Supply chain blogs and news sources have recently been chock full of commentary and advice relating to tariffs. Unfortunately, just as with emerging technologies, it is much easier to get swept up in over-generalized hype than it is to drill down to the facts that support good decision-making. Despite the parallel challenges of complexity and unpredictability, procurement and supply chain professionals must understand if and how tariffs will affect their company directly, if and how tariffs will affect their first and second tier suppliers, and what to do if the answer to those two questions is more ‘how’ than ‘if’.
What are tariffs?
Tariffs are taxes levied by one country or trading bloc (such as the European Union) on specific categories of goods from another country or trading bloc. From a cost management perspective, they effectively make it more expensive to buy certain goods from specific countries. Tariffs are typically used to either protect local producers from foreign competition or penalize foreign producers for artificially lowering their prices. Tariffs raise revenue for the country or trading bloc that establishes and collects them at the expense of the importer.
How do tariffs work?
Tariffs are paid to the customs organization of the country or bloc that established the tariff – and they are paid by the company importing the goods, not by the exporter of the goods or the country those goods originate in. When the import is a finished good, the tariff is usually paid by the end consumer as part of the purchase price, and when the import is an ‘intermediate’ good, the cost is paid by the manufacturer – within reason. At some point, tariffs may require manufacturers to pass along some of the elevated cost burden to their customers.
Do tariffs affect my company?
In the United States, the US International Trade Commission (USITC) manages a list of current products and tariffs in the Harmonized Tariff Schedule (HTS). This uses an internationally standardized list of product categories (rather than a list of individual items), whether they are currently subject to tariffs or not. If an item that your company imports is in a category that is subject to a tariff in one or more countries, the details will be listed in the HTS.
Do tariffs affect my supply chain?
Depending on what industry your company is in, you could be indirectly affected by tariffs based on your suppliers’ purchases. If they are importing goods/materials from tariff affected countries, then they are being hit with higher costs. Even if they don’t pass those costs along to you in the form of price increases, the money has to come from somewhere. It will either hit their bottom line or be subtracted from planned investments in talent, R&D, capital equipment, expansion, etc. Keep in mind, too, that if you ask a supplier about the impact of tariffs and they say there is none, the next step is to have them ask the same of their suppliers, and their suppliers’ suppliers.
What should I do if I am concerned about the impact of tariffs?
- Reach out internally to see if others share your concern and potentially even have experience that may be helpful to procurement and supply chain.
- Speak with suppliers of products that involve products/materials commonly affected by tariffs to see what they know and what they plan to do about it.
- Add a question to standard RFx templates inquiring about whether the supplier is affected by tariffs and what they are doing to address this risk in their supply chain. Tariffs are a cost factor that needs to be addressed in side by side supplier comparisons pre-award, just as much as they have to be managed in contracted suppliers.
- Connect with peers in your industry (or related industries) to find out how they are staying on top of changes in tariffs and what risk mitigation plans they are putting in place.
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