Although Korea remains an important off shore manufacturing location, China is emerging as a global manufacturing power house backed by an inexpensive labor force, rapidly improving production quality, new sources of a capital, a more dynamic private sector, and a deliberately undervalued currency. China supplies a growing range of products to the global marketplace. Japan the land of zero defect quality control is increasingly happy with the competence of Chinese workers. Star Manufacturing a Japanese precision machine tool manufacturing company moved 30 percent of its production to China because China’s cheap labor and cheap resources production cost by 20 percent.
Eliminating costly functional features or even lowering overall product quality is another method of more developed home market may not be necessary in countries that have not attained the same level of development or consumer demand. In the price war between P&G and Kimberly Clark in Brazil, the quality of the product was lowered in order to lower the price. Remember that the grandmother in the grocery store chose the poorest quality and the lowest priced brand of diaper. Similarly functional features on washing machines made for the United States such as automatic bleach and soap dispensers thermostats to provide four different levels of water temperature, controls to vary water volume and bells to ring at appropriate times, may be unnecessary for many foreign markets. Eliminating them, lower manufacturing costs, and thus a corresponding reduction in price escalation. Lowering manufacturing costs can often have double benefits. The lower price to the buyer may also mean lower tariffs since most tariffs are levied on an ad valorem basis.
When tariffs account for large part of price escalation, as they often do companies seek ways to lower the rate. Some products can be reclassified into a different and lower customs classification. An American company selling data communications equipment in Australia faced a 25 per cent tariff, which affected that price competitiveness of its products, it persuaded the Australian government to change the classification for the type of products the company sells from computer equipment (25 per cent tariff) to telecommunication equipment (3 per cent tariff). Like many products this company’s products could be legally classified under either category. One complaint against customs in Russia is the arbitrary way in which they often classify products. Russian customs, for instance insists on classifying Johnson & Johnson ‘s 2 in 1 Shower Gel as cosmetic with a 20 per cent tariff rather than as a soap substitute, which the company considers it, at a 15 percent tariff.
How a product is classified is often a judgment call. The difference between an item being classified as Jewelry or art means paying no tariff for art or a 26 per cent tariff for Jewelry. For example, US customers inspector could not decide whether to classify a $2.7 million Faberge egg as art or jewelry. The difference was zero tariff versus $700,000 an experienced freight forwarder / customs broker saved the day by persuading the customs agent that the Faberge egg was a piece of art. Because the classification of products varies in countries a thorough investigation of tariff schedules and classification criteria can result in a lower tariff.
Besides having a product reclassified in to a lower tariff category, it may be possible to modify a product to qualify for a lower tariff rate within a tariff classification. In the footwear industry the difference between foxing and fox like on athletic shoes makes a substantial difference in the tariff levied. To protect the domestic footwear industry from an onslaught of cheap sneakers from the Far east the tariff schedules state than any canvas or vinyl shoe with a foxing band (a tape band attached at the sole and overlapping the shoe’s upper by more than one quarter inch) be assessed a higher duty rate. As a result manufacturers design shoes so that the sole do not overlap the upper by more than one quarter inch. If the overlap exceeds one quarter inch, to shoes classified as having a foxing band; less than one quarter inch, a fox like band. A shoe with a foxing band is taxed 48 percent and one with a fox like band (one quarter inch or less) is taxed a mere 6 percent.
Source: International Marketing