Softening The Blow Of The
U.S. Trade War

This article was originally published in CFO Leadership.

According to the Tax Foundation and other economics researchers, U.S. companies and consumers could bear a significant share of the costs in the Trump trade war.

While go-to-market teams gauge the effects of tariffs on a company’s products, finance leaders and their procurement have a different remit: reducing the financial effects of buying from international suppliers in targeted countries.

Managing risks associated with purchasing, supplier selection, contract negotiation and payments falls within the CFO’s purview, as does any operating expense or margin impact from soaring parts or product costs.

We asked Michael Braunschweiger, managing partner and chief client value officer of LogicSource, to provide options for U.S. companies buying or importing from countries facing new tariffs on U.S.-bound products. Since tariff targets are constantly changing, buyers need protection against already enacted tariffs and those still under discussion.

Jump Start

Front-running price challenges. A company, even a manufacturer, can place a large order shipped to the United States and warehouse it to avoid an upcoming levy. That had been happening in the steel and aluminum markets somewhat before the tariffs on those imports took effect. But forward buying is only a stopgap—you eventually run out of inventory, says Braunschweiger. “You can’t buy forward for 10 years,” says Braunschweiger. “Maybe five or six months.”

Not all companies can afford to tie up working capital for that time or pay a premium for additional warehouse space. Forward buying is also risky in markets like commodities, where prices can whipsaw.

Sourcing from alternatives. Companies can shift purchases to providers that are not subject to the tariffs or those subject to lower tariffs. Another route is looking for suppliers with manufacturing sites in multiple geographies. “You could stay with the same supplier but buy from the U.S. domestic manufacturing site instead of the one in China, even if the cost is higher,” says Braunschweiger.

A caveat: applying tariffs on imported products will lead to some U.S. companies raising prices on competing products, as (1) the tariffs provide protection and (2) they will theoretically reduce domestic competition.

Changing suppliers comes with other risks and costs—like order delays and higher shipping charges. Makers of textiles, shoes, and fashion clothing, for example, many of whom still manufacture in China, could relocate to India, Vietnam, and Malaysia. But rerouting ships outside the well-worn China to the U.S. channel will increase freight and fuel costs, says Braunschweiger. European countries may be an alternative, but the European Union, too, maybe hit with substantial import levies by the U.S.

In the short term, the economics of many markets don’t make moving production to the U.S. possible.

Publicly held Limited Brands, which sells everything from kitchenware to outdoor storage boxes, is trying to lower its China-based production. “Reshoring,” though, is off the table. “We’d like to move to the United States, but we’re not prepared to sell a can opener for over $20, and so at this point, not feasible,” said CEO Robert Bruce Kay on the company’s fourth-quarter earnings call.

Relocating value-add. According to Braunschweiger, companies that import individual, already packaged products ready for retail have an opportunity to bulk-ship products and complete the final packaging or assembly in the U.S. Shoes sold to U.S. customers that are individually packaged and shipped are an example. Chinese companies make, print, and assemble the boxes in China. By producing boxes or other packaging and assembling them in the U.S., a company pays the tariff on the value of the partially completed product. In some industries, like liquor, packaging can be as much as 40% of the finished product price, says Braunschweiger.

Working With Suppliers

After COVID disrupted supply chains, experts encouraged CFOs to develop closer relationships with their primary suppliers, including inviting them into production planning. If a company formed those ties, they could now prove handy.

Value engineering. One way to reduce tariff impact is to work with the supplier to adjust product specifications—in the case of steel, for example, finding an alternative material or reducing the amount of steel in a product without compromising product integrity, says Braunschweiger. To come up with a creative solution requires the supplier’s participation “because they know best what exactly goes into a product,” he says.

Seeking alternatives for heavy crude oil from Canada and Mexico, some U.S. refineries have floated the idea of switching to lighter crudes to avoid the threatened U.S. tariffs. However, some Midwest refineries don’t have that option; according to the Institute for Energy Research, those refineries are uniquely designed for heavier-grade Canadian crude.

Contract negotiations. On earnings calls, most businesses that foresee adverse effects from the trade penalties say they will pass the costs on to customers or those downstream in their supply chain. But some suppliers may be willing to absorb a percentage of tariffs, says Braunschweiger.

Suppose customers try to move production out of Mexico and Canada. Suppliers in those countries will try to keep them from leaving and may be more flexible in negotiations, he says. Companies should review their supplier contracts and negotiate better contracts that protect them from rising tariffs or that make it easier to exit a contract without penalties.

Buyers expecting tariffs or higher tariffs to hit in the future can negotiate a bulk contract with “a negotiated price, delivered into the U.S., including tax and duties,” says Braunschweiger. Another option is to agree to a cap and collar on a potential tariff increase.

Braunschweiger says that if a company needs to increase leverage with a supplier, consolidating spending with that supplier or increasing your purchasing from them could help. However, doing that reverses some supply shortage mitigation measures companies took during COVID.

Global Procurement

For companies with genuine global supply chains, the decisions around supplier relationships and locations won’t be simple.

Deciding where to produce and for which market is a “difficult calculus” for a company like Skechers USA, said CFO John M. Vandemore at a UBS conference last week. “For us, it’s not just about transit from a market like China or Vietnam to the U.S., but rather all the transits we do globally,” according to the S&P Capital IQ transcript of Vandemore’s remarks.

“From Europe to Vietnam and China to Southeast—there are a lot of different routes we have to consider, and what we’re optimizing for is kind of the global tariff cost, not just what happens in the United States,” Vandemore said.

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