Global trade is a highly dynamic environment, with numerous factors that can affect supply chain costs, market competitiveness, and company strategy. With the recent political shifts in the U.S., tariffs have emerged as a "top of the agenda" topic.
Companies tend to view tariffs as a requisite evil, and many organizations only react to their imposition once they directly impact the business, rather than taking anticipatory steps. But by incorporating tariffs into their strategic decision-making, companies can transform this challenge into a competitive advantage.
The Role Tariffs Have on Supply Chain Volatility
Tariffs are only one factor in supply chain volatility. Businesses have had to navigate several shocks in recent years, including the COVID-19 pandemic, the Suez and Panama Canal blockages, shipping delays, and technology outages. All these incidents have underscored the importance of supply chain resilience and agility.
As opposed to macroeconomic challenges, which might impact entire industries, tariffs can affect companies heterogeneously depending on their supply base, sourcing strategies, and import dependence. This heterogeneity means that while some companies may struggle with increasing costs, others may be able to leverage favorable tariff regimes to gain market share.
Understanding the Tariff Competitive Impact
Most companies source goods from overseas but may not fully understand how tariffs are affecting their competitive position. For instance, a uniform across-the-board 10% tariff on global steel imports affects every company equally. But if the tariff only applies to imports from Mexico but not China, then companies that import from China gain an advantage over those that rely on Mexican steel.
This uneven imposition can result in price and market swings as less tariff-exposed competitors increase market share. When companies lack a clear understanding of how tariffs are affecting their costs, supply chain capacity, and pricing, they risk falling behind more strategically nimble competitors.
From Reaction to Proactive Management
Rather than responding to tariffs once they hit the bottom line, businesses should take a data-driven approach to measure exposure and create mitigation strategies. The following are steps organizations should consider:
- Assess Your Tariff Exposure: Businesses should analyze import data, classify goods into Harmonized System (HS) codes, and benchmark their tariff impact against that of their peers. Trade databases, such as the U.S. Customs database, can be helpful in this context.
- Diversify Supplier and Sourcing Strategies: Companies too reliant on imports from a single country may be more vulnerable. By establishing suppliers in multiple jurisdictions, organizations can shift production as needed to absorb the cost of rising tariffs.
- Reevaluate Tariff Classifications: Reclassifying products based on the value-added processes undertaken in other nations can sometimes reduce or eliminate tariff obligations.
- Scenario Plan for Future Tariff Changes: Trade policy can change quickly, and companies should model different tariff scenarios to develop contingency plans, so they are prepared to act rather than react.
The Difference Between Reactive and Proactive Approaches
Companies that neglect tariff exposure can find themselves subject to substantial cost hikes when new tariffs are imposed. Moreover, if the organization is highly dependent on one supplier in a high-tariff nation, it might have no alternative but to absorb the cost and pass it on to customers, possibly losing market share.
Conversely, a proactive company pre-determines its tariff exposure, diversifies suppliers across regions, and negotiates flexible agreements with the potential for production shifts. Some may even pre-negotiate supplier relocation to ensure a smooth transition aligned with the new trade policy.
Leveraging Data for Competitive Advantage
Competitors' supply chain configurations can also be analyzed for valuable insights. Based on an examination of past import data and HS codes, companies can gain insights into how competitors are reacting to tariffs and identify alternative suppliers, or strategically price products to capture market share.
Some companies have increased China sourcing, taking advantage of lower post-COVID costs as China tries to recover its manufacturing base. While these strategies can result in short-term financial benefit, they can also entail long-term risks in the event of a future shift in policy.
The answer is to remain nimble and – now more than ever - frequently revisit sourcing strategies.
Strategic Actions for Companies with High Tariff Exposure
Once you have calculated your tariff exposure, key actions to consider include:
- Renegotiate Supplier Contracts: Revise agreements to divide tariff costs or create new supply lines. This could also include a commitment from suppliers to develop their own facilities in other countries.
- Consider Onshoring or Nearshoring: While moving production to domestic or proximate markets can mitigate tariff risks, companies must weigh possible cost increases. Or it may require challenges to product quality and innovation or even require your own resources to help a new supplier develop robust capabilities.
- Adjust Inventory Strategies: Stocking up ahead of anticipated tariff changes may help reduce short-term exposure—but that is not a long-term solution. In a tariff war, what is next? In the case of the US-bourbon industry, that was totally ineffective as products were totally taken off the shelf, resulting in even higher costs for manufacturers to bring that product back.
- Enhance Supply Chain Agility: Leveraging technology that provides visibility into global trade flows can help companies predict and react more efficiently to tariff volatility.
Turning Tariff Adversity into Business Opportunity
Rather than viewing tariffs as an exogenous risk, companies should integrate them into their overall supply chain planning. Data analysis, supplier diversification, and forward thinking can help companies hedge risks while unlocking new opportunities for growth.
In a climate of ever-evolving trade policy, those who plan ahead will be the ones that thrive. It is also a great opportunity to the broader question of supply chain resiliency to establish a long-term competitive advantage. After all, change is constant.
