Tiffany Okoya, Attorney at Law
Gregory Bryant, CPA and Attorney at Law
Caroline Byrd, Intern
Introduction
President-elect Trump has vowed to impose tariffs immediately after taking office next year. Although many details are still unknown, he has suggested that a blanket tariff will be imposed on all imports, with additional tariffs imposed on goods from specific countries in response to economic and noneconomic concerns. This will have an immediate effect on companies’ costs, pricing strategies, and supply chain operations, so a proactive approach to manage and mitigate the risks and challenges presented by increased tariffs is vital.
Regional Dynamics
Trump has also promised additional tariffs on goods imported from Canada, Mexico, and China. Regarding the US-Mexico-Canada relationship, Trump has cited illegal immigration and drug trafficking as two noneconomic factors giving rise to the need for an additional 25% tariff on imported goods from these countries. The proposed tariff raises questions of potential violations of the US-Mexico-Canada Agreement (USMCA), so renegotiation of the USMCA may come early if the threats alone do not have the intended effect. For China, Trump has proposed an additional 10% blanket tariff as a mechanism to protect American technological advancements and economic priorities. Although European countries will not feel the harsh effects felt by China, concerns still exist regarding potential retaliatory measures by the EU under the WTO rules.
Sector-Specific Implications
Semiconductors, EVs and EV parts, medical devices, and the auto industry have been hot topics in the tariff discussion; however, the agricultural and retail sectors will also be affected. Mexico and Canada are the US’s top two suppliers of agricultural products, so the tariffs targeted at these countries will undoubtedly impact the US agricultural industry. Additionally, China’s prominent role in retail raises questions as to what extent US consumers will feel the effects of tariffs imposed on Chinese consumer products. Beyond consumer considerations, workers in affected industries can be adversely affected as well. For example, a study on tariffs imposed on steel and aluminum found that while these tariffs aimed to protect domestic industries, they caused unintended consequences. Specifically, domestic automakers faced higher costs for aluminum due to the tariffs, which led to significant layoffs. These job losses outweighed the number of jobs created domestically because of the tariffs on imported steel and aluminum.
Strategic Importance
Tariffs can impact companies’ profitability, supply chain, and market access. Beyond the direct cost of the tariff itself, the prices of raw materials often rise as industries impacted by tariffs pass on their increased costs. Supply chain disruptions are likely to arise as different industries acclimate and adjust to the new trade environment, especially in industries reliant on materials or services from a specific, heavily impacted region. Moreover, the widespread impact of tariffs intensifies competition in new markets, as many companies face similar pressures and seek to diversify their operations simultaneously.
Managing Tariff Uncertainty: Strategies for Risk Mitigation
In the face of fluctuating trade policies and rising tariff uncertainty, companies must adopt proactive strategies to manage and mitigate risk. Immediate actions may include pulling shipments forward to avoid imminent tariff hikes and renegotiating contract provisions to account for potential cost increases. However, for long-term resilience, companies should explore more strategic solutions, such as tariff engineering and supply chain diversification.
Tariff Engineering
Tariff engineering involves strategically designing or modifying products, production processes, or supply chains to achieve a more favorable tariff classification or country of origin designation. Key elements of this approach include:
· Reevaluating Country of Origin: Analyzing the manufacturing location of key products to determine if relocating production to a lower-tariff country—or even to the U.S.—would yield cost savings. This includes assessing labor costs, infrastructure availability, and potential tax incentives in alternative jurisdictions.
· Reclassifying Products: Adjusting product specifications, materials, or components to meet the criteria for a different Harmonized Tariff Schedule (HTS) classification with lower duties. (e.g., combining or transforming components to change a product’s functionality or end-use).
· Leveraging Manufacturing Processes: Performing substantial transformations, such as chemical synthesis, assembly, or packaging enhancements, in tariff-favorable regions to alter the country of origin under international trade rules.
Additional Risk Mitigation Strategies
· Utilizing Foreign Trade Zones (FTZs): Establishing or leveraging FTZs allows companies to store, assemble, or process goods in the U.S. without immediate duty payment.
· Diversifying Supply Chains: Minimizing reliance on a single country or region by sourcing materials and components from multiple markets, allowing a reduction in exposure to localized tariff spikes.
· Optimizing Trade Agreements: Taking advantage of free trade agreements (FTAs) or preferential trade schemes to lower duties.
· Investing in Production Automation: In cases where relocating production to higher-cost regions like the U.S. is beneficial for tariff purposes, automation can offset labor costs and maintain competitiveness.
Review Contracts
To mitigate tariff risks, companies will want to review existing contacts and consider tariffs in new contracts. The goal is to push tariff costs back to suppliers or through to customers. The downside to either solution could be supply chain disruption. The other solution could be where everyone shares the cost. Where possible renegotiate supplier and customer contracts to incorporate provisions like:
· Tariff Pass-Through Clauses: Allowing cost increases resulting from new tariffs to be shared or absorbed by the parties involved.
· Force Majeure Clauses: Broadening these clauses to account for unforeseen tariff changes as a disruption to the supply chain. Generally speaking, it is hard to assume a tariff would trigger force majeure unless it is specifically mentioned because events that trigger force majeure generally must be “unforeseeable” and tariffs are not entirely unforeseeable.
Market Diversification
Expanding into new markets reduces dependence on a single country or region impacted by tariffs. By shifting focus to regions with stable trade relationships or favorable tariff structures, companies can achieve greater resilience.
Looking Forward
As trade tensions escalate between the U.S. and key partners like Canada, Mexico, China, and the EU, the global uncertainty surrounding trade policies poses a significant challenge for businesses to navigate. Considering President-elect Trump’s proposed tariff policies, businesses must prioritize agility, remain well-informed, and adopt proactive measures to navigate the shifting trade landscape effectively. By staying alert to policy changes and embracing innovative approaches, businesses can position themselves to minimize disruption and maintain resilience in an era of trade uncertainty.
Sources
https://taxfoundation.org/blog/trump-tariffs-revenue-estimates/
https://www.cfr.org/backgrounder/what-are-tariffs
https://www.reuters.com/world/us/trump-promises-25-tariff-products-mexico-canada-2024-11-25/