Protective tariffs are a tool countries leverage to support their domestic industries and manage international trade dynamics. With the potential for new protective tariffs to be introduced by the United States in 2025 across a wide range of industries, manufacturers must be prepared for the potential impact on their operations. Understanding the possible effects and developing strategies to mitigate these risks will be crucial for companies looking to maintain their competitive edge in an uncertain global market.
What will likely happen if across-the-board (across all or most industries and countries) tariffs go into effect, and what should manufacturers do about it? Read on to find out more.
What are Protective Tariffs?
Tariffs are a duty imposed on imports into a country. Tariffs can serve numerous purposes, with the following two being the main ones:
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Raising Revenue
Protective tariffs generate revenue for governments by imposing duties on imported goods. Historically, they were a primary source of income before income taxes were introduced. While their importance as a revenue source has diminished in many developed countries, tariffs still provide a valuable funding mechanism for public services, infrastructure, and other government needs, particularly in developing economies. -
Protection of Local Industries
Tariffs protect domestic industries by making imported goods more expensive and encouraging consumers to buy locally produced products. This protection helps emerging industries compete against established international players, supporting local jobs and fostering economic growth. However, protective tariffs can also lead to higher consumer prices and may trigger retaliatory measures from other countries.
What are the Negative Effects of Protective Tariffs?
There are negative effects as well. Tariffs raise prices for consumers and businesses that rely on imported goods. Consumers bear the costs, not foreign producers. The proposed 10% tariff would cost every American about $1,700. Foreign producers will suffer from lower demand for their products. Tariffs, in effect, act as a tax that primarily affects smaller businesses and consumers. Lastly, they often can create trade wars as other countries retaliate, which is usually a net negative for everyone involved.
Tariffs will negatively affect the global economy, reducing the flow of goods, increasing prices, and likely increasing inflation. Every part of the economy will be affected, and every company, especially SMEs, will struggle.
What Can Manufacturers Do to Mitigate Protective Tariffs?
The companies and manufacturers that plan and adapt to the circumstances will be better positioned to survive and possibly thrive under an across-the-board tariff regime. What should your company do in these circumstances? Here are 4 suggestions you certainly should consider.
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Understand Your Situation
The first step is to understand how the tariffs will affect your business. Who are your suppliers? Who are their suppliers? What parts of our supply chain and operations are most affected by tariffs? It might not be as easy to understand as you think, and it can be a good time to use it.
Every company's answers to each question will be different. A deep dive into your operations will yield surprising results. MTG has never visited a factory that did not have many opportunities to improve operations across the board. Prioritize operations with the greatest immediate impact while planning for future improvement activities since it is unclear how much tariffs may increase. -
Improve Your Planning and Inventory Control
Planning and inventory are something we have seen nearly every manufacturer struggle with. Planning is difficult with the amount of uncertainty most businesses face. Reducing your inventory to increase cash-on-hand through planning can save a significant amount on raw materials. Many companies buy too much to save with bulk pricing. We have a client now that is low on cash despite having saved thousands of dollars on excessive inventory purchases because it does not have the right components to finish its operations. Higher tariffs may cause you to think that buying excess inventory is a good idea, yet it will cause more cash flow headaches than it is worth. -
Using AI in Manufacturing
There is a lot that can be, and should be, said about the use of artificial intelligence (AI) in manufacturing much of it is beyond the scope of this blog. The most important is to understand that AI is a tool that, when utilized correctly, can be incredibly valuable. A few quick and easy uses of AI are quality control and visual inspection. AI visual inspection tools have improved significantly over the past 3 years and are inexpensive and easy to use. Paired with a robust quality control system, visual inspection reduces or eliminates the need for human inspectors. That allows labor to be redirected to more efficient uses such as expanding capacity or new production lines. -
Working With Your Suppliers
Companies are finding that, despite tariffs, they must continue to produce abroad, especially in China. China is still unrivaled in production capacity, depth of the supply chain, and variety of manufacturing companies. Finding mutually beneficial arrangements to improve efficiency and split the benefits will be advantageous for both parties. Chinese companies are feeling the squeeze of tariffs on their own operations, so they will welcome the opportunity to cooperate to keep orders steady and reduce their costs to keep or improve profit per unit.
This is especially important now, as moving your manufacturing to a new location or owning the means of production yourself is a long process that may cause disruptions.
Turning Protective Tariffs into Strategic Advantages
Protective tariffs present challenges but also opportunities for manufacturers to strengthen their operations. By understanding their impact, optimizing supply chains, enhancing inventory management, and leveraging technologies like AI, companies can build resilience against uncertainty. The key is to adapt proactively, turning potential disruptions into drivers of efficiency and growth, ensuring a competitive edge in a shifting global market.
How can CMC help you navigate tariffs in the trade landscape? Click below to learn more.
