(This column originally appeared in the Inquirer)
In just over a month Donald Trump will become president, and he has repeatedly promised one of his first acts will be raising tariffs.
“The direct impact will be on companies that are importing goods and it could be significant,” said Ron Drozd, chief operating officer at the World Trade Center of Greater Philadelphia, a nonprofit that aims to help local companies increase international business.
Under the Biden administration, tariffs on certain goods purchased from China have been increased to between 25% and 100%. Trump has said he plans on adding another 10%, and he’d like to see tariffs as high as 60% on Chinese goods. He has also threatened to increase tariffs on our largest trading partners, Canada and Mexico, to as much as 25%.
“You buy a product from China for $10 and because of a 60% tariff that price goes up to $16,” Drozd said. “The costs can impact everything in the supply chain because there are a lot of sub-components in the goods we buy that also come from overseas.”
Business owners may not want to pass these additional costs down to their customers and risk losing business. Here are other strategies to consider.
Buy as much as you can right now
If you have the capital, it makes sense to purchase as much as you can before increased tariffs take effect. But there are additional costs to be considered, particularly higher interest rates if you’re using loans to pay for your purchases, as well as the overhead expense for additional space to inventory those materials. Some of this cost could be offset by negotiating discounts from buying in bulk.
Barrett Fisher, president of Conshohocken-based chemical products sourcing company Van Horn, Metz & Co., says that freight costs have also jumped because of increased purchasing.
“People have brought a massive amount of products in the run-up to these tariff increases,” he said. “That’s putting pressure on freight, which adds to the overall cost of carrying inventory.”
Manufacture elsewhere
Some companies are either starting manufacturing facilities or partnering with foreign manufacturers in countries where tariffs will be relatively lower, like India, Vietnam, Malaysia, South Korea, and parts of Latin America.
“We have many members who are trying to do this, but it can be tricky because it all relates to the country of origin,” said Drozd. “Some companies are bringing in component parts from China to other countries where tariff rates are lower and then completing the manufacturing there. Tariffs will be determined by where the majority percentage of that product comes from.”
For those looking to build their own manufacturing facility in another country Fisher warns: It takes time.
“We know of several manufacturers that are building plants outside of China, but you can’t build a chemical plant overnight,” he said. “You can find someone to do this for you, but that requires patience and raises other issues like quality control.”
Shift buying to other countries
Buying directly from overseas suppliers in countries with lower tariff rates may be more practical than building a new overseas facility.
The World Trade Center of Greater Philadelphia can match local companies with potential suppliers in countries where tariff rates are lower, Drozd said. The World Trade Centers Association (WTCA) also offers customized, one-on-one trade counseling, market research, educational programs, trade mission support, and business networking events.
Fisher, a member of the WTCA, also noted that China is “no longer” the low-cost supplier, and materials can be sourced from plenty of other places.
“As wages have increased in China, prices have gone up,” he said. “When I attend trade shows I’m seeing suppliers emerge from all over the world to compete with China. India, for example, has become a producer of many products that we import.”
Find cost savings elsewhere
Some companies are looking to mitigate price increases by reducing overhead expenses and investing in technology to improve efficiency.
“It’s all about margins,” said Fisher. But, he added, taking these steps “can only do so much.”
Buy American
The best way to avoid these additional costs is to simply not buy from overseas suppliers. This is easier said than done if your e-commerce site relies on Chinese products or your manufacturing process requires materials not available in the U.S.
But, where possible, tariffs will force many U.S. companies to pivot towards U.S. products.
Many business owners hope Trump’s tariffs exclude items that absolutely must be imported. Smart executives, in the meantime, are already preparing.
“Many companies I speak with have already built tariff increases into their current plans,” said Drozd. “Those that are forward-looking will weather things the best.”
