Looming Tariffs Prompt Companies to Protect Supply Chains

Companies haven’t been waiting for a formal Trump announcement on new tariffs to prepare their responses—many are ready now.

Since the November election, in-house counsel at companies with global supply chains have been mapping their suppliers, planning how they can relocate, and starting to renegotiate contracts.

“We have clients who the tariffs could impact quite meaningfully,” said Felicia Nowels, a partner at Akerman. “Hence the need to prepare with great detail and in advance so that on day one they are ready, no matter what mechanism is in place—and of course, we need to be prepared to be surprised.”

Despite his promise for day-one tariffs, Trump floated on Monday that he might impose 25% tariffs on Mexico and Canada, effective in February. He said Tuesday his threat to hit China with 10% tariffs on all imports was still on the table.

The implementation of all of Trump’s proposed tariffs could generate nearly $900 billion annually, up from the the current $81 billion, with the highest impacts on the auto and pharma industries, according to a Jan. 17 PwC analysis.

For the most part, companies aren’t making major supply chain shifts yet. They’re waiting until they know from what countries and at what rates the tariffs will apply, and when—but they’re preparing intensely.

“Even those clients who are in action mode, there’s still a wait-and-see, because we don’t know how he is going to implement these tariffs, Nowels said.

Mapping Supply Chains

Preparation started in November—or even earlier—with companies analyzing their full supply chains, mapping where their suppliers, and those suppliers’ suppliers, are sourcing from. And even if a company isn’t hit directly with a tariff, its costs stand to rise if its suppliers face higher tariffs.

“Most organizations are missing that solid understanding of what their supply chain looks like"—in particular, visibility into their supply chains beyond their tier one, or immediate, suppliers, said James Crask, global head of multinational client advisory at Marsh.

Mapping supply chains isn’t always a straightforward exercise, said Daniel Cannistra, a partner at Crowell & Moring LLP. When a company imports a car, for example, it contains parts from many different countries. What is the country of origin for tariff purposes? It’s not necessarily where the car ships from.

That inventorying exercise will likely be much tougher for a major retailer, with thousands of different imports, than a manufacturer importing a few raw goods or components, Cannistra said.

Companies must also look at their competitors’ supply chains, said Chandri Navarro, senior counsel at Baker McKenzie. If Trump imposes a universal tariff, or if a company and its competitors all source goods from China, “then you’re all in the same boat,” she said.

But if a company sources from China and its key competitors from Vietnam or South Korea, for example, the company must analyze how its competitive position will be affected by potential tariffs.

Tariffs and supply chain changes also come with contractual risks, Cannistra said. If prices suddenly go up, but the company negotiated a price with the supplier, which party carries the contractual risk associated with the increases?

Cannistra is advising clients to renegotiate contracts if they can. One key piece: Force majeure language or other provisions that could help a company cancel a contract.

It’s critical to analyze exactly how that contract language is written, Nowels said, as some such provisions might cover tariffs.

Moving Forward

The first thing companies must do when tariffs are formally announced is figure out whether they have a direct or indirect exposure—whether the tariff will hit them or their suppliers, Crask said. If the company has exposure through its suppliers, in-house counsel should then examine their contracts to figure out whether tariffs hitting suppliers will be passed on to the company. If so, it’s time to think about shifting the supply chain: Is the same product available somewhere else?

Before taking action, companies also need to know not just the country or rate of the new tariffs, but the legal mechanism by which they’ll be implemented, Nowels said.

The administration could impose tariffs under Section 301 of the US Trade Act or Section 232 of the Trade Expansion Act of 1962, which include notice-and-comment periods companies can participate in to help mitigate impact or get an exclusion, Nowels said. President Trump could also invoke the International Emergency Economic Powers Act, which would let him take economic measures in the name of national security. IEEPA tariffs would have more immediate effect.

It’s not clear whether tariffs on Mexico or Canada would last beyond negotiations for a reworked US-Mexico-Canada agreement, which will be reviewed next summer.

“Most companies aren’t going to overhaul their supply chains over speculation,” and have deepened their presence in Mexico and Canada because of the trade agreement, said Jake Colvin, president of the National Foreign Trade Council. Companies will decide what to do as concrete policies emerge, he said.

“In the meantime, businesses will prepare as best they can for a variety of tariff scenarios, potentially stockpiling goods in the short term and, over the longer term, deciding whether they’ll absorb the cost, pass it on to consumers, or re-orient supply chains where feasible,” he added.

For companies looking to shift to new suppliers or manufacturing locations in response to tariff policies, a move may not be immediate. Anything involving regulatory approval, like drug-manufacturing facilities, takes much longer to move, Navarro said. It’s easier to shift suppliers when only commodities are involved.

Moving out of a targeted country might not even be possible. Companies looking to relocate parts of their supply chain must consider whether raw materials are available in other locations, and whether their is sufficient capacity for manufacturing a product in a different country.

And any actions taken by the US could also elicit responses from its trading partners.

“No country is 100% safe,” Nowels said. “Fundamentally, companies need to be flexible.”