10 Strategies to Mitigate Tariffs

STRATEGIES: 1) Diversify Suppliers, 2) Source Locally, 3) Re-Design, 4) Stock-up, 5) Negotiate,

6) Shift Production, 7) Duty Drawback, 8) Tariff Engr’g, 9) Pass on Costs, 10) Free Trade Accords.

How? By proactively adopting a mix of these strategies to mitigate (reduce) tariffs – companies can not only manage, but potentially reduce the impact of higher tariffs. Flexibility and creativity in the supply chain, along with careful planning and negotiation, can significantly mitigate the financial strain imposed by tariff increases.

1. Diversify Suppliers

Why: Relying too heavily on one country or region for key materials or goods can expose a company to risk if tariffs rise. Expanding the supplier base to countries unaffected by the new tariffs reduces dependency on a single source and spreads risk.
How: Research and establish relationships with alternative suppliers in other regions with lower tariffs. Consider countries that have trade agreements with your home country or that are part of multi-country trading blocs.
Example: If your company imports from China, consider switching to suppliers in Southeast Asia or Eastern Europe where tariffs are lower or non-existent.

2. Source Locally

Why: Local sourcing helps mitigate import tariffs entirely and may even reduce shipping costs and lead times.
How: Assess the feasibility of switching to domestic suppliers or shifting some production back to the home country or regional partners. Local suppliers may also have better logistical support and flexibility.
Example: A U.S.-based manufacturer of consumer electronics could explore using domestic components or assembling parts within the U.S. to avoid tariffs on Chinese-made components.

3. Re-Evaluate Product Designs

Why: Certain raw materials or components may attract higher tariffs, while others may be tariff-free or less expensive.
How: Work with your design and procurement teams to find alternative materials or components that are either tariff-free or subject to lower tariffs. Small modifications can reduce the tariff impact significantly.
Example: A furniture manufacturer might switch from using imported exotic hardwoods to locally sourced materials to avoid hefty tariffs on specific imported woods.

4. Increase Inventory before Tariff Changes

Why: If the tariff increase is imminent, buying up inventory before the tariff hike allows you to avoid paying the higher fees for goods already in stock.
How: Forecast demand carefully and ramp up procurement of goods expected to be hit with higher tariffs. Ensure warehouse space and cash flow are managed effectively to store extra stock.
Example: A company expecting tariffs on Chinese electronics might bulk-buy key components before the tariffs kick in to maintain competitive pricing for months afterward.

Related Story: How Tariffs Impact Supply Chain.

5. Negotiate with Suppliers

Why: Tariff increases often hit companies at the same time, creating a shared challenge. Suppliers may be open to re-negotiating prices or payment terms to help manage the impact of tariffs.
How: Open conversations with suppliers about the new tariff and explore options for cost-sharing, adjusting prices, or lengthening payment terms to help absorb the extra costs.
Example: A retailer that relies on imported apparel may ask its overseas suppliers to share some of the tariff burden by slightly reducing their price per unit.

6. Shift Production to Lower-Tariff Regions

Why: If tariffs are targeting goods imported from specific countries, consider shifting production to countries with lower or no tariffs.
How: Research low-cost manufacturing countries or areas within free trade zones that offer tariff benefits. Additionally, this strategy could potentially benefit from lower labor or operational costs.
Example: A company that assembles products in China, but faces high tariffs on Chinese goods might consider relocating assembly operations to Vietnam or Mexico, which could offer more favorable trade terms.

7. Use Duty Drawback Programs

Why: Duty drawback programs allow companies to recover some or all of the tariffs paid on goods that are later exported. This is especially helpful for businesses involved in re-exporting or international trade.
How: If your products are subject to tariffs but will eventually be sold abroad or used in manufacturing exported goods, investigate duty drawback programs available through your country’s customs agency. Ensure compliance with any required documentation and timelines.
Example: A U.S. company that imports electronics to assemble and then export them can apply for a refund on the tariffs paid on components when the final products are exported.

Related Story: How Companies Avoid Tariffs.

8. Explore Tariff Engineering

Why: Tariff engineering involves making small changes to a product’s design or manufacturing process so that it qualifies for a different, lower tariff rate.
How: Work with Customs Consultants or Trade Experts to assess the classification of your goods under tariff codes. Simple adjustments, like changing the material composition or assembly process, can sometimes result in significant tariff savings.
Example: A textile manufacturer could alter the way a product is stitched or finished to change its tariff classification and avoid paying higher duties on the original product type.

9. Pass on Costs to Customers

Why: If it’s not possible to absorb the tariff costs, passing on some or all of the increased cost to consumers may be necessary. The key here is balancing cost increases with maintaining customer loyalty and price competitiveness.
How: Consider a strategic price increase that reflects the tariff costs, but remains competitive in your market. Communicate transparently with your customers about the reason for the price hike (e.g., rising raw material costs due to tariffs).
Example: An importer of luxury goods might raise the retail prices of their products by a small percentage to cover higher import duties, explaining the situation to customers in a clear and empathetic way.

10. Utilize Free Trade Agreements (FTAs)

Why: Many countries have free trade agreements that reduce or eliminate tariffs between the signatory countries. Utilizing these agreements can help reduce costs and avoid new tariffs.
How: Identify if your company’s target market or suppliers are covered by a Free Trade Agreement. Engage in strategic trade with countries that offer the most favorable terms, ensuring compliance with FTA requirements.
Example: A company importing goods from Canada to the U.S. might benefit from the USMCA (United States-Mexico-Canada Agreement) to avoid new tariffs imposed on goods from non-FTA countries.