4 Steps to Help Your Company Respond to Tariffs and Trade Uncertainty
Those who don't prepare in today's fast-changing trade environment risk facing significant disruption
After months of speculation on how U.S. tariffs on certain goods from China, the European Union and other countries might affect U.S. business and the overall economy, more companies are starting to report concrete effects.
The picture has come into focus more clearly as companies have issued forward-looking guidance during second-quarter earnings season. Lately, I've fielded calls from a number of clients inquiring about the best way to respond.
A FAST-EVOLVING TRADE ENVIRONMENT
Developments on the trade front are coming fast and furious and headlines are changing almost daily. As of late July, it appears President Donald Trump and the president of the European Commission have defused some of the mounting trade tensions by agreeing to work toward lowering tariff and non-tariff barriers. But existing tariffs remain in place, and tough negotiations still lie ahead.
Since the spring, a 25 percent U.S. tariff on imported steel products and a 10 percent tariff on imported aluminum products from all but a few countries have been in place, imposed citing national security concerns. In early July, U.S. tariffs were also levied on more than 800 imports from China valued at $34 billion, with the Trump administration referencing unfair trade practices. In addition, the administration has formally proposed tariffs on some 6,000 additional products from China impacting more than $200 billion in imports, and reportedly it is still considering global tariffs on automobiles and auto parts. Meanwhile countries around the world have begun implementing retaliatory tariffs in response to U.S. tariffs.
All this, along with continuing concern over ongoing NAFTA negotiations, has created considerable uncertainty made trade a top issue in many C-suites and corporate boards – both here in Colorado and across the nation. It's spurring action.
DOING BUSINESS AMID UNCERTAINTY
As the playbook that has guided global trade over the past several decades is rewritten, companies are reviewing operations, rethinking supply chains and weighing options. Here are four steps your company can consider taking to cope with today's tumultuous trade environment:
Obtain your global import and export data and model out the potential impact of current U.S. and non-U.S. retaliatory tariffs. Only by knowing the data can you quantify the potential implications of the tariffs, assess the risks facing your company and plan accordingly.
Fully assess all the potential ways to mitigate, eliminate or defer the tariff impact. This assessment should include the following:
- CONFIRM AFFECT: Examine such critical elements as the affected products' country of origin and harmonized tariff classification (HTS) to accurately ascertain whether your product is actually subject to the new tariffs (classified in a HTS category on the list with a country of origin of China).
- STRATEGIC SOURCING + MANUFACTURING: Explore strategic supply chain restructuring and manufacturing options. Assess, for example, whether using a different manufacturing operation or switching suppliers would result in a product being removed from the tariff list and being cost effective. Be sure to examine the non-trade impact of the decisions, as well, including logistics costs, transfer pricing ramifications and tax implications.
- CORE TRADE STRATEGIES: Assess and quantify the benefits of core trade strategies such as duty drawback, first sale and foreign trade zones, temporary importation bonds and bonded warehouses. Many of the programs have been around for years and may provide short- or long-term solutions.
Determine which strategies meet your company's short- and long-term goals. While some programs may serve as "Band-Aids" until the tariffs revert back to most-favored-nation tariffs, others could yield long-term benefits beyond minimizing the impact of the new tariffs.
Continue to monitor trade developments and regularly update your "what if" planning so you can respond quickly to the fast-changing global trade landscape.
OTHER LENDING PRACTICES
- Applying for an exclusion or exemption for imported products affected by the new tariffs with the U.S. Commerce Department or U.S. Trade Representative.
- Assessing whether you can pass on the added costs to customers or renegotiate pricing with suppliers.
- Strengthening your import compliance programs to confront the challenges posed by both the new tariffs and heightened U.S. Customs and Border Protection scrutiny of goods and services crossing U.S. borders.
As the U.S. and its trading partners work to resolve their trade disagreements, one thing is certain: Companies that don't prepare for different possible outcomes could face significant disruption.
Mark Tylicki is a Director in the Trade & Customs practice in the Denver office of KPMG LLP.