3 Ways Businesses Are Mitigating the Impacts of Tariffs [Report]
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The latest trade tariffs imposed by President Donald Trump could impact as much as $630 billion of traded goods annually, according to the American Action Forum. Some of the recently imposed tariffs, which include a 25% tax on steel and a 10% tax on aluminum with multiple trading partners, impact the production of everything from vehicles to candy wrappers to Coca Cola cans.
Escalating tensions in global trade leading to uncertainty surrounding trade tariffs are having a major impact on U.S. companies.
Mitigating Tariff Risks and Associated Costs
To mitigate the risks and costs associated with trade tariffs, companies are reassessing their production processes and adopting tariff engineering strategies, a methodology designed to reduce the impact of tariffs as much as possible. Companies often employ one of the three following techniques:
1. Reshoring Manufacturing to the U.S.
This approach reduces dependence on overseas manufacturing, helping to avoid tariffs, speed up production processes, and eases quality control.
Other companies are moving production to low-cost countries such as Vietnam and Malaysia, an option that presents its own set of challenges. Over time, many Chinese suppliers have progressed to meet American product safety and quality standards, as well as adhering to ethical supply chain expectations.
It will take time and effort to meet these criteria in other countries but that doesn’t seem to be deterring many companies looking to reduce costs. For example, Hasbro, a toy manufacturer responsible for Nerf, Transformers, and Play-Doh, has vowed to reduce the goods produced in China for its American market from two-thirds to half by the end of 2020, moving production to India and Vietnam.
2. Tariff Engineering
Many companies are looking to re-engage their supply chains to account for tariffs during the design and production process. This includes changing how they ship their products, adopting new production techniques and tools, and altering the materials used.
Shipping products before they are fully assembled results in a lower tariff, a loophole that 65% of survey responders are taking advantage of; opting to assemble end-use production parts locally rather than in China. One survey respondent noted, “We need to pay closer attention to what state of completeness products are shipped at – partially assembled products may be classified at a lower tariff than the fully assembled version, so it makes more sense to do final assembly in the U.S.”
Altering fiber content and changing the materials used can also reduce tariffs. Converse avoided a potential 48% shoe import tariff simply by adding a layer of felt to the sole of their shoes. This addition changed the product classification from shoe to slipper, and the much preferred 6% tariff rate.
Hardware developers looking to leverage tariff engineering must be mindful of the laws, such as not reversing product changes following importing to the U.S. and ensure changes do not compromise product quality.
3. Stockpiling Manufacturing Parts
A number of U.S. trade tariffs have yet to be implemented or have been postponed. This includes a new 10% tariff on some Chinese imports, which has been delayed until December. In the run-up to Christmas, some manufacturers will likely opt to stockpile parts purchased at a lower cost to avoid paying higher rates for as long as possible.
Image Credit: eamesBot / Shutterstock
