Bond Sufficiency Amid Rising Tariffs: 

President Donald Trump’s administration recently imposed a baseline effective duty rate on Chinese originating goods to an unprecedented 125% ad valorem reciprocal rate. Additionally, other tariffs exist on Chinese goods including the 2018 Section 301 tariffs (7.5% or 25% depending on tariff classification), Section 232 tariffs on steel, aluminum, and their derivatives (25%), and the 20% International Emergency Economic Powers Act tariffs. The escalation of tariffs and resulting volatility might have overshadowed a critical concern for importers: bond sufficiency.

Importers use customs surety bonds to facilitate the release of goods before the deposit of estimated import duties, fees, and taxes. However, the bond’s efficacy becomes strained as tariff rates surge, especially over a short period. The bond limit, set at 10% of the estimated import duties, fees, and taxes during a 12-month period, faces immense pressure under the weight of unliquidated duties.

When the unliquidated duty liability nears the bond limit, importers receive an insufficiency notice from the bond surety, indicating a potential halt in importing activities until the bond limit is increased, often necessitating supplemental bonds or “bond stacking.” However, the escalation of bond limits triggers increased scrutiny from the underwriting insurance company, which may demand audited financials and, in the case of unfavorable assessments, require the posting of collateral in the form of a letter of credit, up to 110% of the bond limit.

Substantial increases in import taxes alongside the requirement to set aside cash until the liquidation of underlying entries on the bond can create a significant financial burden. Considering that the liquidation process can extend for at least 314 days from the bond’s expiration date, importers could experience cash flow issues.

Crowe observation

If the current tariffs remain in place, many importers could face the potential of having insufficient bond surety amounts in the very near future, perhaps as soon as 14 to 20 days.

Looking ahead

Escalating tariffs increase the financial burden of customs surety bonds for importers. Importers should consult their tariff and trade advisers to identify strategies to mitigate bond surety issues and navigate the uncertainty of the current tariff and trade landscape.