Many manufacturing companies in the United States are facing an uphill battle when it comes to increased expenses due to the bigger picture of international trade. More and more tariffs are being introduced in the global marketplace, and this increase could be the new normal as countries continue to wield the political power of tariffs. So, why are manufacturing companies seeing this problem, how are they responding and how can they navigate the complexities of tariffs in the future in order to protect their own profits?
We’ve examined the issue and provided our top recommendations for manufacturing companies as they navigate a new and complicated world of tariffs.
Context: How The Rise of Tariffs is Impacting the U.S. Manufacturing Industry
Tariffs obviously aren’t new in and of themselves, but recent political activities have incited a greater prevalence. Countries across the globe are increasingly introducing tariffs as a way to regulate foreign trade, promote domestic economic activity, retaliate against other countries that have imposed their own tariffs and give an advantage to domestic businesses.
As the larger political activities across the world trickle down to impact companies that are engaging in international trade, many of them have faced significant changes and challenges as a result. Here are a few ways that tariffs are financially impacting U.S. manufacturing companies:
- Many U. S. manufacturing companies that base their production activities in China are relocating their facilities to other countries like India and Vietnam to circumvent the tariffs that the U.S. has placed on Chinese imports. This relocation is often at a great short-term expense to the company but done in hopes that it will save even more through mitigating tariff issues in the long term.
- In some cases, foreign federal governments are subsidizing companies in their respective countries, which means that in the global marketplace, U.S. companies are competing against governments—not just another company. Often, this means that U.S. manufacturing companies have been taking a loss on their profits in order to break into the market share.
- S. manufacturing companies are absorbing extra costs without a way to avoid them or pass them along to their own customers because of stipulations that were previously determined in their contracts.
- In foreign countries, tariffs have been making imported goods from other countries, including those from the United States, more expensive, thereby positioning similar domestic products to be more affordable and increasingly more competitive.
In short, new tariff activity is creating a new world of financial uncertainty for many U.S. manufacturing companies through many different factors.
Top Recommendations for the Manufacturing Industry in Light of the Rise in Tariffs
As we have advised manufacturing companies about their finances and business strategies in light of the increase in tariffs and their respective impacts, we have recognized select takeaways that can benefit manufacturing companies as they respond to changes in the marketplace. Below are our top recommendations for manufacturing companies.
1. Get an Exclusion.
Apply for a tariff exclusion with the Office of the United States Trade Representative (USTR). According to Forbes, “companies can request exemptions from the additional 25 percent tariffs placed on List 3 goods imported from China under section 301 of the Trade Act of 1974. Products from Section 301 List 3 have a total import value of approximately $200 billion.” Companies have until September 30 to submit a request for exclusion. If an exclusion is granted, it is effective going back to September 24, 2018. Companies can submit a request for an exclusion with the USTR here.
2. Edit Your Contracts.
The American Bar Association recommends that, “all buyers and sellers of goods moving to or from the U.S. [should] review their respective sales contracts for the potential impact of tariffs.” Build a clause into your contracts that states that you can edit your contract pricing in order to pass a tariff through to the customer. Forbes also notes that some companies may be able to “lower—or in some cases—zero out the impact” through renegotiating contracts with suppliers in some cases as well.
3. Talk with Your Advisor.
While we generally recommend the two broad avenues listed above, as beneficial ways to respond to tariff changes, meeting with your specific advisor is the best way to get information and insight about what’s best for your specific company. As with any issue, the best course of action is one formulated with your company’s specific circumstances and goals in mind.
Moving forward with Responding to Tariff Changes
No two manufacturing companies are alike, and responding to new changes will look different for each and every company, depending on specific circumstances. For information and guidance about how your specific manufacturing company should be responding to tariffs, please contact a Warren Averett advisor.