The Trump Administration has given a temporary reprieve on tariffs for two of its primary trade partners, Mexico and Canada, extending the suspension until April 2nd. Goods exempt from tariffs during this period include those under the United States-Mexico-Canada Agreement (USMCA), such as agricultural products, automobiles and auto parts, electronics, machinery, and textiles. Although we are only a few weeks away from the tariffs, the unpredictably of the situation means it is time to prepare but maybe not yet make major changes.
If fully enacted, the tariffs would impact the cost of a wide range of consumer goods for American importers, potentially driving up prices across various sectors. Under this potential threat to their operations, many manufacturers and other businesses have started planning ahead. Such is the case with Nissan, whose CEO announced they are considering moving part of their production out of Mexico if Trump’s proposed tariffs go into effect.
By diversifying their production locations and supply sources, companies can reduce the risk of disruptions to their supply chain. We’ve seen this strategy being implemented before in 2018 at the beginning of the US-China trade war and during the COVID-19 pandemic, when companies sought to prevent delays and increasing production costs. India and Vietnam became increasingly attractive manufacturing locations due to their cost competitiveness and reduced trade barriers. However, businesses should take into consideration the potential challenges of supply chain diversification including the high costs of relocating entire processes and finding skilled workers.
Companies can also prepare against tariff-driven cost increases by renegotiating existing contracts with suppliers and making strategic use of Incoterms. The terms under which an international trade agreement is negotiated determine which party should be responsible for absorbing the cost of custom duties. Renegotiating an unfavorable Incoterm can help buyers mitigate the risks of tariffs by shifting responsibility. Price escalation provisions are another tool that can be used to prevent sudden price increases due to tariffs, allowing business time to adapt and adjust. With the fluctuating trend of U.S. tariff policies, periodic reviewing and renegotiation of contracts with suppliers could become a necessary practice for buyers.
Given these uncertainties, businesses must take proactive steps to mitigate potential risks. As tariff policies continue to evolve, fully understanding their impact will take time. However, businesses affected by tariffs should adopt immediate strategies to mitigate operational risks, cash flow, and protect their value.
Ultimately, the 30-day tariff pause offers these businesses a chance to strategize and optimize their plans. Below are key strategies that companies can implement in conjunction with a comprehensive assessment of the fiscal and economic impact of tariffs.
Strategies to Mitigate Tariff Impacts
- Inventory Hoarding: Businesses that can purchase and store additional inventory in the U.S. may be able to minimize financial strain. Furthermore, if inventory purchases are financed through debt, companies should assess whether the interest rate is lower than the applicable tariff rate to make cost-effective decisions. Additionally, storing goods in free trade zones can help defer tariff payments or lower duty costs.
- Evaluate Country of Origin: Conducting a detailed review of the country of origin may allow businesses to reclassify goods under a jurisdiction not subject to tariffs. The country of origin is determined by where the product undergoes “substantial transformation,” rather than its shipment or sale location. Additionally, companies may consider alternative suppliers or manufacturing sites, though this could present logistical challenges.
- Review existing contracts for force majeure provisions: Business should thoroughly review their contracts with suppliers, vendors, and customers to identify force majeure clauses or similar provisions. These clauses may provide relief from contractual obligations in the event of unforeseen circumstances, such as tariff increases or supply chain disruptions. Understanding the applicability and limitations of these provisions can help companies assess their legal responsibilities and determine whether to renegotiate terms or explore alternative solutions.
- Assess Secondary Impacts: In addition to direct costs, businesses should analyze potential ripple effects, such as rising fuel prices or disruptions in supplier operations.
- Anticipate Recovery Actions by Final Customers: Supply chain disruptions may result in delivery delays or quality issues. Businesses should carefully review customer contracts to understand penalty and credit provisions, allowing them to proactively address potential disputes and mitigate financial risks.
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