped to Sweden for final assembly. The assembly of the five subassemblies in Sweden was ruled not to rise to the level of complex processes necessary to amount to a substantial transformation.

In short, merely assembling components in New Zealand may not be enough. Exporters should be prepared to justify origin classifications based on processing steps and value added. If your products include components from higher-risk countries, such as China, it may attract tariffs even if finished in New Zealand.

Position yourself to respond — and take advantage

Once you’ve gathered the facts and tested your assumptions with partners, be decisive in your strategy. Some may face tighter margins. Others may experience disruptions as suppliers reprice, pause lines or exit markets. But disruption often creates opportunity – market share may be up for grabs, and you may be able to reprice, renegotiate, or re-source in ways that improve your long-term competitiveness.

Tap into support

Now is the time to engage with your networks. NZTE, ExportNZ, industry bodies, and trade consultants are all working to stay up to date with developments. Use them.

We’re monitoring the situation closely and are here to help New Zealand exporters navigate this complex and shifting environment. If you have specific concerns about your products, contracts, or supply chain strategy, we’re ready to assist. Now is the time for calm, reasoned action — not knee-jerk reactions.

Looking to make sense of the tariff changes? Talk to our commercial team for clear, strategic guidance.  Get in touch.

This article was written with the help of Alice Croucher, Eric Stratton and Jarrod McDermott.