According to recent Procurement Leaders research, 40% of category managers are anticipating risk associated with tariffs. As expected, then, the word “tariff” often brings a sense of confusion and misunderstanding, especially on how they will impact a supply chain. This makes it imperative for global sourcing strategies to include an analysis of tariffs. This will ensure transparency when buying products from international suppliers as well as domestic suppliers that import components from foreign suppliers. Sounds straight forward, right? In this article, we provide:
- What tariffs are and how they’re applied
- How Procurement fits into the equation
- Strategies to eliminate or reduce the impact of tariffs
In the most basic sense, tariffs are a tax on imported goods.
Tariff – A schedule of duties imposed by a government on imported, or in some countries exported, goods.Merriam Webster
Tariffs can also be referred to as a duty or customs duty and are used by governments to generate revenue or to protect domestic industries from competition. There are two tariff classifications, export duties, and import duties.
- Export duties – levied primarily by raw material producing countries (coffee, rubber, palm oil, mineral products)
- Import duties – the most common type. May be levied for revenue generation or resource protection…or both
In addition to tariff classifications, there are also two types of tariffs: ad valorem and specific tariffs. Ad valorem tariffs are calculated as a fixed percentage of the value of the imported good. When the price of the good changes, so too does the tariff.
For example: Company XYZ produces widgets in the EU and exports the widget to the U.S. at a price of $100 per pound. An ad valorem tariff of 20% would require Company XYZ to pay the U.S. government $20 to export the widget.
How tariffs are applied
A specific tariff is a fixed amount of money that does not vary with the price of the good.
For example: a specific tax of $30 per pound assessed on widgets exported from the EU to the U.S. would result in charging $30 per pound of widgets shipped whether widget sold for $100 or $200 per pound. In some cases, a single product may incur both, which is something that most businesses would hope to avoid.
When it comes to the rules of trade, the World Trade Organization (WTO) is the only global international organization that deals with such practices between nations. At its heart are the WTO agreements, which are negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. Put simply, 164 members represent 98 percent of world trade and are in charge of ensuring that trade flows as smoothly, predictably and freely as possible.
It seems obvious then, the importance of understanding and analyzing the effects of tariffs and the potential impacts they may impose, especially with headlines like these:
The World Trade Organization approved new U.S. tariffs on Scotch, French wine, cheese, and other EU exports worth $7.5 billion effective October 18.
The United States imposes new tariffs of 15% on $300 billion worth of Chinese imports. Tariffs effective Sept. 1 include consumer electronics worth $52 billion, including smart speakers, earbuds and televisions. Tariffs starting on Dec. 15 include consumer electronics worth $115 billion, including smartphones, laptops and videogame consoles.
So, what does this all mean?
How Procurement fits into the equation
With the ever-evolving changes in international trade between nations, procurement personnel should be aware of any modifications that may affect a category or commodity being sourced. This is where Procurement comes in.
A good starting point to ensure mindful procurement is to verify if a product or a component of a product is produced internationally and the country (or countries) of origin where the product was made. The website for the U.S. International Trade Commission (usitc.gov) can be used as a resource to determine if the product or component is subject to tariffs or if it is being imported from a country where a Free Trade Agreement in place.
Once it has been established that a tariff is being assessed on the product, those additional costs need to be included in a cost analysis to accurately determine the total cost of ownership. This is important, especially when comparing proposals from other domestic and international suppliers who may be sourcing products that are not tariffed.
For some, this is new territory and may require additional questions to ensure quality analysis:
- Does the supplier intend to continue sourcing products/components from sources affected by tariffs?
- Will tariffs be reflected in the price of the product before a selection decision is made?
- Is the supplier going to absorb the tariffs or are they enacting other measures to offset the tariffs?
- Are there other terms and conditions that can be negotiated to offset the tariffs?
- What are the best strategies to reduce negative affects to our business?
So, what now?
Once it is determined how tariffs will affect the products being sources, it is time to start executing revised strategies to eliminate or reduce the impact of the tariffs. Such strategies include
- Leveraging large/long-term contracts and supplier relationships to negate the cost of tariffs or negotiate lower prices per unit to offset the additional tariff costs
- Considering alternative sourcing countries and regions where the United States has an equitable trade balance and have trade agreements in place
- Exploring options such as temporary product exclusion requests or duty drawback exemptions
The objective is to strategically review all sourcing alternatives available rather than simply raising prices to customers or reducing profit margins by absorbing the cost of the tariffs. As this poses quite a lot of questions for businesses, it also presents an interesting opportunity for change and development.
Proxima has experience spanning a range of industries and sectors to help clients find savings opportunities in their current supply chain through our wide repository of benchmarks and industry experience with policies and best practices. As the procurement specialists, we look objectively to strengthen processes and abilities and do more than just negate any downside of the current and potential future climates. Proxima provides a valuable and favorable outcome through strong supply chain and procurement management, and for the long term.