President-elect Donald Trump's return to office has sparked concerns about a resurgence of import tariffs, especially targeting mainland China. In this article, we'll explore various strategies businesses can employ to manage these potential costs and ensure their financial and operational resilience.

Unraveling the Tariff Maze for Business Success

Defence Against Tariffs: Lobbying for Exemptions

One of the initial lines of defence against tariffs is lobbying for exemptions or the complete removal of duties. As highlighted by Fitch Ratings, this can involve making exemption requests, seeking waivers, or directly advocating for trade policy changes. Pre-emptive lobbying efforts, which aim to prevent duties from being imposed in the first place, are often more effective than reactive measures influenced by political considerations. For instance, in the 2019 Section 301 tariff exemption process, one company managed to secure a 62.5% approval rate by leveraging strong political connections and demonstrating a commitment to US-based manufacturing. This shows the power of proactive lobbying in obtaining temporary relief from tariffs.Another company might have a different approach. They could focus on building a coalition of like-minded businesses and industry associations to present a unified front in their lobbying efforts. This could increase their chances of success and lead to more significant tariff exemptions. By working together, these businesses can demonstrate the broader impact of tariffs on the economy and push for policy changes that benefit them.

Financial Strategies for Immediate Relief

When faced with tariffs, companies often turn to financial strategies to address their immediate impact. Fitch Ratings outlines three main approaches. Firstly, accessing the most comprehensive Company Profiles on the market, powered by GlobalData, can save hours of research and give businesses a competitive edge. By having access to detailed information about their competitors and the market, companies can make more informed decisions and potentially find ways to offset tariff-related costs.Secondly, companies can consider passing costs to customers by increasing product prices. However, this strategy comes with risks, especially in competitive markets where price hikes can lead to a loss of market share. It's important for companies to carefully assess the market dynamics and customer sensitivity before implementing this strategy. Additionally, they need to be prepared to handle any political or public scrutiny that may arise if the price increases are seen as contributing to inflation.Finally, negotiating with suppliers is another option. Firms can seek to share the burden of tariffs by renegotiating supplier contracts to reduce input costs. This requires time for competitive sourcing processes and supplier negotiations, but it can lead to long-term savings. For example, a company might work with its suppliers to find alternative sourcing options that offer lower costs or better terms. By collaborating with suppliers, businesses can find creative solutions to manage tariff-related costs and maintain their profitability.

Historical Insights into Tariff Impacts

Looking at historical data provides valuable insights into the effects of tariffs. After the imposition of duties on $250 billion worth of Chinese imports in 2018, US import prices declined by 1.9% year-on-year by late 2019. This reflects the efforts of businesses to renegotiate pricing and adjust their sourcing strategies. It shows that companies can adapt to changing trade policies and find ways to mitigate the impact of tariffs over time.However, historical data also highlights the challenges businesses face. For example, during the previous tariff cycle, US imports from mainland China significantly decreased, with their share of affected goods dropping from 21.6% in 2017 to 13.5% by mid-2024. This indicates the need for businesses to be proactive in diversifying their sourcing locations and exploring alternative markets to reduce their dependence on tariffed countries.

Long-term Sourcing Adjustments

In addition to short-term financial fixes, firms can also make long-term sourcing adjustments to mitigate tariffs. Stockpiling inventory is one strategy where companies can accelerate imports from targeted countries before tariffs are implemented, creating a buffer of untariffed goods. However, this approach requires careful management as elevated inventories can strain finances, especially in an environment of high interest rates.Shifting sourcing locations is another effective strategy. By diversifying supply chains to non-tariffed countries supported by trade agreements or more favourable tariff regimes, businesses can reduce their exposure to tariffs. This requires careful planning and coordination with suppliers in different countries, but it can lead to long-term cost savings and increased supply chain resilience.Partial reshoring is also an option. Importing components for domestic assembly instead of finished goods can reduce tariff exposure. This requires significant operational flexibility as companies need to manage the production and assembly processes in-house. However, for some businesses, this approach can be a viable way to navigate the tariff landscape and maintain their competitiveness.

Strategic Planning for 2025 and Beyond

As the contours of US trade policy under the new administration take shape, businesses must assess their mix of financial and operational strategies. None of the approaches are without cost, and companies will need to make trade-offs between raising prices, cutting expenses, or accepting reduced profitability. It's crucial for businesses to be proactive and strategic in their planning to ensure their long-term success in a changing trade environment.By carefully considering their options and implementing a combination of strategies, businesses can navigate the tariff maze and emerge stronger. Whether it's through lobbying for exemptions, implementing financial strategies, making long-term sourcing adjustments, or engaging in strategic planning, companies have the tools at their disposal to manage the impact of tariffs and safeguard their financial and operational resilience.