The global trade war is not a threat that is far away it is here and it is changing supply chains in a short time. The US has imposed a 25% tariff on Mexican and Canadian imports and an extra 10% on Chinese goods, which has left businesses with no choice but but to try and limit the losses. However, Canada, China and, possibly Mexico have imposed retaliatory tariffs.
For supply chain leaders, it is not if tariffs will affect the business but how best to handle the impact. There is no point in waiting and hoping for the best. You require a plan of action in order to reduce the costs, avoid the risks and make your supply chain more stable.
This is exactly what you need to do in order to protect your business, control the costs, and make your supply chain more sustainable.
Step 1: Reassess Your Supply Chain Exposure to Tariffs
Before making any changes, map your supply chain to determine the potential risks.
What You Should Do Now:
✔ Identify high-risk products and suppliers. List all the goods you import and which are now affected by tariffs. First, focus on those that will have the most effect on your profitability.
✔ Calculate the financial impact. Learn how much you will pay more for your imports. For example, if you buy $5M worth of aluminum every year then a 25% tariff will raise the cost by $1.25M.
✔ Get a tariff classification review. Can your goods be classified under another HS code that is not as expensive? There could be a way to lower the duty rates through legal ways if you look at the HS codes.
✔ It is recommended to work with customs brokers and trade consultants who can help you with the trade compliance to reduce tariff risks as much as possible.
Step 2: Optimize Costs and Leverage Existing Trade Loopholes
Tariffs increase costs, but smart businesses find creative ways to reduce their burden without cutting product quality or service.
Some Cost-Saving Measures You Can Adopt:
✔ Leverage First-Sale Rule: This method allows you to pay duties based on the factory price of the product and not the higher price charged by the distributor. Employing this approach, firms are able to cut tariff expenses by 10-15%.
✔ Use Free Trade Zones & Bonded Warehouses: These allow you to hold goods without paying tariffs at the time of entry and may avoid or eliminate duties on the goods if they are exported.
✔ Negotiate Better Supplier Terms: Due to the trade war, it is not unheard of suppliers shouldering the cost burden to keep the business going. Ask for lower prices, longer payment terms, or other ways of sourcing that would reduce the tariff impact.
✔ Explore Product Modifications to Reduce Tariff Classifications: If the raw material or the place of assembly of a product can be changed slightly to bring it under a lower tariff heading then it should be considered.
Step 3: It is time to diversify your supply chain and avoid dependence on a single country or supplier. The result? Divestment.
How to Reduce Your Risk:
✔ Develop alternative sourcing in tariff-free regions. You should also explore countries like Vietnam, India and Malaysia as they are not affected by the U.S. tariffs.
✔ Increase supplier redundancy. Instead of working with one or two suppliers it is advisable to build a network of five or six to create balance and supply flexibility.
✔ Leverage nearshoring & reshoring. Although reshoring (relocation of production to the United States) is expensive and time-consuming, companies are already doing it.
✔ Cost vs. Agility. Although Chinese manufacturing is the most affordable, the tariffs (and other supply chain issues like COVID-19) make regional diversification more risky.
Step 4: It is important to have both short-term solutions and long-term plans for businesses that are affected by tariffs in the meantime.
Short-Term Moves:
✔ Streamline supply chain operations. Reduce overhead costs, improve inventory management and remove weaknesses.
✔ Re-engineer products to lower tariff exposure. Can you change the material or move the assembly to a different country that has lower tariffs?
✔ Pass costs to consumers (wisely). Some companies raise prices for products selectively aiming at high-end customers who are not likely to react to price changes.
Long-Term Strategies:
✔ Automate and invest in digital procurement tools. Supply chain visibility tools that use AI help to detect potential risks and make real time adjustments to the supply chain.
✔ Expand manufacturing footprints. To Mexico or Canada it is possible to turn to nearshoring as well. Even with the tariffs, it is cheaper to ship and logistify goods.
✔ Advocate for policy changes. Businesses must also work to convince policymakers to engage in negotiations for better trade agreements and offer incentives for domestic production.
The last word: Action is Necessary – Not Voluntary
The trade war is not a dream, it is a reality and it is not going to end soon. If you are still thinking that it will subside on its own, then you are already falling behind.
What you need to do right now:
✅ Evaluate your supply chain for tariff risks.
✅ Some of the measures that you should employ include first-sale pricing and free trade zones.
✅ Source your products from different suppliers and avoid having to work with one supplier only.
✅ Change the design of the product and the management of the processes to reduce the effects of tariffs.
✅ Buy supply chain technology and implement supply chain automation for the future.
What has your company done to address the trade war issue? Please leave your thoughts in the comment section!
