Electronic Component Tariffs 101
It’s hard not to panic with the uncertainty in sourcing electronic components these days. Semiconductors have become the political battleground between China and the US, catching a lot of us in the crossfire. Let’s dig in for a primer on how these tariffs can affect you and what you can do about it.
What are tariffs?
Put simply, tariffs are a tax imposed by a government on imported goods. This tax is generally a percentage of the value and it’s charged on the importer.
But as we’ll see, there’s a lot of nuance to what the value is, who the importer is, and what rate is charged!
When and where do tariffs get paid?
Tariffs are charged by the customs of the destination country and are paid by the importer of record, which is a fancy way of saying the one on the paperwork. That means that if you are importing goods to the US from China, you will be charged by US Customs and Border Protection (CBP) when your goods hit the border. If you were importing the same goods to Mexico, you’d be charged by the SAT (Servicio de Administración Tributaria) instead.
Tariffs need to get paid before the goods are released. Typically, if you use a major shipping carrier like DHL or Fedex, they will have a built-in customs broker who will file paperwork and charge you. If not, you will need to directly pay before releasing the goods. If you are importing more than $2500 of goods, typically you’ll also be asked for a customs bond, which is insurance guaranteeing you’ll be good for the money.
What rate do I pay?
The exact rate depends on two things:
- Country of Origin of your goods
- The HS code of your goods
Let’s get into both.
HTS codes
HTS stands for Harmonized Tariff Schedule. It is part of a globally standardized system used to classify traded goods for customs purposes.
Every product is assigned a six-digit Harmonized System (HS) Code, which corresponds to a very specific type of product like “Switches for electrical circuits,” “Pullovers, cardigans, and similar of cotton, knitted,” or even “shells of molluscs.”
Individual countries expand on this by adding additional digits to align with their own tariff regulations. In the United States, this expanded version is called the HTS-US code, which typically includes 8–10 digits (the original 6, plus 2 to 4 more digits). For example, a MOSFET may carry an HS Code of 8541.29 and the corresponding HTS-US code could be 8541.29.0095.
Country of Origin
The country of origin, or COO for short, is the country where a product is manufactured, produced, or substantially transformed into its final form.
Practically speaking, that means the location where the goods last changed HS code in most cases. For example, if your PCBs were manufactured in China, your components were manufactured in Malaysia, your PCB assembly was in Vietnam, and your final assembly was in Thailand, your COO would be Thailand. But if you then ship the goods to Taiwan and add more labeling to the box, the COO doesn’t change. It’s still Thailand.
COOs are confusing! None of these matter to the COO:
- The place where most of it was produced
- The place it shipped from
- The headquarters of the company that made it
Sellers determine the COO. When you are buying and selling parts, you will typically find the COO on the packaging or the packing slip. If you are shipping finished goods you made, you’ll need to determine it and provide it to your buyers.
New Chinese and US Tariffs
It’s a wild time to be in the electronics business! There are two specific tariffs affecting us currently, both of which are changing rapidly.
Info as of April 10th:
Section 301 and IEEPA tariffs add together to give you a final rate. This means Chinese parts being imported to the US could be tariffed at 125 to 175%. Since things are changing rapidly, check before you buy on current rates.
Is Hong Kong affected by the new tariffs?
As of April 10th, Hong Kong is still a free port — meaning that it’s not subject to duties or tariffs. On April 6, Hong Kong Financial Secretary Paul Chan Mo-po indicated: "Hong Kong will continue to maintain its free port status, implement a free trade policy, and ensure the free and convenient flow of goods, capital and information."
Like anything about tariffs though, please check before you ship.
Who pays?
The annoying answer: it depends. Contracts for international sale will be written with a concept called “Incoterms®” specified. Incoterms® is a trademarked concept referring to standardized rules published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international trade.
Here are some common Incoterms® and who pays tariffs:
- EXW, FCA, FOB — Buyer pays. These are common Incoterms® in B2B transactions and probably used in import of chips or electronic products.
- DDP — Seller pays. This is the most common in B2C situations such as buying from an international supplier on Amazon.
How to protect your margin from tariffs
1. Ask for COOs before shipment
Manufacturers often have several possible countries of origin for a single part because their supply chains span the globe and can shift frequently. For high-value parts or large orders, it’s best to confirm the exact Country of Origin with your supplier before placing a purchase.
2. Check and understand the Incoterms® in your contracts
Depending on your contracts you might not even be on the hook for tariffs. Regardless, negotiating a cost split or cost reduction is also common.
If you’re manufacturing in the US
1. Avoid Chinese-origin parts
Although 16% of chips are manufactured in China, most stay in the domestic market. Those that do not are typically substitutable. If you can, try to remove these from your BOM.
2. Find parts already in the US
Many distributors currently have stock that’s located in the US and wouldn’t have tariffs, including us! Contact us for some help building up some tariff-free inventory.
If you’re manufacturing in China or other countries
1. Avoid US-origin parts
First, you may not need to panic. Even if you buy from a lot of US manufacturers like TI or Molex, they likely do not manufacture in the US. The US produces about 12% of the world’s semiconductors but given the large military and aerospace domestic use, most of our customers only have 5% exposure or less. If you do have US COOs, see if they can provide alternative COOs for the same parts or try to swap them for alternates.
2. As tariff rates stabilize, look for possibilities to shift your manufacturing from the highest tariff locations
Supply chains can move quickly to build final assembly capabilities in a new country. We have yet to see who the global winner of this round of shocks is (like the 2018 manufacturing boom in Vietnam) but you may be able to react quickly to optimize your supply chain.
What about if you have excess chips and want to sell?
It’s a great time to sell your excess chip inventory. Though the situation regarding tariffs is evolving day by day, we expect many parts to experience supply shocks over the next few months.
If you have excess in the US right now, you’re sitting on a gold mine, regardless of the COO of those parts. Most manufacturers within the US will be looking for parts that have already been imported —we expect high returns for excess in the next 6 months.
Key takeaways
We know that we have some volatile times ahead for supply chain managers and purchasers. However, the typical set of US and Chinese chips is often limited to <10% of a BOM, and these are often substitutable. There are some near term strategies, like finding a US-based supplier and negotiating your Incoterms®, that you can take to reduce the impact to you.
If you have any questions about how tariffs affect you, please don’t hesitate to contact us. We can help cut through the uncertainty and make sure you get the parts you need.
