Insights

The shifting landscape of tariffs

Jonathan Colehower, Managing Director, Global Supply Chain Management, UST

The supply chain challenges we have experienced over the past several years will appear mild relative to what we see on the horizon. Tariffs and escalating trade tensions are poised to redefine how businesses operate. Organizations that rely on global supply chains must think carefully about risk and resilience.

According to insights from Goldman Sachs, the next chapter of tariff imposition will extend far beyond the U.S.-China trade conflict. Countries like Korea, Taiwan, India, and Japan are expected to face increased scrutiny, with new tariffs likely to impact their exports to the United States. Despite much talk about re-shoring and near-shoring, supply chains remain largely unchanged and vulnerable. Businesses, therefore, find themselves susceptible to changes in trade policies. It should be borne in mind that excessive protection of domestic industries can lead to countermeasures and escalation of trade wars, which are detrimental to economic development.

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The fast track to tariffs: Understanding IEEPA

The International Emergency Economic Powers Act (IEEPA) of 1977 grants the U.S. President the authority to impose tariffs to address national security, foreign policy, or economic threats.

The IEEPA is operative at a perilous time. It also allows for bypassing some of the procedural bottlenecks of most legislative processes.

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Strategies for managing tariffs

Businesses must adopt a multifaceted approach to mitigate risks associated with tariffs. Below are key strategies categorized into supply chain, legal, financial, and operational frameworks.

Managing tariff risks requires businesses to adopt a strategic, holistic approach. The following strategies, from rethinking supply chain configurations to leveraging regulatory frameworks, can help organizations build resilience and minimize disruption.

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Supply chain optimization: Building resilience and flexibility

Reshoring and near-shoring

Relocating production facilities back to one's own country (reshoring) or near one's country (near-shoring) can also help significantly reduce tariff exposure. Even though these are costly initially, they add more resilience to the supply chains and fit into the increasing trend of regionalization. When production processes are moved closer to the end market, companies can consolidate control, diminish lead time, and lower the risk associated with long global supply chains.

Diversification

Depending on a given geographical area, raw materials and components have a drawback in that they are subject to specific regional levies and trade interruptions. If firms, however, source their suppliers from different countries, they can offset risk and persist in such neck of the woods even when there are policy reforms. This enhances supply chain resilience and ensures firms remain strong when faced with dynamic trade conditions.

Tariff engineering

Innovative product design and strategic reclassification can significantly lower tariff obligations. Tariff engineering offers a smart and strategic answer to lower tariff rates and can even lead to exempting their products from customs duties. To get there, companies must work with experts and learn how to alter product designs, modify materials, or reclassify items, companies.

Legal and regulatory strategies: Leveraging trade frameworks to manage tariff costs

Organizations that face complex international trade policies must adequately use the legal and regulatory frameworks to reduce the cost of tariffs. Here's a roadmap for optimizing trade compliance and reducing costs:

1. Leverage free trade agreements (FTAs)
   • FTAs give access to lessened or eliminated tariffs, which makes trading across borders cheaper. Enterprises based in North America particularly benefit from agreements such as the United States-Mexico-Canada Agreement and USMCA. They follow the recommendations to stay updated with the changes in these agreements.
2. Utilize foreign trade zones (FTZs)
   • Foreign Trade Zones allow businesses to defer, reduce, or eliminate tariffs. Goods stored, processed, or assembled within an FTZ are not subject to tariffs until they enter the domestic market. For companies with complex import/export operations, leveraging FTZs can significantly improve cash flow and reduce overall tariff obligations.
3. Take advantage of duty drawback programs
   • Duty drawback programs relieve companies of the burden of duties on imported materials that are subsequently exported or incorporated into goods for export. Such schemes can be greatly beneficial, especially for manufacturing or international distribution businesses. To some extent, organizations' tariff expenses are offset by careful documentation and observance of the program's regulations.
4. Ensure accurate tariff classifications
   • Correct product categorization is essential in reducing bipartite compliance costs and avoiding compliance complications. Incorrect classification of goods can result in penalties, a customs control period, or customs duties far higher than should be paid. That is why joint work with specialized consultants makes it possible to avoid incorrect classification of the products and benefit from low or even zero duty rates, exemptions, and favorable tariff treatment of the goods.

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Financial strategies: Cost management and market competitiveness

The use of tariffs is not cost-free, so businesses must be able to find the best weight between cost control and being competitive in the market. In this regard, the following measures can be taken by the businesses to ensure that the financial impact is not too catastrophic concerning the customer and supplier relationships:

Revised price policy

Where tariffs are involved, raising product prices would inevitably become a means to cover the costs, but the market should be cautiously presented to avoid driving customers away. It is essential to inform customers about price changes, particularly when external circumstances cause them. Only when absolutely necessary should price increases be made, and even then, they should be made in small steps or not at all to avoid consumers changing their purchasing patterns drastically.

Struggles with the suppliers

Therefore, working with suppliers affects the sharing of tariff-related costs. Companies may seek out new contacts that allow them to buy out processes at certain costs. Close relations with suppliers diminish the impact of tariffs and contribute to the general stability of the business outlook.

Combining thought-out price arrangements with supplier negotiations will lessen the effect of tariffs and enable a stronger marketplace for businesses.

Avoiding overreaction

The cautionary lesson from the COVID-19 supply chain crisis cannot be overemphasized. When the world experienced shortages, several organizations panicked and "over-corrected" by stockpiling, which led to much wastage and loss of funds. Businesses may repeat this tendency to overreact if they act thoughtlessly regarding tariffs.

Advice for clients

Measure twice, cut once: Make thoughtful considerations regarding changes in tariffs before implementing complex tactical changes.

Scenario-based decision making: Use data to model scenarios and determine suitable actions.

This will allow businesses to avoid making wasted expenditures and the need for major decision-making.

Future readiness

It's time to rethink traditional supply chain models by prioritizing resilience. Engage with policymakers to influence tariff policies and seek exemptions or reductions. Regularly assess your supply chain's exposure to tariffs and develop contingency plans. Seek advice from customs brokers, trade lawyers, and supply chain consultants to navigate complex tariff regulations.

Feel free to contact me directly to explore strategies for building a more resilient supply chain.