The escalation of tariffs will likely impact the sufficiency of customs bonds in a significant way, posing challenges for importers and surety companies alike. I am going to offer for your thought a few of the implications of rising tariffs on customs bond sufficiency, pull in some historical instances where tariffs adversely affected sureties, and “lightly” analyze cases where courts or U.S. Customs and Border Protection (CBP) have obligated sureties to pay amounts exceeding the penal sum of the bond. Understanding these dynamics is crucial for stakeholders navigating the complexities of international trade and customs bond compliance. For you surety gurus some of this will not be new, more specifically the brief discussion of “things surety”, however, the following is for the consumption of parties that aren’t familiar with our playground.
Customs bonds are financial assurance mechanisms that importers file in order to comply with U.S. customs regulations, including the payment of duties, taxes, and fees. The penal sum of a bond represents the maximum amount a surety is liable for in the event of a default. The bond amount appearing on the face of the bond form is presumptively the “severity” of the exposure, and anti-stacking language informs the “frequency”, both essential benchmarks for assessing bondability. The imposition of a significant tariff regime can strain these bonds, leading to situations where the bond’s penal sum may be insufficient to cover the heightened duties. Thus, onerous treatment by CBP will expose sureties to financial risks that we are not prepared for.
Impact of Rising Tariffs on Customs Bond Sufficiency
The imposition of additional tariffs increases the duties owed on imported goods, which can quickly exhaust the penal sum of existing customs bonds. Per U.S. Customs and Border Protection (CBP), if a bond is deemed insufficient, importers are required to obtain a larger bond to continue importing goods into the United States. Failure to do so can result in painful delays or simply denial of entry. If a tariff structure is exorbitant, the increased financial burden on importers will affect sureties. We are going to see higher claims and potential losses as importers default on their obligations. While we might hedge some of this risk by regular assessment of bond sufficiency, a volatile trade environment characterized by fluctuating tariffs or tariffs fixed at extreme rates will likely put importers out of business. Indemnity from an insolvent entity is worthless..
Historical Context: Tariffs and Their Impact on Sureties
Historically, periods of high tariffs in the United States have posed challenges for customs bond sureties. The media references “Smoot Hawley” whenever the tariff subject arises. Their concerns are instructive both the their constituencies and to our sector. During the implementation of the Smoot-Hawley Tariff Act of 1930, which raised U.S. tariffs on over 20,000 imported goods, the increased duties led to a brutal decline in international trade. This decline adversely affected importers’ ability to fulfill their financial obligations, thereby increasing the risk exposure for sureties. The Ford Motor Company presents a good case sample. Ford suddenly faced duty increases of over forty percent on key parts when tariffs were imposed (per its own archives), which posed a very real risk to Ford that it might default on duty payments. This exposed Ford’s customs bond surety to higher claim risk under continuous bonds, as the penal sum could have been quickly exhausted by large, high-duty shipments. It is hard to include figures to memorialize the peril that faced Ford (and other mega-importers) and even more difficult to review documentation of individual bond claims from that era because archival material is scarce. What we DO observe is the spike in customs litigation and trade payment defaults during the tariff period which is well documented by U.S. Treasury reports and in economic studies of the period.
Similarly, the Dingley Act of 1897, which imposed high tariffs to protect domestic industries, resulted in increased costs for importers and, by extension, greater liabilities for sureties. These historical instances highlight the cyclical nature of trade protectionism and its implications for customs bond sufficiency. Unreasonable (or in some cases even “reasonable”) tariff regimes are a vestige of an era to which we should avoid a return
Legal Precedents: Sureties Obligated Beyond Penal Sum
In certain cases, courts and CBP have held sureties liable for amounts exceeding the penal sum of the bond. One notable case is Hartford Fire Insurance Co. v. United States, where the Court of International Trade addressed the obligations of a surety under multiple single-entry bonds. The court upheld CBP’s demands for payment, emphasizing the surety’s responsibility to cover duties owed by the importer, even when the total exceeded the penal sum of individual bonds.
Further, in United States v. International Fidelity Insurance Co., surety paid a substantial amount to settle the government’s claims related to unpaid duties. The court’s decision reinforced the principle that sureties could be held accountable for the full extent of the importer’s liabilities, highlighting the potential for exposure beyond the initial bond amount. Would immediate settlement on notice have made a difference? Perhaps, however, the uncertainty of how the current tariff game will play out and the unpredictability of the current administration’s trade policies leave quite a bit to gamble.
Strategies for Managing Bond Sufficiency Amid Tariff Increases
To mitigate the risks associated with rising tariffs, importers and sureties should consider the following strategies:
Regular Assessment of Bond Sufficiency: Continuously monitor import volumes and the impact of tariff changes to ensure that bond amounts remain adequate.
Collaboration with Customs Brokers: Move closer to customs brokers to stay informed about regulatory changes and to discuss the likelihood of a spike in unliquidated exposures that will drive up bond amounts.
Engagement with Legal Counsel: Seek legal advice to understand the implications of tariff increases and to develop strategies for compliance and risk management. Sureties can and should offer this to their principals.
Diversification of Supply Chains: While diversifying sourcing is a strategy and measure taken by importers, not sureties, to mitigate the impact of tariffs on specific goods or countries, surety companies should understand the impact on the importer’s financial health and continuity.
The resurgence of protectionist trade policies and the resulting increase in tariffs have significant implications for customs bond sufficiency. Historical precedents and pertinent legal cases demonstrate the possibility that surety companies face liabilities exceeding the penal sum of customs bonds. Proactive assessment and strategic management are essential for sureties as is open communication with Activity 1 principals to assist their navigation of newly imposed complexities of international trade.
~ C. Constantin Poindexter, MA, JD, CPCU, AFSB, ASLI, ARe
References
Crowe LLP. (2025). Bond Sufficiency Amid Rising Tariffs. Retrieved from https://www.crowe.com/insights/tax-news-highlights/bond-sufficiency-amid-rising-tariffs
U.S. Customs and Border Protection. (n.d.). CBP Bonds. Retrieved from https://www.ecfr.gov/current/title-19/chapter-I/part-113
Court of International Trade. (n.d.). Hartford Fire Insurance Co. v. United States. Retrieved from https://www.cit.uscourts.gov/sites/cit/files/17-103.pdf
Wikipedia contributors. (n.d.). Smoot–Hawley Tariff Act. Retrieved from https://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act
Wikipedia contributors. (n.d.). Dingley Act. Retrieved from https://en.wikipedia.org/wiki/Dingley_Act
Fordham Journal of Corporate & Financial Law. (2019). A Brief History of Tariffs in the United States and the Dangers of their Use Today. Retrieved from https://news.law.fordham.edu/jcfl/2019/03/17/a-brief-history-of-tariffs-in-the-united-states-and-the-dangers-of-their-use-today/
