How Procurement Can Plan for Trump Tariffs
Few things upset the global economy like uncertainty – and President-elect Donald Trump has dialed the uncertainty level up to 11.
During his Presidential campaign, Donald Trump used the threat of tariffs as a political weapon and hasn’t changed his course since then. He has declared plans to impose a 10% to 20% tariff on US imports, with tariffs as high as 60% to 100% on all goods from China.
He recently said he would place 25% tariffs on all Canadian and Mexican goods, including oil imports, on his first day in office. Canada and Mexico are the top two sources of imported oil, so a tariff may raise prices at the pump.
Trump has vowed to implement new tariffs on his first day in office and with inauguration scheduled for Monday, January 25, 2025, it could be a very unhappy start to the year for some.
Onshoring and Retaliation
Trump aims to pressure US companies that manufacture overseas to move production to the US and force other countries to lower barriers to US goods. He also sees tariffs as retaliation for illegal immigration and “crime and drugs” coming across the border.
During his first term, Trump imposed tariffs on about $380 billion worth of Chinese-made products. The Biden administration largely maintained the tariffs on Chinese imports as leverage in trade negotiations and as tools to protect domestic industries. In May 2024, the Biden administration announced additional tariffs on $18 billion worth of Chinese goods, including semiconductors and electric vehicles, resulting in a further tax increase of $3.6 billion. Any new Trump administration tariffs could affect many more countries.
Tariffs on retail goods don’t directly dictate the final price tag for consumers. When products are imported into the US, the importer is charged a tariff based on the declared value of those imports, not the marked-up retail price buyers eventually pay. While tariffs are a component of the cost of goods sold, they don’t include additional costs like labor, marketing, logistics, or rent, nor do they include the margin expected from the product.
Despite Trump’s rhetoric, realistically, it may be 10 to 12 months after the inauguration before new tariffs can be put into effect. The process requires a data-driven investigation to identify damages, and then a public comment period is required. Litigation can slow the process.
Without knowing the proposed tariff rates for specific goods, it’s difficult to plan for the new environment. New tariffs may be selective – higher for strategic materials such as steel but lower for household goods.
Procurement Guides Tariff Response
If the process hasn’t started already, the procurement team will be tasked with developing models to calculate the impact of tariffs under different scenarios. It’s critical to analyse the country of origin of all products and import classification codes and model scenarios for new tariffs, using previous measures as a baseline.
By revealing the potential financial implications, the analysis will drive decisions regarding sourcing events, onboarding suppliers, and increasing prices. Modifying product design and requirements to align with inputs from non-tariff sources is another effective strategy.
Be aware of the location of any supplier sites currently under consideration as well.
The analysis may indicate the need for a price raise on finished products or alternative sources to support sales growth at lower costs. Depending on the category, there may not be viable alternative sources immediately. Some niche industries don’t have the demand to drive investment to develop in new countries.
3 Ways to Manage Tariffs
1. Absorb the Tariff
Profit margins are such that the additional costs can be absorbed without a material impact on the earnings. Many retail goods have markups of more than 100% over their declared value, while luxury goods could be 500% or more. The tariffs may represent only a tiny fraction of the profit margin.
2. Find Alternative Suppliers
Source products from other countries with better import terms. The pandemic accelerated nearshoring, with production shifting to Mexico and Vietnam, and the tariffs could further shift manufacturing centers.
3. Raise Prices
Pass on some or all of the increased costs to buyers of your products. For smaller-margin goods, increasing prices may be the only way to survive. A decline in demand from US importers could lead some suppliers to lower prices so goods remain attractive to US buyers, offsetting some of the cost of the tariffs.
Planning Ahead
Based on the analysis of import product classifications, identify possible alternatives, such as using a foreign trade zone (FTZ). A designated FTZ allows you to perform production activities in imported goods to significantly change the product so the country of origin can be adjusted to avoid tariffs.
Some companies may opt to pull forward inventories, stocking up on critical materials prior to imposition of tariffs. Increased transportation and warehousing costs will be a factor in weighing the benefits.
Potential for Abuse
Researchers have identified companies transferring inputs from China to Vietnam, Laos, Cambodia, and other nations in the region. These products can be tagged with the country of origin other than China to avoid the tariffs yet allow Chinese content into the US at lower costs. Also, companies may intentionally misclassify products, gambling that they will slip through the customs unnoticed.
One of the benefits of a global supply chain is its agility. Sourcing will flow to suppliers with lower costs and high reliability. Stay tuned – the Trump tariff saga is only just beginning.
