Watch: How Tariff Hikes Can Trigger a Bond Crisis for Importers

Dan Swartz, tariffs and customs principal with Crowe, explains how a rapid rise in tariffs, especially on goods from China, is threatening to impose a huge financial burden on U.S. importers, well beyond the amount of the tariffs themselves.

Importers obtain surety bonds in order to speed up the receipt of their goods entering the country. The bonds allow them to take delivery of import shipments at the port upon release by Customs, before paying duties. They have 10 days to make the payments, with the bonds serving as backup should they fail to do so.

With the Trump administration’s steep increase in tariffs, however, there exists the possibility that the bonds won’t cover the full amount of the liability. Bond limits are calculated as 10% of the estimated import duties, fees and taxes owed over a 12-month period. Should a bond’s monetary limit become “saturated” due to high tariffs, the importer could be hit with an “insufficiency notice,” and be forced either to increase the amount of the existing bond, or obtain additional ones. Often that means putting up collateral equal to up to 100% of the bond limit. And those additional funds, parked in a bank, won’t be available to the importer until all entries are liquidated by Customs, which could take a year or more.

Swartz expects many importers to be facing this dilemma within the next few weeks, as the higher tariffs kick in. They need to be having a conversation with bond issuers “as soon as possible.” Options include paying duties and taxes at time of entry, and asking the supplier to serve as importer of record, thereby shifting the responsibility for payment to that entity. But both parties might lack the cash reserves to shoulder the burden. 

Swartz says the prospect of a “bond insufficiency meltdown” is symptomatic of a larger issue: “You have a significant increase in tariffs in a relatively short period of time that’s going to put a tremendous strain on the bond limits for these importers. And there’s not a lot of room to navigate for them.”