Summary

Recent U.S. tariffs—25% on imported vehicles and auto parts—pose a significant challenge for Japanese automakers, threatening profits and market share in the U.S.. However, the First Sale Rule offers a legal avenue to mitigate some of these impacts by reducing the dutiable value of imports, potentially softening the blow for Japanese exporters.

First Sale Rule:

The First Sale Rule allows U.S. importers to calculate customs duties based on the price paid in the initial sale (manufacturer to middleman), rather than the higher price paid by the U.S. importer to the middleman or distributor. This can exclude intermediary markups from the duty calculation, resulting in lower tariffs.

Example:

If a Japanese manufacturer sells a vehicle to a Japanese trading company for $80,000, and the trading company sells it to a U.S. importer for $100,000, the U.S. importer can use the $80,000 price for customs valuation, saving duty on the $20,000 difference.

Key Requirements:

The sale between manufacturer and middleman must be bona fide, arm’s-length, and for export to the U.S.

Both manufacturer and middleman must be outside the U.S.

Documentation must clearly show the goods were destined for the U.S. at the time of the first sale, with all supporting contracts and invoices.

Are We Overestimating Tariff Impacts?:

While the First Sale Rule provides some relief from tariff costs, it is not a complete solution. Leading Japanese automakers still anticipate significant profit declines due to these tariffs, with few immediate options for mitigation beyond raising prices, restructuring supply chains, or relocating production to the U.S. While this rule helps reduce costs, it does not fully counteract the broader financial impact of the new tariffs.

That said, I suggest that the consequences may not be as severe as feared.