Why Should Businesses Scenario Plan for Potential Tariffs?
The Boston Consulting Group have outlined the importance of scenario-based planning as a critical feature for businesses being ready to act on potential tariffs and their impact.
While there is no crystal ball to know what trade policies President Trump will implement during his time in office for a second term, new tariffs have either already been seen or have been mentioned by Trump.
He has mentioned plans to levy new or increased tariffs, while US trading partners could — and probably would — retaliate with measures of their own.
We have already seen the President threaten Colombia with tariffs and sanctions for refusing to accept military flights carrying deportees as part of his sweeping immigration crackdown. But these were not imposed after Colombia had agreed to accept the deportees.
Nevertheless, the Boston Consulting Group (BCG) has stressed that tariffs could be rapid and significant for businesses — which is why leaders who are able to move quickly to assess the impact of a multitude of scenarios can prepare their companies for tariffs and trade restrictions — while also obtaining the upper hand on competitors who are not as quick. Many companies have already started to build up stocks of critical inputs, according to BCG.
The consulting firm has outlined a number of mitigation strategies; some are straightforward and quick — while others pose difficulties and require lead time. Businesses have the ability to build their tariff muscle through a combination of the engagement of senior leadership and cross-enterprise response teams, while scaling up the data and analytical capabilities to uncover exposures to product lines across their network of suppliers, production sites and end markets.
Scenarios and timing
President Trump has made remarks on potential tariffs for Mexico, Canada, China and others. BCG believes there are three potential scenarios, given with some historical precedent.
Targeted Tariffs
This is where the new administration could give its attention to a set of high-profile countries, products or policy goals. President Trump mentioned, during his time on the campaign trail, high tariffs on imported vehicles from Mexico. In the 1980s, the US increased tariffs on electronics and semiconductors imported from Japan and imposed quotas on Japanese auto imports—moves that were related to concerns about Japan's industrial and monetary policy.
Patchwork Tariffs
The President could use tariffs as a tool for negotiating, mixing threats with real measures and granting selective company, product or country-specific exclusions. In 2018, the US imposed a tariff on worldwide steel and aluminium imports under Section 232 of the Trade Expansion Act of 1962. But after political pushback and retaliation from key trading partners, the US offered conditional or unconditional exemptions or tariff-free quotas, to Mexico, Canada and the European Union, among several other trading partners.
Broad Tariffs
Trump's administration could look at imposing new or higher tariffs on all its major trading partners, with little to no exceptions. This situation could see a combination of the most aggressive tariffs proposed to date, with a 20% tariff on all global imports, an increase to 60% tariff on all imports from China and a 25% tariff on all imports from Mexico and Canada.
While there is no recent history of such precedent—in 1971, President Nixon imposed a 10% tariff on all dutiable imports in an attempt to address balance of payments and currency misalignment issues (the measure was dropped after less than five months).
The fallout from any of these scenarios could hit individual companies hard, with those possessing a higher proportion of US sales — or with supply chains that are majority based outside of the US — facing the biggest risks. BCG believes many companies could see material impact on their EBITDA margins under various scenarios, from 6% points to nearly 14% points, depending on industry and supply-chain footprint. Those with higher margins may have the capacity to absorb tariff-related costs instead of passing them on to customers; doing so often comes at the expense of profitability.
Some of the tariffs levied in 2017, during Trump's first term, are still in place today. The president could act alone, using executive orders, under the International Emergency Economic Powers Act (IEEPA).
Trump could also expand the tariffs during the first term without the need for Congressional action or a lengthy new investigation. Alternatively, the new administration could order the Department of Commerce or another federal agency to begin an investigation to build the factual and legal basis for additional tariffs.
Mitigation for companies
Companies face increasing pressure from new and changing tariffs. While these challenges can seem daunting, businesses have several powerful levers they can pull to protect their bottom line and maintain competitive advantage.
