Free trade, once a cornerstone of global economic policy, has given way to neo-mercantilism, with tariffs and protectionism dominating the landscape. While these shifts challenge exporters, importers, producers, and consumers, they also present opportunities for businesses to reassess and improve their operations.
Tariffs as a Catalyst for Efficiency
Although nearly 90% of economists argue against tariffs, citing their tendency to drive up costs and hinder economic growth, the reality of rising tariffs forces businesses to confront inefficiencies. Companies are compelled to conduct a comprehensive audit of their operations, examining efficiency, productivity, competitiveness, and sustainability across all departments, including finance, production, sales, and IT.
Responding to Tariffs
When faced with tariff increases, businesses have four primary options:
- Pass Costs to Customers: Increase prices to offset tariffs.
- Absorb Costs: Accept reduced profit margins.
- Renegotiate Contracts: Work with suppliers to lower input costs.
- Switch Suppliers: Diversify sourcing to reduce expenses.
These strategies, while challenging, can lead to long-term resilience and adaptability in a rapidly shifting trade environment.
Leveraging Trade Agreements and Policy Knowledge
Understanding free trade agreements (FTAs) is crucial. Companies can identify competitive advantages by capitalizing on tariff reductions available through these agreements. For trade with countries like China, a thorough knowledge of Section 301 of the Trade Act of 1974 is essential, as it provides mechanisms to counter unfair trade practices.
Mitigating Tariff Impacts
Several tools and strategies can help businesses reduce the immediate financial burden of tariffs:
- Foreign Trade Zones (FTZs): Goods stored in FTZs avoid tariffs until they leave the zone. For instance, importing holiday items months ahead can defer costs until closer to peak sales.
- Gary Goldfarb, chief strategy officer of Interport, explains, “FTZs allow businesses to defer duties, avoid tariffs on re-exported items, and eliminate duties on scrapped goods, keeping supply chains competitive despite evolving trade policies.”
- Duty Drawbacks: Refunds of up to 99% of duties paid on goods that are subsequently re-exported.
- Tariff Engineering: Reclassifying products to reduce tariff rates, often with the assistance of customs brokers or trade lawyers.
- Supply Chain Diversification: Sourcing components from alternative locations or importing unfinished goods for local assembly can minimize tariff loads.
The Role of Technology
Technology plays a pivotal role in navigating modern trade challenges. Import-export software streamlines logistics, compliance, and finance management. Solutions like Thomson Reuters’s Onesource Global Trade and Descartes Datamyne facilitate efficient cross-border commerce, enabling businesses to adapt quickly to regulatory changes.
Embracing a New Trade Era
The Reagan-Thatcher era of free trade is over. Protectionism and tariffs are here to stay, but businesses can find a silver lining by using these challenges as opportunities to optimize and innovate. By leveraging trade agreements, exploring cost-saving mechanisms, and embracing technology, companies can not only survive but thrive in the age of neo-mercantilism.
