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Global Sourcing Spotlight: Tariffs—The New Reality

Navigating the complexities of international trade has become increasingly challenging following the imposition of tariffs by the Trump administration on imports from countries including China, Mexico, and Canada. These tariffs—ranging from 10–25% and higher—have major implications for businesses engaged in global sourcing. 

I know this is scary right now, but I am a great believer in the power of commerce, and in the power of people wanting to do business with others, no matter the country they are from. For now, though, we must deal with the reality and find a way forward.

As my mother used to say, “There is always a way.” No matter what challenges my parents faced (and I am sure they faced heavy ones), they sat at the kitchen table and figured out how to get through the hard times. This is how I feel today as people wring their hands and worry about the new tariffs. However, as with everything, we will get through this. We will find a way. 

To mitigate the adverse effects of these tariffs, companies can implement several strategic measures.

1. Diversify Supply Chains

Relying heavily on suppliers from tariff-affected countries can expose businesses to increased costs and supply chain disruptions. To mitigate this, explore alternative sourcing options in countries not subjected to prohibitive tariffs. This not only helps reduce tariff costs but also mitigates risks associated with over-reliance on a single country. 

2. Leverage Free Trade Agreements (FTAs)

The United States has FTAs with multiple countries, allowing for reduced or eliminated tariffs on certain goods. By sourcing products from countries with FTAs with the U.S., businesses can benefit from preferential tariff rates, reducing the impact of the imposed tariffs. For instance, sourcing from countries within the USMCA (United States-Mexico-Canada Agreement) can be advantageous. 

3. Implement Tariff Engineering

Tariff engineering involves modifying products or their supply chains to qualify for lower tariff classifications. This can include altering the product's composition, changing the country of origin through substantial transformation, or adjusting the manufacturing process. For example, importing components for assembly in a country with lower tariffs can result in a finished product that is subject to a reduced tariff rate. 

4. Use Foreign Trade Zones (FTZs) and Bonded Warehouses

FTZs and bonded warehouses allow businesses to store, assemble, or manufacture goods without immediate payment of customs duties. Importers pay duties only when the goods enter U.S. commerce, and they can avoid duties altogether if the goods are re-exported. This strategy provides flexibility in managing inventory and can lead to significant cost savings. 

5. Apply for Duty Drawbacks

Duty drawback programs allow businesses to receive refunds on duties paid for imported goods that are subsequently exported. This benefits companies that import components, assemble products domestically, and then export the finished goods. By taking advantage of duty drawbacks, businesses can recoup a portion of the costs incurred due to tariffs. 

6. Negotiate Incoterms with Suppliers

International commercial terms (Incoterms) define the responsibilities of buyers and sellers in international transactions. By negotiating terms such as Delivery Duty Paid (DDP), businesses can shift the responsibility of import duties to the seller. This can lead to cost savings and simplify the import process. 

7. Monitor Policy Changes and Engage in Advocacy

Tariff policies are subject to change because of political negotiations and economic considerations. Staying informed about policy developments allows businesses to anticipate changes and adjust strategies accordingly. Engaging in advocacy through trade associations or directly with policymakers can also influence trade policies in favor of the industry. 

8. Optimize Product Classification

Accurate classification of products under the Harmonized Tariff Schedule (HTS) can result in lower duty rates. By understanding the HTS and classifying products appropriately, businesses can ensure compliance and potentially reduce tariff liabilities. Consulting with customs experts or legal advisers can aid in this process. 

9. Explore Nearshoring and Friendshoring

Nearshoring involves relocating production closer to the home country, while friendshoring sources from countries that are geopolitical allies. Both strategies can reduce supply chain risks and exposure to tariffs. For example, moving production to Mexico or Canada, under the USMCA, can be beneficial. 

10. Invest in Local Production

Increasing domestic manufacturing can eliminate exposure to international tariffs. While this may require significant upfront investment, it can lead to long-term stability and control over production processes. Companies like the Swedish-Swiss ABB Group, based in Switzerland, are boosting their U.S. investments to mitigate the anticipated tariff hikes and to take advantage of the country's economic growth. 

In conclusion, while the imposition of tariffs presents challenges, businesses have a variety of strategies at their disposal to mitigate these impacts. By implementing these measures, companies can navigate the complexities of global trade and maintain their competitive edge.

Bob Duke is president of the Global Sourcing Division at American Standard Circuits.