Navigating Tariff Risks: How Businesses Can Stay Resilient in an Uncertain World

The world has become increasingly polarized with tensions between major powers like the U.S. and China, the effects of the Russia-Ukraine conflict, the Israel & Palestine war, and shifting global alliances. These geopolitical tensions have contributed to downturns in global trade and supply chain networks, as well as global inflation that is still felt post COVID-19. Many corporations, both single entity and conglomerates, have implemented strategies to navigate these issues and remain competitive. While success has been realized in some cases, consistent global tensions have created increase uncertainty regarding future operations and outlook of many companies. One new crisis that may become even more significant than the existing global tensions for U.S. businesses, is a potential conflict between the United States and Mexico with the incoming US government.

As of last week, tension has been brewing between the former and next President of the United States, Donald Trump, and the current President of Mexico, Claudia Sheinbaum Pardo, with regards to increase tariffs on Mexico if their government refuse to address the fentanyl crisis. One of Donald Trump's expected mandate is to impose a 25% tariff on imports from Mexico if there is lack of support with a joint coordination between both countries to reduce Fentanyl production and transport via the southern border. The United States is Mexico's most important trading partner in the region. As of 2023, trade between the two countries totaled roughly $807 billion, with exports to Mexico accounting for $332 billion and imports roughly $475 billion. Additionally, US exports have supported 1.1 million jobs in the US as of 2019.

On the surface level, many may think that Mexico, having a much lower GDP, would be detrimentally impacted by this without having a much broader understanding of the implications of American-based companies with nearshore manufacturing operations in Mexico. Major players with manufactering operations in Mexico General Motors, Honeywell, Medtronics, Pepsico and Molex to name a few. Tariff's imposed on these companies would likely results in increase prices of final good and services sold to American consumers, potential delays with manufacturing, and supply chain disruptions along with economic instability due to possibly layoffs. The implementation of tariffs means any business in the US seeking to import goods made in Mexico would pay the imposed tariffs that will likely pass on to consumers in the form of price increases.

What does this mean for your business?

Any business whose supply chain network or product offerings is connected to any product impacted by the 25% tarriffs would be affected. Some include supermarkets, corner stores, car dealerships, electric appliance stores, and eventually consumers who will prioritize essential items during times of uncertainty and inflation. It is not as straightforward to predict the level of impact this might ensue, but its within a business' top priority to take accelerated steps to mitigate against the potential risks and outcomes from this imposition.

What can business do to safeguard their operations and mitigate against potential losses?

While there has been no set timeline or start date for tariffs being imposed on Mexico, there are a few steps businesses can begin to evaluate in both the short and long term to safeguard their operations.

• Supplier Diversification: Businesses can establish relationships with multiple suppliers in different countries to spread risk and avoid disruptions from tariffs. This strategy is highly dependent on the level efficiency with those supply chains, any procurement costs, the type of products/raw materials needed, and any existing supplier relationships with other businesses that may restrict supply. In some cases, it will be challenging for some businesses in the short term eg. car dealerships, to obtain exclusively branded cars at a much less expensive rate than at the tariff-related new price.

  
  

• Inventory Management & Prioritization: Businesses can optimize inventory levels to minimize the impact of potential supply chain disruptions and tariff-related price increases. With limited inventory on the supplier side, it is possible that some buyers' contractual obligation might not be fulfilled. To determine how best to navigate this, it's essential to evaluate potential loss ratios, profit margins, and the potential fees associated with forgoing any contractual agreements using cost/benefit analysis approach. On the buyer's side, it's critical to optimize in-house inventory based on average order volume and to evaluate alternative suppliers in advance that can support expected inventory levels and/or provide similar alternative products.

  
  

• Risk Insurance: Consider purchasing insurance policies to cover losses related to trade disruptions or tariff-related costs. General business insurance may not include clauses that support tariff-related disruptions and costs.

  
  

• Contingency Planning & Preparation: Business can develop detailed contingency plans to address potential scenarios, including alternative sourcing, production sites, and distribution channels. Its challenging to predict how long, if applied, these tariffs would be imposed so it's very essential that any contingency planning includes both short-term and long-term objectives.

Other measures than can be taken include:

• Leveraging futures and options trading to hedge against currency exchange risks

• Renegotiating supplier contracts between buyers and sellers to account for expected inventory changes

• Consulting with legal experts to understand the complex legal and regulatory landscape and identify potential opportunities to minimize tariff impacts