As a manufacturing leader, navigating the hour-by-hour changes in U.S. tariff landscape is a complex and demanding responsibility with significant potential implications on your business operations. Manufacturers in a variety of industries are anticipating cost increases, supply chain disruptions, and mounting regulatory compliance concerns. While definitive answers remain elusive, let’s explore the nature of tariffs, potential strategies and how manufacturers throughout Pennsylvania and beyond are responding.
Understanding the Nature of Tariffs
Historically, tariffs have served as a tool for the protection of domestic industries, a source of government revenue, and a leverage point in international negotiations.
- Protection of Domestic Industries: Tariffs can make imported goods more expensive, thus promoting the consumption of domestic alternatives and protecting local jobs and industries.
- Revenue Generation: Tariffs can provide a significant source of income for the government, which is especially pertinent in the context of large-scale economic policies.
- Negotiation Leverage: Tariffs have been used as a strategic tool in international negotiations to encourage foreign nations to amend trade practices deemed unfair.
However, they can also lead to unintended consequences such as increased consumer prices and potential retaliation from other nations. Amid these complexities, many stakeholders question whether tariffs are a temporary negotiation tactic or a more permanent fixture of global trade.
Hear from Your Peers: How Are Manufacturers in our Region Responding
In our ongoing work supporting the financial and operational success of the M&D industry, we’ve had the opportunity to get the firsthand perspective of manufacturers in Central and Eastern PA. While certainly not all-encompassing, a few of their strategies and key issues include:
- Inventory Management: Some companies are stocking up on inventory in anticipation of tariff increases. This preemptive strategy can help maintain cost-effectiveness, but it also creates potential issues for the future. If tariffs are reduced or removed, companies may find themselves with excess inventory and lower reordering rates, mirroring the impact we observed during the COVID-19 pandemic.
- Strategic Importation: A company that was acquired by a Canadian firm, which was also their main supplier, aimed to import more products into the U.S. before tariffs took effect, thereby keeping costs lower for customers. The intention was to gain marketshare as competitors grappled with higher tariffs. However, the fluctuating nature of tariffs and the additional manufacturing costs posed challenges to this approach.
- Increased Machinery Costs: Concerns have been raised about machinery costs, particularly for companies that use machinery manufactured and supported outside of the United States. For companies with large vehicle and equipment fleets, additional costs could significantly impact their capital expenditure in future periods.
- ERP Software Modifications: The changing tariff landscape has led some businesses to request modifications to their Enterprise Resource Planning (ERP) software. These modifications help them handle tariffs using custom fields and modified calculations, allowing them to pass Purchase Order (PO) costs directly to a customer sales invoice line item. Some have also sought report enhancements to separately identify the tariff.
In this shifting environment, several key strategies can help your business remain resilient:
- Diversification of Supply Chains: Minimizing dependence on a single country or region can shield your business from tariff-associated risks and potential disruptions in your supply chain.
- Investment in Technology: Adoption of automation and advanced manufacturing technologies can enhance operational efficiency and potentially offset cost increases due to tariffs.
- Exploration of Foreign Trade Zone: Leverage existing foreign trade zones (include Zone 147 covering 11 counties in South Central PA) as they can provide avenues for market expansion and tariff reduction, helping to mitigate the impact of tariffs on your business.
- Customs and Tariff Management: Ensuring accurate classification and valuation of goods can optimize duty payments and promote regulatory compliance, thereby protecting your business from potential penalties.
- Prepare with multiple scenarios and remain nimble: Given the current fast-paced changing environment, management should develop multiple alternative what-if scenarios and be prepared to pivot as current events and economic results dictate.
In this dynamic tariff and economic landscape, RKL’s M&D advisors are here to help you navigate uncertainty and change. We offer a full spectrum of solutions tailored to your needs, including strategic tax planning; regulatory compliance guidance, digital transformation and technology implementation, HR and workforce consulting and more. Learn more about our services or contact me at the email address below.
