Tips for Manufacturers to Prepare for President Trump's Trade Policies

Some of these can be executed as what is commonly referred to as “day one actions” (e.g., IEEPA, executive orders); while others require some level of congressional involvement (e.g., trade agreement negotiation, fast track authority) and could take significantly longer to implement.

How Will Companies React?

Companies are exploring or already taking active steps in preparation for the new administration’s potential tariffs and trade policies. Each option has pros and con and not all options are available to all companies.

A few options being considered for immediate action include:

• Increasing (“pre-loading”) Inventory: To avoid the immediate impact of tariffs, some companies may increase their inventory levels by purchasing goods before the tariffs take effect. This may help to mitigate the tariff impact, but it will increase inventory holding costs and potentially increase logistics costs. In some cases, it may increase the pressure on forecasting and the risk that the extra inventory cannot be sold. Depending on the item, for example perishable inventory, may suffer damage or loss.

Practically speaking, there is a question on how much inventory a company can front load based on cycle time from order through production to delivery into the United States. Remember that tariffs are applied upon importation of goods. So, prepayment without delivery does not solve the problem. Foreign Trade Zones (Zones) can be considered for duty deferral, but due to current Section 301 treatment of Zone admissions, companies would be well advised to import those products from the Zone in advance of any new tariffs.

From a tax perspective, holding more inventory longer than usual may change the profile of a related limited risk distributor; thus, may increase the compensation it earns.

• Relocating Production: Some companies are considering relocating manufacturing operations to countries that they believe will not be affected by the tariffs. It may be obvious which countries are clearly in the incoming administration’s sights. Without final authority in place, however, it is difficult to definitively know which countries may be outside the scope of the new policies.

Buying or building a new facility is expensive and operationally disruptive. By contrast, reallocating capacity between existing facilities may mitigate costs and disruption if the “receiving facility” has capacity and appropriate production lines. Another option is to hire third-party contact manufacturers to produce goods. Even if the third-party contract manufacturers are already on board, the shift may not be as simple as it sounds. For example, one must address supply contracts, raw material vendor alignment, customs processes, order management.

• Passing Costs to Consumers: In some cases, companies may pass the increased costs due to tariffs onto consumers by raising prices on their products. Would doing so put them in a competitive disadvantage. In the context of B-2-B sales, do contract terms and conditions all for the price increase? If they choose not to pass some or all of the additional costs to customers, then companies may have to consider cutting costs elsewhere in the organization.
• Customs valuation planning: Most duties are ad valorem, or a percentage of value. Consequently, a reduction in customs value will result in a reduction of duties owed. Together with tax, companies can look to bifurcate product and non product costs from the tangible good pricing. Direct tax implications need to be understood and modeled for this planning. Companies can also consider utilizing the sale price of an earlier sale, in a chain of sales. Under this First Sale for Export approach, customs value is reduced by the amount of profit up the value chain. Certain requirements need to be met for a valid first sale transaction and cross functional collaboration with supply chain and tax is necessary.
• Lobbying and Advocacy: Some companies are weighing whether to engage in lobbying efforts to influence trade policy decisions and advocate for exemptions or reductions in tariffs. This can be pursued by companies individually, through trade associations and other broader collaborative efforts. These efforts would require speed and strong coordination considering the short timeline of the expected incoming administration’s actions.

Assess procurement and production alternatives and current mitigation strategies

• Are alternative sources of the same materials and products available? If so, from where? Are alternative vendors pre-qualified?
• Are there materials or components that can be substituted for current items that may be subject to tariffs or other restrictions?
• How does the company’s business continuity plan address geopolitical disruption, specifically tariffs and export controls, for sourcing and production operations?

Assess potential costs 

• How are materials and goods currently categorized for customs purposes?
• What is the cost difference of using different materials and different vendors?
• Will the use of different materials create a quality risk?
• Scenario modeling using US Customs import data to better understand potential magnitude of impact of the contemplated policies

Develop a comprehensive assessment and contingency plan

• Assemble a cross-functional working group (e.g., legal, tax, supply chain, operations, sales, etc.) to analyze risks and opportunities.
• Prepare a decision tree supported by a business case cost-benefit analysis and governance to decide actions.
• Develop short-term, medium-term, and long-term mitigation steps and a change management plan to mitigate disruption as steps are implemented.
• Socialize the plan, costs, and governance model with senior leadership for their buy-in.

It is certain that the incoming presidential administration is bringing a change in trade policy. It is less certain exactly what that entails, although the president-elect’s campaign message gives some insight. U.S. and non-U.S. companies across industries must stay apprised of how the new trade policy evolves, how it impacts them, their suppliers, and their customers. They should prepare for what appears to be the inevitable starting with knowing their current supply chain, but then prepare a comprehensive cross-functional plan to respond to policy decisions as they materialize.