The Don’ts and Don’ts of Managing Tariffs
Mitigating the impact of tariffs on imports from China requires a comprehensive, company-wide strategy that encompasses both short- and long-term solutions. The list of what you can do to help is long and dependent on your unique situation. But there are few things any affected company should avoid.
Don’t think you can wait it out
The situation regarding tariffs on Chinese imports—along with trade issues in other regions—is unpredictable. Certainly, few could have predicted the trade war would go on this long. Companies that thought the situation would come and go have found themselves in a predicament two years later.
“I’m constantly amazed at the patience among executives for not aggressively making adjustments,” says Derek Begue, global vice president of business development at PRA Global, an international business development firm. “Companies believe it will pass and go about business as usual.”
Part of the problem lies with the way the tariffs were implemented, and the administration’s messaging about them.
“There was a lot of optimism about things being fixed, then it all fell apart, then you had another punitive action,” Begue says. “It would have been better if a year ago we said there will be tariffs and we’re going to go all in and you need to do something now. Instead it’s been death by a thousand cuts.”
Don’t think the tariffs won’t be enforced
There are all sorts of tactics and schemes that companies think they can use to get around tariffs. But many of these are complicated at best, illegal at worst.
“We’ve seen efforts at ‘minimal processing’ of a product in a third country to make it a product of that country, but that’s not what the law is,” says Lawrence Friedman, a partner at Barnes, Richardson & Colburn, a law firm specializing in international trade regulations and customs law. “People are taking advice from their Chinese suppliers on how to manage the duties, and that in and of itself is a bad idea. A supplier in China is the last person you should be getting your American legal advice from.”
As Dave Andrea, principal in Plante Moran’s strategy and automotive-mobility consulting practice, puts it: “Anything that manipulates the system to avoid customs is a criminal offense.”
Don’t think only of yourself
Your suppliers’ problems are your problems too. Even if you have protections in place, you may want to share in some of the risk if it means helping your suppliers.
“If you’re talking to people in your supply chain who are coming to you with concerns about how they’re going to make it, I would be very concerned if I have suppliers who think they might go out of business because of this,” says Matthew Jackson, a partner at Barack Ferrazzano Kirschbaum & Nagelberg, a law firm with expertise in representing manufacturers and distributors.
“Your suppliers’ problems become your problems. You might be contractually protected, but from a practical perspective or a relationship perspective, you might feel the necessity to absorb some of the hit in the interest of your suppliers staying in business or staying happy suppliers.”
According to Andrea, mitigating the effects down the supply chain requires a company-wide effort.
“It takes a cross-functional approach, with purchasing being the front line in communication downstream with the sub-tier suppliers,” he says. “Large first-tier companies have to have finance looking at what costs can be absorbed. Legal should be looking at making sure their purchasing contracts have equivalent terms and conditions to their selling commercial contracts, so that they aren’t caught exposed on one end or the other. Operations should look at logistics, whether suppliers can take in material from other suppliers or locations and keep up with the production schedules, cost and quality.”
BMO Harris Bank’s Jaime Freeman, Mea Konopasek and Carl Skoog contributed to this article.
Group Head - Middle Market and Mid-Corporate Banking
Henry Munez currently serves as Group Head - Middle Market and Mid-Corporate Banking. He leads a team of bankers, covering middle market companies and private equ...(..)View Full Profile >
Many companies didn’t foresee the duties levied on imports from China lasting as long—or expanding as much—as they have. As a res...
What to Read Next.
Laura Ullman | September 26, 2019 | Doing Business In Canada
BMO recently sat with a group of cross-border experts to discuss the state of play for businesses regarding the economy, trade, tariffs, and even a...Continue Reading>
Who We Are
- Agribusiness & Protein
- Auto Dealerships
- Commercial Real Estate
- Correspondent Banking
- Educational Institutions
- Engineering & Construction
- Food & Beverage
- Franchise Finance
- Futures & Securities
- Not-for-Profit Orgs
- Private Equity Sponsors
- Professional Services
- Retail & Wholesale Distribution
- Specialty Finance
- Dental Practices
- Fuel Services & Convenience
- Logistics, Rail and Shipping
- We Can Help