As we have already seen, President Trump has and is making a major focus on implementing tariffs to equalize trade imbalances. The current and any future tariff and any retaliatory tariffs imposed by foreign countries are going to have a significant impact on U.S. companies and consumers.

Let’s take a look at how tariffs could impact American manufacturers and supply chain businesses.

What Are Tariffs and Why Do They Matter?

A tariff is a tax imposed on imported or exported goods. It is a source of revenue for the government imposing the tariff and can also be a way to protect and encourage domestic production.

Tariffs can be used to counter subsidies provided by foreign countries for their businesses or other methods employed to create artificially low prices. They can also offset unfair practices like product dumping and economic issues like currency translation imbalances.

Tariffs can have a negative impact on domestic production by reducing pressures on domestic production to increase efficiencies and promote innovation. There is a lot of consensus that, in the long term, tariffs can have negative effect on economic growth, so they are best used on a short-term basis. Import tariffs can also have a negative impact on domestic importers by disrupting their foreign supply chains and raising their costs.

How Tariffs Affect U.S. Manufacturers and Supply Chains

For U.S. manufacturers that rely on imported raw materials, tariffs can drive up costs, affecting pricing, supply chain efficiency, and overall production expenses. Understanding the impact of tariffs on manufacturing costs is essential to maintaining profit margins. To avoid having your margins erode, you will need to be able to pass along those cost increases through price increases on your products. If you are unable to increase the price for your product, you may need to resort to surcharges like the steel and fuel surcharges that occurred a decade ago when the cost of those inputs rose dramatically and rapidly.

How to Prepare Your Business for Tariff Changes

Obviously, no one in a capitalist economy is in business to break even or lose money. Those companies who are most nimble in reflecting any increased costs that they incur into the price of their products will be best able to weather a tariff “storm.”

Purchasing Materials Before Tariffs Take Effect

Another opportunity for consideration is to buy inputs that you suspect may be subject to a tariff before the tariff takes effect. If you have the liquidity to buy ahead extra quantities of inventory that you are confident that you will use, we recommend weighing the cost/benefit of buying ahead. In considering the cost/benefit of buying ahead be sure to consider any holding costs that you will incur, including the additional interest expense.

Investing in Efficiency and Cost Reduction

To manage rising manufacturing costs due to tariffs, businesses should explore cost-saving strategies such as sourcing domestic materials, negotiating supplier contracts, and investing in automation. Proactively improving supply chain efficiency can help manufacturers offset tariff-related expenses and maintain competitive pricing. If your business is struggling with excess capacity, now is the time to turn that challenge into an opportunity.

It can be tempting to put off efficiency and process improvement initiatives to save money in times where you face price increases from external sources. However, making investments in improvements can pay dividends both now and in the future after tariffs subside.

For manufacturers exporting goods, tariffs can significantly increase costs. However, tax-saving strategies like an IC-DISC can help offset some of these expenses by reducing federal tax liability on export sales.

Exploring New Domestic Market Opportunities

Companies with foreign competitors may see, and should be prepared for, opportunities with new customers. As the tariff-induced pricing from foreign competitors rises, domestic companies with strong business development efforts may find themselves rewarded with lucrative opportunities. Domestic businesses that proactively market their ‘Made in the USA’ products can attract customers looking to avoid tariff-induced price increases. If you typically face a lot of foreign competition, now may be the time to emphasize your marketing efforts.

Proactive Planning is Key

To be sure, tariffs can create some sizable challenges to address and are not a great long-term solution to counter foreign competition. However, with some proper planning, a lucrative opportunity may exist for manufacturing and supply chain companies to weather the economic storm quite successfully.

The economic landscape for U.S. manufacturers is evolving, with both tariffs and tax law changes poised to impact business profitability—bringing both challenges and opportunities. U.S. manufacturers looking for strategies to manage rising supply chain costs can benefit from proactive tax planning and efficiency improvements. Connect with our manufacturing advisors to learn how to optimize your manufacturing operations amid changing policies.

We will continue to monitor these and other changes that may impact your manufacturing business, and we’ll keep you informed of what’s next. If you’d like to receive timely manufacturing updates delivered right to your inbox, sign up for our email list.