How Does the 90-Day Reprieve for Reciprocal Tariffs Affect Your Business?

What Changes are You Making to Your Product Sourcing Practices to Prepare for July 9th?

Introduction

In the everchanging US tariff landscape, reciprocal tariffs were announced on April 2nd and then postponed except for China on April 9th. Chinese imports were one of the top three (See Figure 1) entities that the US imported goods from prior to April 2nd but the level of imports is rapidly declining due to the 145% additive tariff being applied to Chinese goods.

Figure 1 – The Value of US Imports from 2008-2024

Tariffs against Chinese goods will continue to reduce the number of imports from China, potentially reducing future annual imports to less than 20% of imports in 2024. The impact of additional tariffs is illustrated by comparing Figures 1 and 2. When exclusions for Chinese goods were removed in 2021, tariffs increased but imports decreased. If China and the United States are unable to negotiate a reduction in these tariffs, many of the products previously sourced in China will need to be sourced elsewhere. The reciprocal tariffs due to activate in 90 days vary from country to country with countries such as Vietnam, a natural alternative to China, with a tariff of 46%.

Figure 2 – US Tariffs on Imports from 2008-2024

Increasing the Robustness of Your Import Practices

Changing sourcing to alternative suppliers in other countries is not a trivial exercise especially when considering that new suppliers need to be qualified. Even prior to qualifying new suppliers, finding good alternate suppliers can be daunting, especially if they are located in a country different to yours.

It is common practice for many US companies to import particular products or components from one or at most 2 countries. When this practice is applied to China, the consequences are immediately apparent in light of the new 145% additive tariffs that have been imposed on Chinese goods. Changing from one supplier to another becomes a complex and time consuming exercise if suppliers have not been pre-qualified from a more suitable country.
In order to provide better protection against dynamically changing tariffs, it is important to pre-qualify suppliers in multiple countries (with a minimum of 3). These countries need to be diverse and should ideally not be located within the same region or trade zone such as the European Union, Mercosur, etc.. Using this approach, it is possible to switch your supply from a supplier in one country to another quickly with the primary concern being lead time from the alternate supplier.

Country Selection

The number of suppliers that need to be evaluated can be minimized by selecting countries that meet your financial objectives. Although there is significant variation within each country, using this approach is likely to enable you to locate a country with suitable suppliers. Cost is used since it is usually weighted the highest of all factors used to identify new suppliers. To include other factors in your selection of countries, please refer to our lesson on “Sourcing in different countries” in our “Managing Product Cost As A Team” course.

The cost of most products is determined primarily by labor cost rather than the raw material cost unless exotic materials are used. For this reason, it is expedient to factor out raw material costs when determining which country you should be sourcing your goods from. In Figure 3 below the estimated labor rates for a few countries are shown together with an effective labor rate accounting for productivity and tariffs. In the case of Mexico and Canada, products that are compliant with the USMCA (NAFTA 2.0) agreement (per Federal Register publication 90 TR 15041) will not have the 25% tariff applied and therefore only the productivity factor should be used in these cases. Shipping costs will need to be added to allow for a more accurate analysis.

Figure 3 – Selecting Countries by adjusted Labor Rates. 

A productivity factor derived from GDP data is used to standardize output from different countries since the output varies significantly from country to country. By dividing the labor rate by this factor, labor rates are adjusted to account for productivity.

A table similar to the one in Figure 3 can then be used to determine which countries have more favorable labor rates than labor rates in the US. Combining labor rates with other factors as outlined in our “Managing Product Cost As A Team” course can be used to further refine selection.

For more information on how to reduce tariff costs read our post on “Strategies for Reducing Tariff Costs”.