6 Steps to Manage Tariff Risks in a Trade War

This article is a precursor to an in-depth white paper on this topic. If you would like to subscribe to receive the white paper when it drops, please click here.

As Trump seeks to raise U.S. tariffs (which currently tend to be among the lowest worldwide), manufacturers, distributors, retailers, and other companies that frequently import (“importers”)  must determine the best strategy to deal with the resulting uncertainties. Determining such a strategy is further complicated by the fact that President Trump has made a number of different proposals depending on the country and product.

But while the exact form of higher tariffs is unknown, the reality is that higher tariffs are coming. This means importers have three tariff-related problems:

1. Identifying and Managing Immediate Risks and Cost Increases. Importers need to manage the immediate risk of higher tariffs, which can sharply change production cost structures.
2. Nimbly Responding by Changing Supply Chain Structure. Importers need to ensure they can nimbly respond to rapid shifts in importing from planned suppliers, even if it means entirely changing long-standing supply chains.
3. Maintaining Supply Chain Integrity to Avoid Detained Goods. Importers need to continue to comply with ongoing efforts of Customs & Border Protection (CBP) to emphasize supply chain integrity issues so that goods do not get detained at the border — specifically, supply chain integrity issues related to forced labor, human trafficking, and the importing of goods potentially violating the Uyghur Forced Labor Prevention Act (UFLPA).

To cope with these problems, importers need to identify their import-related risks, add flexibility within their supply chains, address tariff-related risks in both their buy- and sell-side contracts, and ensure their customs and supply chain integrity compliance is in good working order. Below are six practical steps that importers can take to identify and mitigate their import-related risks.

• Step 1: Risk Identification – Understanding Your Company’s Importing Patterns and How They Impact Your Company’s Importing Risk Profile. Importers need to gather full information on their historic and planned import patterns so that they can understand the full scope of potential supply chain disruptions and higher tariffs on importing costs.
• Step 2: Risk Planning – Understanding How to Add Flexibility to Your Supply Chain to Address Your Company’s Import-Related Risk. It is likely that the Trump Administration will announce tariff rates that target certain countries, including not just China, Canada, and Mexico but also Europe and countries that have free trade agreements with the United States. Accordingly, importers need to conduct risk planning and identify areas where they can build in supply chain flexibility to ensure they have the ability to quickly pivot import patterns if needed to respond to a rapidly changing tariff environment, particularly when importing from countries that maintain higher tariffs and non-tariff barriers, such as China, India, and Brazil (which will likely be targets of reciprocal tariffs).
• Step 3: Contractual Risk Management – Identifying Ways to Increase Your Company’s Contractual Ability to Adapt to Unexpected Changes in the Importing Environment. Importers should gather and audit their contractual provisions, on both the buy and sell sides, to determine how the contracts address tariff-related risks. The goal is to ensure all contractual arrangements incorporate supply, sales, and pricing flexibility to deal with unanticipated tariff changes.
• Step 4: Risk Minimization– Ensuring Your Company’s Customs Compliance Is in Order. In a high-tariff environment, tariff underpayments mount up much more quickly, as do potential penalties. As a result, manufactures must examine import-related compliance to ensure your company is exercising reasonable care in import operations and not underpaying customs tariffs.
• Step 5: Opportunity Identification – Ensuring Your Company Is Maximizing Tariff Savings. In a high-tariff environment, it also is more important to identify potential tariff-saving opportunities. Therefore, importers must examine their historic and planned import patterns to identify available tariff-saving opportunities, including potential ways to minimize tariffs if USMCA disappears (or if it is substantially modified), or if additional tariffs are imposed on Canada or Mexico or other major sources of imports.
• Step 6: Minimizing Supply Chain Integrity Risks– Understanding Your Supply Chain and Mitigating Supply Chain Integrity Risk, Right Down to the Last Sub-Supplier. Finally, CBP has been detaining a record number of goods for supply chain integrity issues, especially for UFLPA violations. An importer must carefully consider whether it has implemented measures to help ensure it is ethically sourcing goods from abroad, including the need to quickly vet secondary or alternative suppliers brought on board to expand supply chain flexibility.

Stay tuned for Foley’s in-depth white paper that will be published soon that further outlines the Trump Administration’s international trade and tariff priorities and then works through in detail how companies can implement these six steps to manage import risks. Click here to receive the white paper when it publishes.