The recent U.S. election signaled a changing of the guard—generally positive news for the business community. As policymaking heats up in areas like regulation relaxation, tax breaks, and emphasis on American manufacturing powering many different sectors, so does the rhetoric around trade tariffs.
The looming potential of tariffs has cast a shadow of confusion and hesitation over supply chains.
- How hefty will the tariffs be?
- Who pays for the tariffs?
- What even are they? (yes, I see this a lot)
- Finally, what do trade tariffs ultimately mean to businesses that rely on imported goods?
How much are the proposed tariffs? According to TaxFoundation.org, Trump may impose new tariffs of between 10-20% on all imports, 60% on Chinese imports, and 25-100% on Mexican imports. We can help you assess your defense approach and deploy immediate changes to put you in control of your supply chain.
Let’s start by simply defining how tariffs work, then consider their potential impact on your supply chain, and finally, discuss how you can protect your business from tariffs and other future risks.
How trade tariffs work
What are tariffs and how do they work? Simply put, tariffs are taxes on goods coming from a foreign country. They are applied at the Customs receiving process and are paid by the purchaser of record.
For example, if you buy shirts from South America, you might have a 10% trade tariff applied to them, due at the port of entry and Customs clearance. If you buy $100 in declared goods, you pay $10 at the port of entry. You’ll then include this in your Cost of Landed Goods in your warehouse.
Who pays the tariff?
The importer/buyer pays the tariff, not the exporter/seller.
The nuance is that the amount of tariffs is never universally applied. The tariffs on finished goods and classes of finished goods differ from components, raw materials, fuels, and consumables. Carefully understanding how a tariff is applied based on the imported item is critical.
This also becomes complicated when materials from one country are combined with fabrication and components in another country and final assembly in yet another country.
End consumers will not need this level of detail, but you, as a buyer, do.
Impact of tariffs on supply chains
What do tariffs mean for your retail or ecommerce business? Well, quite a lot actually. You can expect to see an effect from the cost of goods (COG) themselves to the transportation used to move them.
- COGS increase—The cost of acquiring goods from select countries is increasing. There’s no delicate way to say that. Look at your catalog and know what’s coming from where, especially since the date of entry matters, not the purchase agreement date. If you ordered it last year and it’s due in March 2025, you could get some sticker shock from Customs after a new tariff is applied.
- Transportation increase—This can be more subtle depending on many things. Carriers are fairly high maintenance, so the source and composition of aftermarket parts have to be passed along, and it’ll be in rates. Fuels are also potential targets of tariffs; the final customer will foot the bill. This can also cause low-margin carriers to contract or exit the market entirely, leading to capacity crunches.
- Uncertain consumer demand—End customers are incredibly sensitive to prices right now, which can lead to swapping products or doing without them entirely. Look for shifts within your own inventory or product lines that experience quick demand drops. Ensure that your own services—from transportation to warehousing to labor—can flex as well since a decrease in demand could be paired with an increase in expense.
- For goods and services providers—like 3PLs—monitor your accounts receivable. If tariffs cause hesitation around cash flows and profitability, objectively or subjectively, cash flows can be impacted. Look for slowing the order-to-cash cycle, more customers delaying payments, and more accounts in arrears. Slow or non-payment can be a strong smoke signal.
Tired of time-consuming billing processes, mistakes, long cash cycles, and missed revenue opportunities? See how a third-party logistics billing solution integrated with your supply chain platform fixes this.
Tariffs will increase prices
In general, tariffs will likely increase prices, and only sometimes in the ways you expect. You can mitigate these effects and even find opportunities for growth. The easiest way to do this is to plan for it.
How to prepare your business for tariffs
Assess your exposure. You may not know the end-regulatory changes, but you can estimate and deploy immediate changes or response mechanisms. This proactive approach will put you in control of the situation.
- Adjust replenishment—Look at your working capital tolerance. Should you reduce safety stock within reason and increase reserves to fill the war chest? Look at your payment terms and only pay early when there is an incentive. Do you have an easy tool to automate replenishment decisions?
- Acceptable alternatives—Is there a product that meets consumer demand that you can acquire locally or from friendshoring? Look at the full landed cost and swap to a local supplier if the math works out. Take a critical eye, though, as luxury goods and name brands are resistant to this kind of swap.
- Renegotiate early—Look at your supplier contract terms. How long are you locked in? Start negotiating with suppliers and carriers to confirm prices/volume/lane commitments early. Even if there is an increase, a locked-in rate means you have facts to calculate plans and prices from when factoring in tariffs.
- Trace goods—Look not just at your immediate supplier but also at the original countries of origin. Just because you got it from New Jersey doesn’t mean you won’t have to pay pass-through penalties from Canada or China.
- Tariff engineering—If you’re a brand or merchant, you should invest here if you aren’t already doing it. Areas like softgoods are incredibly sensitive to rules, where an 80/20 fabric blend vs. a 75/25 one carries wildly different tariffs. Pair this with acceptable alternatives to maximize avoidance.
- Continuous review—Shorten all your review cycles. If you look at your true landed costs and cash flows annually or semi-annually, you might let sudden price shocks from tariffs go unaddressed a long time. Shore up your BI with regular reporting and tolerance-violation notifications.
Two tales that reveal a fundamental truth: every decision carries the potential to unlock different levels of value and can dramatically alter a company’s trajectory.
A central theme in preparing for tariffs is assessing, responding, and maintaining. Then, the question shifts from reactive stress situations: “Yikes, what band-aid can we apply to this emergency?” to a more opportunistic stance: “How can we use our technology to adapt and respond?” The right solution partner will have ideas on how to turn a disruption into your competitive opportunity.
Regardless of your forecast, strategize
Remember, seeking expert assistance can provide you with the reassurance and confidence you need to navigate the challenges ahead.
You are likely already doing some of this during your business. In those instances,
☑️ Ensure that the assumptions that drive your formulas are accurate
☑️ Consider alternative models with the assumptions adjusted
☑️ Make sure your business plan holds if certain coefficients take heavy swings
If you haven’t started some of these strategies, invest now in a partner who can help you stay on top of tariffs or any other potential disruption in the future. It’s better to have a strategy ready to deploy and be overly conservative than have no plan and get caught unprepared.
Never fly solo
Deposco has the expertise to help you simplify supply chain complexities and proactively protect against costly disruptions. Our experienced team can help you implement the right technology to optimize supply chain execution, planning, and the intelligence surrounding it.
Access personalized advice to weather potential tariffs and future challenges that would be difficult to predict or navigate alone. Book time with us to learn more.