This story first appeared in the May/June issue of SUPPLY CHAIN XCHANGE, a journal of thought leadership for the supply chain management profession and a sister publication to AGiLE Business Media & Events’ DC VELOCITY.
In an era of escalating trade tensions and shifting global dynamics, businesses are grappling with the ripple effects of tariffs on their supply chains. Companies are scrambling to scenario plan and adapt their strategies to maintain competitiveness and profitability. This seismic shift in the trade landscape demands a comprehensive reevaluation of supply chain operations, from sourcing to distribution.
On April 2, the Trump administration announced its reciprocal tariff policy imposing a base level of 10% tariffs across the board and tariffs up to 50% against trade partners, including the largest ones like China, the European Union, Japan, Korea, and Vietnam. The extent and level of tariffs are wide and large, and create a range of challenges for firms in different industries. For some firms, these tariffs can be a serious threat to business, while others have degrees of freedom to partially or substantially mitigate the impact of tariffs. Companies need to be aware and prepared to act on these degrees of freedom either immediately or as they become feasible to activate.
Tariffs are poised to impact a wide array of products, even those produced domestically, as many items rely heavily on imported components that cross borders multiple times. Industries ranging from appliances and industrial goods to pharmaceuticals, automobiles, and electronics are bracing for price hikes that could reshape consumer behavior and market dynamics.
As businesses navigate these turbulent waters, they must employ an array of strategies to mitigate the impact of tariffs and optimize their supply chains. The following are seven of the most effective approaches that forward-thinking companies have used in the previous round of tariffs and are preparing to adopt now. These approaches range from leveraging tariff engineering approaches to strategic price pass-through to supply chain footprint reorganization.
It’s important to note that no single approach will mitigate all the impacts of tariffs. Additionally, while all of these are proven approaches that have been used in the previous round of tariffs from 2018 onwards, some of them may not be available for the current round of emergency tariffs put in place by executive action. However, as the dust settles and more permanent tariff arrangements are put in place, it will be important to be ready to implement these measures.
Leverage foreign-trade zones: A duty-free oasis
Foreign-trade zones (FTZs) have emerged as a powerful tool for companies looking to minimize their tariff burden. These designated areas, often likened to duty-free shopping zones, allow businesses to defer, reduce, or even eliminate customs duties and federal excise taxes on imported goods.
FTZs offer many benefits that can significantly impact a company’s bottom line:
- Duty deferral—Businesses can postpone duty payments indefinitely until goods enter the U.S. market, providing valuable cash-flow flexibility.
- Duty elimination—Products exported from an FTZ to another country incur no U.S. duty, opening opportunities for cost-effective global trade.
- Inverted tariff relief—Manufacturers can take advantage of “inverted tariffs” by opting to pay duties on raw materials or component parts instead of the finished product if it results in a lower overall tariff.
- Streamlined logistics—FTZs allow for duty-free storage and export, reducing the risk of noncompliance penalties and providing trade compliance professionals with greater flexibility in managing risk and making informed sourcing decisions.
To harness the power of FTZs, companies should research available zones in their region and partner with experienced FTZ operators. They will need to analyze their supply chain to identify which products or components would benefit most from FTZ placement, develop a comprehensive FTZ strategy that aligns with overall business objectives, and invest in technology and training to ensure compliance with regulations while maximizing the benefits. For example, holding inventory in an FTZ may be useful where there is a prospect of reduction or removal of tariffs through bilateral negotiations between the originating trade partner and the United States. Once the new deal is in place, the goods can be released into the United States at a lower rate of duty.
Harness free trade agreements
Free trade agreements (FTAs) offer a valuable mechanism for businesses to reduce or eliminate tariffs on goods traded between participating countries. As trade tensions rise, leveraging FTAs becomes increasingly crucial for maintaining competitive pricing and market access.
Companies can make sure they are maximizing FTA benefits in the following ways:
- Conduct a thorough FTA analysis—Conduct a comprehensive review of existing FTAs and upcoming agreements that may benefit your supply chain.
- Make sure you comply with rules of origin—Ensure products meet the specific rules of origin outlined in each FTA to qualify for preferential treatment.
- Consider realigning your supply chain—Consider shifting production or sourcing to countries with favorable trade agreements to optimize tariff savings.
- Ensure proper documentation and certification—Implement robust systems for maintaining proper documentation and certifications required for FTA compliance.
Companies should exercise some caution around relying on FTAs. The 10% tariffs on all imports announced on April 2 apply regardless of whether there is a current free trade agreement. Meanwhile the trade tensions around the so-called “fentanyl-based tariffs” involve signatories of the United States-Mexico-Canada Agreement (USMCA). Provisions of that agreement may be temporarily unavailable and potentially permanently changed through renegotiation. At the same time, as trading partners negotiate with the United States, new deals and agreements will emerge that can provide tariff relief.
Explore special trade programs
Beyond FTAs and FTZs, businesses should explore various special trade programs that can offer tariff relief under specific circumstances. Chapter 98 of the Harmonized Tariff Schedule, for instance, includes provisions that allow for tariff mitigation in certain scenarios, such as:
- Temporary Importation Under Bond (TIB)—This program allows for duty-free importation of goods intended for export within a specified period. *can rebreak to avoid widow?
