EU brands turn to obscure customs clause to soften blow of Trump's tariffs

Economic Times

13 hours ago

Reuters
Consultants including KPMG and PwC have seen a surge this year in enquiries from companies into how to use this method to ease the burden of Trump's tariffs.
PARIS/MILAN: L'Oreal and a growing number of European fashion and cosmetics companies are exploring use of an obscure, decades-old U.S. customs clause known as the "First Sale" rule as a potential way to soften the impact of U.S. President Donald Trump's tariffs. While Trump and European Commission President Ursula von der Leyen announced a deal this week for U.S. tariffs of 15% on most imported EU goods - half the initially threatened 30% - that is still 10 times higher than the average tariff on EU imports before Trump's return to the White House. Some apparel and consumer brands are understandably wary of passing on the higher duties through price hikes to inflation-weary U.S. consumers.That's why they are looking to invoke the "First Sale" rule, which allows companies to pay lower duties by applying tariffs to the value of a product as it leaves the factory - much lower than the eventual retail price.'It's part of the possibilities,' L'Oreal CEO Nicolas Hieronimus told Reuters on Tuesday. "We will make decisions," he added, without giving a timeframe.
Brands like Italy's high-end sneakers maker Golden Goose, outerwear specialist Moncler and fashion label Ferragamo have all touted the strategy. "It's a significant benefit," Moncler executive director Luciano Santel said in a call with analysts, estimating the production cost at around half the import price. The strategy, which can only be invoked for goods clearly destined for sale in the United States and involving multiple foreign transactions, is not without risk, however. It requires a detailed paperwork trail, a firm grip on supply chains and legal structures to handle the required transactions.
Consultants including KPMG and PwC have seen a surge this year in enquiries from companies into how to use this method to ease the burden of Trump's tariffs."We've got three times more requests than usual," for mitigation strategies including the First Sale rule, said Ruth Guerra, a partner at KPMG in Paris, adding that the rule could also be combined with other measures.Paper trail
To benefit from lower customs duties, a company must prove that U.S.-bound products have gone through multiple transactions. Usually that means the goods are sold from the factory gate to a middleman and then to a U.S.-based company handling the goods. All transactions must be handled at arm's length by clearly distinct entities.Usually a U.S. subsidiary is involved to avoid revealing confidential information to an external entity, PwC custom and tax lawyer Francesco Pizzo explained."In our case the 15% tariffs will potentially translate into a 3% impact on the U.S. retail price", Golden Goose CEO Silvio Campara said, adding that the U.S. accounted for roughly 35% of its revenue.While several major textile and apparel companies have been using First Sale for a while, many had overlooked the strategy while the tariff environment remained low, said Mark Ludwig, national leader of trade and tariff advisory services at consultancy RSM in New York."Now the cost-effectiveness is much higher," said Lucio Miranda, founder of consultancy firm ExportUSA, who expects a jump in First Sale use with interest from companies in other industries.There is no publicly available data on goods imported through the First Sale rule, but a 2009 investigation by the U.S. International Trade Commission found that 8.5% of importing entities over a year used the workaround, equivalent to 2.4% of total U.S. import value. Nearly half of that amount was linked to footwear and apparel. For French cosmetics producers, U.S. duties present a new challenge as the industry had benefited from zero tariffs."While the agreement brings an end to uncertainty, it brings a significant threat to the French cosmetics industry," said Emmanuel Guichard, head of French cosmetics lobby group Febea.The First Sale rule is also only available to companies that can comply with a strict process which entails other risks as well."One of the biggest problems with selecting First Sale is that only fancy people can truly afford it - both the compliance costs and the risks of audit that come with it," said U.S.-based tariff and trade lawyer Michael T. Cone.Improper use could also lead to penalties, he said, noting that the U.S. Customs and Border Protection agency routinely audits and denies use of the rule."Importers must proceed with utmost caution,' he said.