How to Prepare for Tariffs

For many years, businesses have believed that trade is getting easier and the world is more connected. These assumptions no longer hold true.

For the past two decades, tariffs have played a relatively minor role in the intricate web of supply chain planning. During this time, globalization and free trade agreements were very important. They allowed businesses to get materials and products from many countries with few trade barriers.

Why Businesses Should Care About Tariffs

Companies that focus on making their supply chains more efficient often prioritize cost, speed, and labor. They pay more attention to transportation logistics and inventory management than to the effects of tariffs.

However, the current economic climate is witnessing a significant transformation. Tariffs are now emerging as a critical consideration in supply chain strategy. Several factors, including rising protectionist policies, geopolitical tensions, and the increasing complexity of international trade regulations, drive this shift.

The Changing Face of Global Trade

As governments impose tariffs to protect local industries or respond to trade practices, businesses face a tougher situation. The cost of importing goods can change a lot.

Companies that see this change early will do better. They can adjust their supply chain strategies.

This will help them succeed in the new environment. This may involve revaluating sourcing decisions, diversifying suppliers, or even relocating production facilities to countries with more favourable trade conditions. By addressing the possible effects of tariffs, these businesses can reduce risks. They can keep prices competitive and build a stronger supply chain.

On the other hand, companies that ignore the rising importance of tariffs in their supply chain planning may face big problems. Higher costs from tariffs can reduce profit margins, disrupt supply chains, and cause delays in product availability.

In a market, customers want fast delivery and low prices. Businesses that do not change may lose customers. They could go to faster competitors.

Why Tariffs Are Inevitable

Donald Trump won the election by promising to protect U.S. industries with tariffs. This victory starts a new era in trade policies. Similarly, other geopolitical shifts, like Brexit, show the potential for widespread changes in trade regulations.

Historically, tariffs have been a common tool of government policy, used to protect domestic industries and generate revenue. Periods of free trade, associated with British and later American economic dominance, are anomalies. Today, the tide is turning back toward protectionism.

The Impact of Tariffs on Supply Chains

Tariffs as a Tax on Imports

Tariffs are essentially a tax on imported goods. They increase costs for businesses and consumers alike, making foreign goods more expensive and incentivizing domestic production. These costs ripple through supply chains, increasing the overall price of goods.

Ripple Effects Across Borders

Tariffs imposed by one major player, such as the U.S., often lead to reciprocal tariffs. For example, if the U.S. puts a 60% tariff on Chinese goods, other countries might do the same. They may want to stay competitive or prevent trade diversion.

Long-Term Changes

Tariff policies are not short-term trends. The geopolitical shifts driving them could influence international trade and supply chain strategies for decades. Businesses must prepare for these long-term effects and avoid short-term fixes.

Steps to Prepare for Tariffs

1. Acknowledge the New Reality

Adopting an “ostrich strategy” and ignoring tariffs is not an option. The business landscape is changing, and preparation is essential. Ignoring tariffs can lead to increased costs, reduced competitiveness, and unnecessary liabilities.

2. Make Tariff Strategy a Board-Level Priority

In the past, tariffs were often overlooked because their impact was minor. Today, with potential tariffs of 20% or more, the financial implications are significant. Companies must integrate tariff planning into their overall strategy, considering:

• Purchasing decisions
• Trade routes and shipping terms
• Warehouse and distribution management
• Sales and customer service policies

A comprehensive, cross-departmental approach is necessary to avoid overpaying duties or missing opportunities to optimize supply chains.

3. Strengthen Governance and Controls

Effective customs management starts with robust governance. Businesses should focus on:

• Data Access: Ensure clear and comprehensive access to trade and tariff data.
• Accountability: Assign responsibility for tariff management to specific roles.
• Analysis: Use governance systems to analyse costs and risks and identify opportunities for savings.

4. Model and Analyse Costs

Use historical data to model potential tariff scenarios. This approach helps quantify the costs under different conditions and informs supply chain adjustments. Understanding these costs is crucial for decision-making and presenting clear options to leadership.

5. Leverage Available Facilitation Programs

Many governments offer programs to minimize the impact of tariffs. Businesses should explore opportunities to:

• Defer duties to improve cash flow.
• Suspend or reclaim duties on qualifying goods.
• Avoid duties through free trade agreements or exemptions.

Weigh the costs and benefits of these programs to determine the best fit for your operations.

6. Take a Holistic Approach

Tariffs impact multiple areas of your business, including operations, finance, sales, and logistics. Make sure all departments work together to prevent unintended problems. This includes avoiding cost shifts from one area to another without saving money overall.

7. Start Now

Adjusting to tariffs is complex and time-consuming. Early preparation gives your business a strategic advantage, allowing informed decisions and smoother implementation. Businesses that delay risk higher costs, rushed solutions, and long-term inefficiencies.

Lessons from Brexit

The post-Brexit environment serves as a cautionary tale. Many businesses delayed preparations, hoping the issues would resolve themselves. Those that did not plan ahead faced years of adjustment and significant costs.

During the transition period, tax authorities exhibited a commendable level of understanding and flexibility. They understood the challenges that businesses and people faced. They were adapting to new rules and changes in taxes. This leniency allowed many to navigate the complexities of compliance without facing immediate penalties or undue stress.

However, it is important to note that this understanding may not be a permanent feature of their approach. As other regions or countries start to set their own tariffs and tax changes, tax authorities may not stay as flexible. Each jurisdiction may respond differently based on its economic conditions, political climate, and administrative priorities.

As a result, businesses and individuals must remain vigilant and proactive in their tax planning and compliance efforts. The landscape can shift rapidly, and people may not tolerate what they currently accept in the future.

You should stay updated on possible changes in tax policies. Be ready for stricter enforcement or less leniency from tax authorities as new tariffs come into play. This proactive approach will help reduce risks. It will also ensure that you are ready to adapt to any changes in taxes.

Conclusion: Be Proactive

Tariffs are not just a passing phase—they are a permanent shift in the global trade landscape. Businesses must embrace this new reality and take steps to prepare.

Proactive planning can help reduce the effects of tariffs. It can also create new opportunities. This includes governance, modelling, facilitation, and strategy.

The cost of preparation is far less than the cost of inaction. Start now, and position your business to navigate and succeed in this new era of global trade.