TARIFFS, TRADE AND DEVELOPMENT
What options can be used to reduce or offset tariffs?
Exemptions from duties These may be harder to secure compared with President Trump’s first term given that he has promised “no exceptions”. Moving production from China to elsewhere in Southeast Asia may not shield firms from tariffs, particularly if President Trump follows through with his threat of applying “reciprocal” tariffs to those Southeast Asia countries.
Tariff engineering #1 This includes tweaking products to change their official classification. Duties can vary significantly even when merchandise appears similar. Simply adding a layer of fabric on a shoe insole or adding pockets below the waist on a blouse can move a product into a category for which tariffs are lower.
Tariff engineering #2 Changing where a product ostensibly comes from. Although the raw material can be processed in one country, most of the production can take place in China, with the finished goods then sent back to the original country for testing and packaging. Designing supply chains so that just enough production happens in a place that benefits from lower tariffs is cheaper than shifting manufacturing in its entirety and allows firms to be nimbler if new tariffs are imposed.
Other options The “first-sale” term, created by a US court ruling in 1988, allows importers to value goods based on the price charged by the manufacturer, rather than the higher ones charged by middlemen prior to import. To preserve cash, companies can also delay the payment of tariffs by using “bonded warehouses” that allow companies to store goods without paying duties until they are sold, as well as “temporary import bonds” for goods that are set to be re-exported.
Since 1990, only 34 middle-income economies have moved up to high-income status.
In conclusion
However, excessive reliance on tariff reductions without complementary policies (such as industrial development and technological upgrading) can leave middle-income countries vulnerable to external shocks. For example, if they rely too heavily on
Tariff changes have varied effects on low-income and middle- income countries due to differences in trade composition and economic structures. While higher tariffs generally harm both groups by reducing export competitiveness and raising import costs, the specific impact depends on their trade profiles. Low-income countries, with their dependence on primary goods, struggle more with external shocks, while middle-income countries face challenges in maintaining their position in global supply chains. Conversely, tariff reductions can create opportunities but also expose domestic industries to stiff competition. Not surprisingly, to maximize benefits, both country groups must adopt policies that enhance industrialization, diversify trade partners and invest in infrastructure and human capital. There are also options to help reduce or offset the impact of tariffs, but these can be complicated and are not a permanent or viable solution for all low-income countries. With all the uncertainty that has recently been generated, further disruptions can be expected, with low-income countries and to a lesser extent US consumers paying the price of President Trump’s unorthodox approach.
importing high-tech products while exporting low-value goods, they may face long-term developmental challenges as highlighted in the World Bank’s World Development Report 2024: The Middle-Income Trap 1 published in August 2024. It finds that as countries grow wealthier, they usually hit a “trap” at about 10 percent of annual US GDP per person – equivalent to around US$8,000, which is in the middle of the range of what the World Bank classifies as “middle-income” countries. Since 1990, only 34 middle-income economies have managed to shift to high-income status – and more than a third of them were either beneficiaries of integration into the European Union or of previously undiscovered oil.
1 https://www.worldbank.org/en/publication/wdr2024
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