How the Threat of Higher Duties Is Reshaping U.S. Business Strategies

Since the original publishing of the following article, the Trump administration confirmed it is imposing a 25% tariff on Mexican and Canadian imports and a 10% tariff on goods from China, effective February 1, 2025.

Although President Donald Trump’s return to the White House has not come with the kind of blanket tariff raises he discussed in his campaign, the threat of additional duties is already costing businesses in the United States money. The ongoing uncertainty will remain as the administration arrives at its comprehensive trade policy.

Many observers believe that the President’s stated intention of raising tariffs generally and boosting them even more significantly in some instances – with China the target of the highest proposed duties at up to 60% – has always been a negotiating ploy. Still, the threat has forced retailers, their suppliers and others in industries that can affect storerunners, such as construction, to push their supply chains harder and deliver goods that might be hit with heavy tariffs into inventory before elevated duties potentially take effect.

Uncertainty remains, with the threat of higher tariffs against Colombia for its initial refusal to accept migrant deportation flights a case in point. Although the dispute was settled, the threat of tariffs to gain political leverage brings further concern retailers and others must weigh as they import goods.

Concerns about blanket tariffs Trump threatened while on the campaign trail have eased for the moment.

In a memorandum from the President’s office dated January 20 entitled America First Trade Policy sent to agencies across the U.S. Federal government, including the United States trade representative, the management and budget director, and the secretaries of commerce, defense and the treasury, President Trump stated, “I am establishing a robust and reinvigorated trade policy that promotes investment and productivity, enhances our nation’s industrial and technological advantages, defends our economic and national security, and, above all, benefits American workers, manufacturers, farmers, ranchers, entrepreneurs and businesses.”

He directed the agencies to investigate national trade policies regarding unfair and unbalanced trade that affect or come under the authority of their auspices. Agencies involved must also consider economic security and economic and trade relations with the People’s Republic of China.

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The Consequences

If not initially, at least in the mid-term, consumer response to tariffs will likely impact policymakers. According to researcher Morning Consult, the imposition of new tariffs may create more consumer opposition than occurred in 2018, given the distress people have felt due to recent inflation. When tariffs were imposed in 2018, inflation was not much of an issue with consumers in the United States, but that has changed.

Lower- and middle-income consumers have demonstrated more opposition to raising tariffs on household goods than higher earners. They are likely to respond most negatively, given that inflation can erode their buyer power, both everyday and discretionary. As services inflation has recently outpaced price increases on goods, any imposition that drives up the cost of food and/or everyday necessities, whether through a U.S. tariff or trade retaliation from elsewhere, is likely to generate concern and even anger among many consumers.

If significant tariffs occur, said Lisa Anderson of the LMA Consulting Group, which advises businesses on supply chain, some companies may want to reshore sourcing, a goal of tariff imposition. However, businesses reconsidering their sourcing may have multiple options, including nearshoring and friendshoring, which involves moving to suppliers allied to or otherwise on good terms with the U.S. or choosing a low labor cost country with reduced risk. Other actions that companies will review include supplier collaborations to reduce tariff impacts and redesigning products to minimize or eliminate them. Although that will create short-term costs and headaches, businesses will explore ways to dilute the effect of tariffs and the cost to their customers, just as they do when other disruptions threaten supply chains.

From a big-picture perspective, Anderson said that while certainly raising costs, tariffs may be more of a shorter-term challenge and less of a longer-term one.

“The broader supply chain will evolve with changing sourcing strategies,” Anderson said. “However, these changes will take time to roll out. As supply chains evolve, they will maintain dual sources of supply and backup sourcing to ensure customers are served.”

Thus, tariffs may not have a broad, immediate impact. On the other hand, as supply chains evolve, disruptions typically occur due to supply and demand misalignment. If disruptions add cost, some proportion will reach the consumer.

However, because shipping capacity, for example, has increased since the pandemic, the price adjustments may not be significant. If reshoring and nearshoring to places like Mexico increase dramatically over the next several years, ocean freight capacity would place downward pressure on prices in the long term, Anderson said. In that case, the effect of tariffs may not be as much of a rate factor as it is a supply chain issue that will have more or less impact on the consumer, retailers and suppliers depending on how the final costs tally on the range of goods. Short-term pricing increases based on major tariff increases would be likely, but the supply chain will adjust as it did in the COVID pandemic when facing the West Coast port strike and during Red Sea terrorist attacks on shipping.

Additional U.S. investment to balance the risk of tariffs will also become more attractive.

Anderson notes that “executives will evaluate the total cost of their products when considering landed costs, inventory carrying costs, IP theft, coordination of resources, and other considerations. After reviewing the total cost and risk associated with the best options to serve their customers successfully and profitably, they will move their supply chains accordingly. Proactive executives will also review the risks of transporting their products through the end-to-end supply chain and they will evaluate if the country and/or supplier have access to the appropriate natural resources such as energy and water to ensure supply.”

“It will become an opportunity to re-think all decisions related to demand and supply, including customer prioritization, supplier sourcing, strategies to make versus buy, investment in capital, equipment, automation and technology, and opportunities to increase profitability and expand the customer base,” Anderson continued.

From a certain perspective, a higher tariff policy could have a silver lining.

Read the full article at Homepage News.