For businesses with international operations and supply chains, the complex tariff landscape is taxing operational models like never before. As tariffs increase or decrease, the costs of raw materials and finished goods can fluctuate significantly, directly impacting pricing strategies and competitive dynamics. If left unaddressed, the shifts can jeopardize profits, and in extreme cases, your company’s ability to continue operations. Standing still risks trapping your company into outdated practices and diminished competitiveness. A short-sighted approach can waste opportunities for market expansion and diversification, putting long-term business goals at risk. Waiting for tariffs to go away isn’t a strategy. You need a careful, holistic approach to evaluating your costs, considering where and how products are manufactured, and redesigning production and distribution models.
Steps to mitigate tariff impacts
The first step in tariff mitigation is to conduct a comprehensive tariff impact assessment to better understand how tariffs are affecting your cost structures. It provides a baseline to understand which areas of your supply chain and production are vulnerable to tariff changes and a roadmap for your team to consider strategic tariff mitigation alternatives.
Your mitigation plan should start with the low-hanging fruit. If you haven’t already done so, review your Harmonized Tariff Schedule (HTS) classifications to ensure they’re up to date and accurately coded. You may discover that some products qualify for more favorable tariff treatments, potentially resulting in cost savings without altering products or their manufacturing location. It’s also possible that because of HTS misclassification you’re not paying tariffs you should be paying.
Five tariff mitigation strategies to minimize the impact of tariffs
Once you’ve established that your HTS classifications are correct, your next step is to consider strategies that adapt your products and operations to minimize tariff impact.
1. Tariff engineering
Tariff engineering is the process of rethinking product design to legally minimize the impact of tariffs. It involves modifying products, using alternative materials, or changing manufacturing processes to fit more favorable tariff classifications. For example, shipping a product unassembled and finishing it in the United States may result in shifting the imported good to more advantageous HTS code and lower its declared customs value.
The tariff reengineering process requires collaboration between your product designers, legal and transfer pricing teams, customs brokers, and logistics professionals to assess the applicable rules governing the materials that go into the product and the economics of final assembly in the United States. In general, shipping components from high-tariff countries and adding value in the United States can help reduce tariff costs.
2. Make vs. buy analysis
Another approach is to determine whether manufacturing products or components in-house is more cost-effective than outsourcing to suppliers in high-tariff regions and vice versa. Current tariff levels may justify bringing production in-house if you have domestic manufacturing capabilities and the cost and supply chain analysis works in your favor. This option can bring other potential benefits, such as better quality control, faster lead times, and improved responsiveness to market changes. Of course, outsourcing inputs can make equal sense if the supplier specialization and business environment (including tariffs, logistics, and other business case variables) are more favorable than in-house production.
3. Alternative sourcing strategies
Tariff burdens can be eased by engaging suppliers in countries with lower or no tariffs, or in areas where advantageous trade agreements exist. For example, sourcing an essential USMCA-compliant component from Mexico or Canada instead of China may lead to significant savings.
Your options may become more limited as the complexity of the component increases. The relative difference in other associated costs, such as transportation and logistics, must also be factored into the calculations used in your assessment. It’s the total landed cost you need to consider when analyzing the various scenarios, and tariffs are simply one layer on that amount.
A related form of alternative sourcing — dual sourcing — can add flexibility and stability to your supply chain by buying similar components from several countries or regions. Introduction of dual supplier competition may reduce purchase prices, plus having a qualified supplier in another country reduces risks of transportation interruptions, manufacturing disruptions, and other supply chain risks by creating an immediate sourcing option. While analyzing the business case, you must again consider transportation and logistics to ensure genuine cost benefits from dual sourcing.
4. Reshoring
Bringing production to the United States may be a strategic move for tariff reduction that also capitalizes on local incentives and market proximity. If your long-term business goals include United States expansion, accelerating these plans could mitigate short-term tariff impositions and supply chain instability. One way to start may be to increase domestic sourcing with new, closer suppliers for commodity-type inputs. The dollar value of these components may be a small share of your cost of goods sold, but the strategy supports a growth in domestic purchasing resources.
If your company has operations across multiple countries, a short-term strategy may be to balance production between locations to reduce tariff exposure. For example, you may have the capacity to manufacture certain items in the United States while concurrently manufacturing the same good in Mexico. You also could shift the Mexico production to the United States to reduce tariff exposure, and backfill the Mexican operations to increase exports to non-U.S. countries as part of your global market expansion.
5. Transfer pricing
An effective transfer pricing strategy is essential for any business operating across multiple jurisdictions. If you have intercompany cross-border transactions, you may be able to manage the impact of tariffs by reevaluating your transfer pricing policies to determine which entity should bear the cost of the tariffs in the existing structure, find opportunities to reduce the price of goods in import transactions, and realign your supply chain to move more functions, assets, and risks into the United States.
Leveraging advisory insights
Analyzing and implementing complex tariff mitigation strategies requires an in depth understanding that spans beyond just tariff classifications. You need to scrutinize cost structures, review supply chain logistics, and ensure regulatory compliance and proper technology support. Integrating these strategies within your overall business planning requires a nuanced, holistic approach, making it critical to leverage skilled advisors who can offer insights and expertise to help align your tariff mitigation strategies with your broader business objectives. They’ll also provide the strategic guidance needed to define, model, and execute mitigation plans, while monitoring ongoing tariff changes and their implications on your business.
A more resilient future starts today
The unpredictability and frequency of changes in the global tariff landscape can quickly change the financial equation for your company by increasing costs and squeezing margins. But here’s the silver lining — being agile with your product engineering and operations today, you ultimately safeguard your organization’s future. By opening pathways to new markets and increasing opportunities, you’ll position your business for a broader global reach tomorrow.