1. Engage in policy dialogue
Smart companies aren't just passive recipients of trade policy — they're actively involved in shaping it. Organisations have several paths to securing exemptions from punitive tariffs, ranging from individual company exemptions for specific products to broader exemptions covering all importers of certain products. Some businesses have successfully negotiated country-wide exemptions, while others have benefited from quota systems that allow defined import quantities without punitive tariffs.
However, pursuing these exemptions requires significant investment of time and resources, with no guaranteed outcome. Companies should carefully weigh the potential benefits against the costs before pursuing this route.
2. Strengthen market strategy
Tariff impacts ripple through the entire supply chain, affecting manufacturers, importers, retailers and ultimately, consumers. A sophisticated approach to pricing strategy must consider numerous factors: the price elasticity across different product lines, market concentration and product differentiation all play crucial roles. Companies should explore opportunities to optimise product families around tariff criteria while making strategic decisions about product assortment, particularly focusing on high-margin and high-growth items.
The key is developing a disciplined, analytical approach to pricing that can absorb tariff increases while maintaining market share and profitability.
3. Master trade compliance
Smart trade compliance can significantly reduce duty burden. Companies can explore several sophisticated approaches to minimise their duty exposure. The first sale rule can help reduce dutiable value, while delivery duty paid arrangements offer another avenue for optimisation. For companies that re-export items, duty drawback opportunities can provide substantial savings.
While these strategies might seem complex, the potential savings from optimised trade compliance can be substantial when tariff rates are high.
4. Reimagine the value chain
Perhaps the most strategic response to tariff challenges is reconsidering the entire value chain across three dimensions.
First, companies must thoroughly analyse their supplier networks, including deeper examination of Tier 2 and 3 suppliers. This analysis might lead to renegotiating terms, considering operational relocations or evaluating potential new supplier relationships.
Second, manufacturing footprint decisions can dramatically impact tariff exposure. Companies should consider relocating production to lower-tariff regions or developing multi-site production capabilities, always carefully balancing potential tariff savings against necessary capital investments.
Third, market selection has become increasingly critical in an era of retaliatory tariffs. Companies must continuously reassess market access risks in different regions, identify new opportunities in emerging markets and develop robust contingency plans for potential market access disruption.
Key capabilities for tariff preparation
There are three capabilities that will help companies prepare for increased or new tariffs:
- Strategic business leadership: If those at the top maintain focus on the impact to business and link trade policy risks to strategic objectives such as revenue growth, market share and earnings.
- Iterate plans: If leaders can iterate plans in an agile manner, leveraging supplier data and strong analytics to respond more surely and quickly to new policies than the competition.
- Effective cross-enterprise collaboration: There is no room for silos.
BCG outlines one approach by building a cross-functional team of experts from all the relevant functions of the business, including procurement, legal and compliance, strategy, etc. Another way is to create a central team focused on geopolitics, tariffs and risk that consolidates risk assessment and works on mitigation bilaterally with each function.
Most companies have experience with the management of tariff costs, but they can activate a series of mitigation measures with a structured and phased approach. This starts with the assessment of direct tariff risks, as well as the impact of potential new tariffs or trade restrictions on goods made by suppliers, based on their analysis of various scenarios.
These assessments should feature portfolios being segmented by revenue at risk—making those with high-impact products and brands a priority. BCG also highlights that a rigorous self-assessment will identify blind spots— situations in which companies don't know where their vendors are sourcing or what the true exposure is. Companies should also benchmark their exposure vis-à-vis peers, taking into account where their competitors source inputs and final products.
Organisations should look develop their frameworks which balance risk and return, lead time and the external environment for specific responses. This process can identify no-regret moves, event-based responses and potential longer-term actions for consideration.
Mitigation plans can be built with a focus on the priority products or brands, while setting up an initial phased implementation roadmap with specific signposts for action. At the appropriate time, based on scenario triggers, the company is ready to implement its mitigation plan on the schedule it deems most beneficial. Dashboards can measure ongoing progress and provide mechanisms for continuing discussion of future resets and actions.
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