- American Goods Returned Declaration—This program allows some U.S.-origin goods to be returned to the country duty-free as long as there was no substantial transformation abroad.
- Generalized System of Preferences (GSP)—Under this program, certain products can be imported from designated beneficiary countries in the developing world duty-free.
Take advantage of duty drawbacks
The duty-drawback program offers businesses the opportunity to reclaim up to 99% of duties paid on imported goods that are subsequently exported. This often-overlooked strategy can provide significant cost savings for companies involved in re-exporting or manufacturing products using imported materials for international sales.
To implement a successful duty-drawback strategy, companies should first determine which products and transactions qualify for drawback, then implement robust tracking systems to maintain the necessary documentation for claims. Next, streamline internal processes to efficiently identify, document, and claim eligible drawbacks. Lastly, companies can ensure compliance and maximize benefits by staying up to date on any regulatory changes affecting duty-drawback programs and adjusting strategies accordingly.
Under the executive orders for tariffs on Canada and Mexico, duty-drawback provisions are withdrawn. However, after these and the reciprocal tariffs are formalized by legislation or through Section 301/201 provisions, duty drawbacks may become available again.
Engage in tariff engineering
Tariff engineering is a strategic approach that involves modifying products or production processes to classify goods under lower tariff categories. This innovative technique can lead to significant duty savings and even exemptions from customs duties.
Some effective tariff engineering strategies include:
- Changing your product composition—By altering the materials or components used in a product, companies can potentially reclassify it under a more favorable Harmonized System (HS) code with lower duty rates.
- Making pre-assembly and post-assembly adjustments—If a company ships goods as individual components rather than fully assembled products, it can sometimes qualify for lower tariffs. These components can then be assembled in bonded warehouses or FTZs before domestic sale.
- Reclassifying products—Working with customs experts, companies can identify opportunities for reclassifying products under lower-duty categories without compromising product integrity or functionality.
One example of an effective use of tariff engineering involves a clothing manufacturer that was facing high tariffs on synthetic fiber garments. The company responded by redesigning its product line to incorporate a higher percentage of natural fibers. This subtle change allowed the company to reclassify its products under a lower tariff category, resulting in substantial duty savings without significantly altering the garments’ appearance or performance.
Restructure your supply chain
As the tariff landscape evolves, many companies are considering fundamentally restructuring their supply chains. This process involves a comprehensive reevaluation of sourcing, production, and distribution strategies to minimize the impact of tariffs and enhance overall efficiency.
The following are some key considerations for companies to take into account as they reevaluate their current supply chain design:
- Diversification of suppliers—By reducing reliance on single-country sourcing, companies can mitigate risk and potentially benefit from lower tariffs in alternative markets.
- Nearshoring and reshoring—Companies should evaluate the feasibility of moving production closer to end markets to reduce transportation costs and tariff exposure.
- Strategic partnerships—Companies should forge alliances with suppliers, logistics providers, and even competitors to share best practices and navigate tariff challenges collectively.
- Technology integration—Companies should invest in advanced analytics and artificial intelligence to optimize supply chain decisions in real time and enhance visibility across the entire network.
One multinational electronics corporation was able to respond to increased tariffs by strategically repositioning its manufacturing facilities. By shifting operations to countries with lower tariff impacts, the company successfully reduced costs, maintained its competitive edge, and stabilized prices for consumers despite the volatile trade environment.
Utilize technology
As supply chains become more complicated, using technology is key to managing tariffs effectively and improving the overall supply chain. Artificial intelligence and machine learning tools can analyze vast amounts of trade data, predict potential tariff shifts, and optimize sourcing strategies to minimize costs and risks. Blockchain technology offers enhanced transparency and security by enabling end-to-end traceability, thereby streamlining customs documentation and ensuring that all stakeholders have access to a single, tamper-proof source of the truth. Advanced analytics platforms enable detailed scenario planning, allowing companies to model various tariff outcomes and assess their impact on production, logistics, and profitability. Finally, automated compliance systems reduce manual errors and administrative burdens by classifying products correctly under relevant tariff codes, calculating duties with precision, and automatically generating compliance reports to help businesses meet regulatory requirements and maintain a competitive edge.
Future-proofing supply chains
To effectively navigate the current tariff landscape and build resilient, agile supply chains, businesses must adopt a multifaceted approach centered on continuous monitoring, adaptation, scenario planning, and strategic alignment with geopolitical interests. This begins with prioritizing sourcing and manufacturing within the U.S. and in regions facing lower tariffs that align with U.S. geopolitical interests to minimize the likelihood of adverse trade policies.
Companies must prioritize agility and flexibility by building supply chains that can rapidly adapt—shifting production, switching suppliers, and reconfiguring logistics networks as conditions change. Equally crucial is making sure to adopt effective pricing and demand management strategies that rely on tools such as price elasticity analysis, willingness-to-pay studies, and cost-to-price monitoring. Using these tools will help companies maintain competitiveness and profitability. Meanwhile, companies should explore sourcing from countries with favorable free trade agreements, relocating operations to best-cost countries that have stable political environments and low labor expenses, and forming joint ventures or partnerships that grant access to new markets while mitigating tariff risks.
