Tariff Whiplash

What Is Happening?

All of the tariff announcements in the past 30-days are giving many supply chain and manufacturing leaders whiplash. If you look at the executive orders in the first days of this administration, we've seen Canada and Mexico come under scrutiny as well as China—with more to come. It’s pretty clear we're moving into a protectionist environment and the current administration is using tariffs as a lever for various policy agendas. 

But these tariffs also have downstream impacts on business, their bottom lines, consumer inflation, as well as consumer spending. And this protectionist stance sets the stage for more tariffs and negotiating tactics to close trade deficits and strengthen U.S. manufacturing. Whether these goals are achievable is debatable. But if you blink, or attend meetings, or take a walk, you’ll likely miss 5 more trade policy and tariff announcements. 

In addition to the 25% tariffs on Canada and Mexico that have been paused until March and the 10% additional tariff on China (on top of the 25% tariff from 2018-2019), Trump recently announced 25% across-the-board tariffs on all imported steel and aluminum set for March 4 which have been condemned by Canada, Mexico, and the EU. And which will likely exacerbate U.S. steel production challenges. And of course, retaliatory tariffs are escalating trade wars with China and sparking pushback from U.S. USMCA trade partners Mexico and Canada. And Trump is threatening more retaliatory tariffs every day. 

Turns out the 2024 State of Manufacturing Report was prescient:  89% of manufacturing and supply chain leaders are either somewhat or very concerned about escalating trade wars.

What I’m hearing from customers backs this up. They’re concerned about tariff impacts on costs and profitability, how increased costs will impact the economy in general, and whether or not tariffs are a negotiating tactic to bring trade deficits and trade partners in line. Because supply chains are making headlines every day, the average American now understands what “supply chain” means (and it’s not just toilet paper and hand sanitizer) and they’re about to learn even more.

Supply Chain 2020 Redux

I’d argue we’re seeing supply chain disruptions reminiscent of 2020. Although the specifics may vary, the effects on manufacturing are likely substantial, especially for companies that rely heavily on a single region for manufacturing. In my opinion, these trade policies will probably result in rising prices for certain consumer goods, particularly those tied to imports or raw materials. Items like cars, electronics, and clothing—many of which depend on tariffed components or finished goods—are expected to see higher production and retail costs as well.

SIDE NOTE: The history of tariffs is fascinating (check out this piece from the Wall Street Journal on Why McKinley Abandoned His Own Tariff Policy)

Thinking back to tariffs levied against China in 2019, we have data on the true impacts of tariffs on the average U.S. household. According to economists at the New York Fed, American consumers faced an average price increase of approximately $419 per household in 2019 due to U.S. tariffs of 25% on $200 billion worth of Chinese goods. The impact could be greater as tariffs expand to include Mexico, Canada, and other countries.

In fact, the Tax Foundation estimates the average tariff rate on all imports would triple (from 2.5% to 7%) if threatened tariffs on China, Mexico, and Canada are imposed. The average rate on all imports would climb to a more than 50-year high.

The impacts on industries like automotive will be as dramatic: According to the Council on Foreign Relations, a 25% tariff on Canada will raise production costs for U.S. automakers, adding up to $3,000 to the price of some of the roughly 16M cards sold in the U.S. each year.

Grocery costs could rise, too, as Mexico is the United States’ biggest source of fresh produce, supplying more than 60 percent of U.S. vegetable imports and nearly half of all fruit and nut imports.

From both a historical and a present-day perspective, our supply chains face significant impacts should all of these tariffs get implemented. But how should supply chain and manufacturing leaders address these challenges and “tariff-proof” their supply chains?

How Can Supply Chain and Manufacturing Leaders "Tariff-Proof" Their Supply Chain?

When dealing with these tariffs, my best advice is to have a strategy to build out a more resilient supply chain. Step one? Diversify your sourcing regions. Avoid relying too heavily on a single region, particularly one impacted by targeted tariffs. Spreading out your suppliers across different regions makes your supply chain more flexible and gives you options to handle disruptions. And let’s face it—2025 is shaping up to be a rough year for manufacturers. Between rising costs, shrinking margins, and potential labor shortages, having an agile supply chain is going to be key to staying profitable.

Manufacturing costs are also set to rise, especially for businesses relying on materials from countries targeted by Trump’s tariffs. Companies using tariffed steel or aluminum will face higher material costs, which could lead to reduced profits, decreased investment, or even the need to relocate production to avoid tariffs. Advanced manufacturing should be a consideration as it could lead to efficiencies that might not fully absorb the tariff impact but could help maintain pricing.

It might be necessary to find a manufacturing partner that’s already established in strategic regions, especially if they have in-region expertise (actual boots-on-the-ground) so you can be assured of quality, responsiveness, and reliability. If 2020 taught us anything, it’s that if you want to survive this level of business uncertainty and disruption, you need a resilient, agile supply chain network.

On top of diversifying your supply base and strengthening those relationships, here’s a 5-point plan to help companies deal with tariffs:

• First Sale: This lets you reduce tariffs by declaring the customs value based on the earlier sales price (as long as the sale was made for export to the U.S. and all customs requirements are met).
• Tariff Engineering: Basically, tweak your product’s design or manufacturing process to qualify it for a more favorable HTS classification, which can lower the applicable tariff.
• Country of Origin: Produce parts in a country that has better tariff rates for your product’s HTS classification.
• Free Trade Zone (FTZ) or Bonded Warehouse: Set up a staging area to delay importing, so you can adjust or reassemble products in ways that lower the tariff designation.
• Duty Drawback: Pay the tariff upfront, but if you re-export the product outside the U.S., you can file for a reimbursement.

It’s critical to have this level of technical know-how in your corner. If you don’t, find a partner who does—they can help you mitigate tariffs and other supply chain headaches.

With new tariffs on Mexico, China, and Canada coming into play, being able to tap into multiple regions for manufacturing is going to be a game-changer. But this only works if you’ve already built relationships in those areas. If you haven’t, partnering with a supply chain expert that has established infrastructure in key regions is your best bet. It’s all about staying ahead of the curve! You can read more about strategic sourcing regions including China, U.S., India, and Mexico over on Forbes.

What’s Next for the Global Supply Chain?

In some ways, the world has never been more digitally connected, but at the same time, doing business globally has never been more complex. Our supply chains are global and the situation is increasingly complex and connected, and I expect significant uncertainty in 2025.

Next Blueprint: Stay tuned for our 2025 State of Manufacturing and Supply Chain Report. We surveyed 254 supply chain and manufacturing leaders about their priorities, concerns, strategies, and supply chain plans. 

The above note is part of my newsletter, The Blueprint, where I talk about supply chains, technology, and mBOMs. 

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Learn more about Fictiv and how we help companies simplify sourcing for custom manufacturing at fictiv.com.