Current Trade Climate and Duty Drawback

Companies that import products into the U.S. market must navigate a disrupted trade environment, characterized by shifting regulatory and policy frameworks, escalated trade and tariff tensions, and reevaluation of agreements such as the U.S.-Mexico-Canada Agreement (USMCA). In this environment, duty drawback is an increasingly crucial tool for mitigating the financial impact of trade friction, allowing businesses to reclaim duties paid on imported goods that are later exported, destroyed or used in manufacturing exports.[1] The key to unlocking duty drawback’s strategic value is disciplined data management and analytics.

Geopolitical and Regulatory Developments

Recent geopolitical events, including increased use of Section 301 tariffs on Chinese imports, the enforcement of Section 232 tariffs on steel and aluminum, and broader industrial policies such as the CHIPS Act, have placed additional strain on global supply chains. Additionally, the Trade Facilitation and Trade Enforcement Act (TFTEA) has reinforced compliance measures, requiring companies to demonstrate stringent recordkeeping and traceability to claim duty drawback successfully.

The evolving trade climate underscores the need for businesses to stay proactive in monitoring supply chain disruptions. Companies affected by shifting tariff structures, retaliatory duties and policy shifts — such as updates to USMCA drawback provisions — must incorporate duty drawback considerations into their trade compliance programs.

Enhanced enforcement mechanisms by U.S. Customs and Border Protection (CBP) mean that companies must maintain meticulous documentation, ensuring a clear audit trail for duty drawback claims. Leveraging automated systems and advanced analytics can streamline compliance, improving efficiency in tracking, filing and maximizing refunds.

Understanding Duty Drawback and Its Benefits

As global economic conditions fluctuate and trade policies evolve, duty drawback is becoming an increasingly important matter for companies operating in the U.S. market. The potential for higher tariffs and shifting trade agreements can negatively impact import-reliant businesses; however, businesses that proactively manage their duty drawback program have an opportunity to gain a competitive advantage by offsetting the impact of rising import costs.

Duty drawback is administered by CBP and allows for a refund of certain duties, taxes and fees paid on imported goods that are later destroyed, exported or used in the production of exported goods. Duty drawback claims have a five-year lookback period. This program allows companies to offset import costs and improve cash flow by recovering expenses associated with international trade, particularly for companies impacted by Section 301 duties on Chinese imports.

Claiming duty drawback is a complex process. One of the biggest challenges is adhering to the strict documentation requirements, particularly for claims using the direct identification provision, which requires companies to track specific imported items through their supply chain to prove that they were exported or destroyed. This level of precision is especially relevant for companies trading with Mexico and Canada, as goods moving between these jurisdictions under the USMCA may qualify for drawback under specific criteria.

Implementing a Successful Duty Drawback Program

Establishing a well-organized duty drawback program can result in significant cash refunds but requires a clear strategy and attention to detail. Companies should consider these three key steps:

• Assess: Analyze import and export activity to estimate potential duty drawback benefit.
• Documentation: Thorough recordkeeping is required to link imports to exports, including invoices, bills of lading and ERP data to support the requirements from CBP. Export documentation is the key component to a drawback program. Typically, import data is clean and easier to work with but export data is messy and often incomplete, resulting in a less-than-advertised ROI for your drawback program.
• Filing: Determining and optimizing the claims being submitted is an intricate, data intensive process. Many businesses partner with technology providers or customs brokers to complete the filing with CBP.

Once a duty drawback program is implemented, it requires ongoing oversight and expertise. Companies should consider having a dedicated team or consultant to ensure accuracy and keep up with evolving regulations to ensure there are no delays or lost refund opportunities. Companies that approach duty drawback as a strategic opportunity rather than an administrative task will benefit from improved cash flow.

How A&M Can Help

The greatest challenge for drawback programs is data. A&M Tax can help you quickly determine if a duty drawback program is right for you. We combine the knowledge of customs and trade specialists with the efficiency of a CBP-approved duty drawback technology solution to help companies maximize their duty drawback refunds while staying compliant with CBP rules and regulatory changes. 

For more information on additional A&M Trade and Tariff Disruption services, click here.

[1] Muhammad Mudasir, “4 Types of Duty Drawback You Should Know About,” Howinsights, May 27, 2024, https://howinsights.com/4-types-of-duty-drawbacks-you-should-know-about/.