The Skill of Adaptability: How to Survive During Whiplash Tariff Policy

The Current Political Climate Makes Business Forecasting Next To Impossible

About a year ago, I read an interesting article about government regulation. Some regulations are puzzling in the 21st Century. For example, in beverage: Ohio prohibits alcohol advertisements referencing Santa Claus; Massachusetts bans happy hours; Utah bans “drink specials” entirely; Pennsylvania has only state-owned liquor stores but allows you to bring wine to restaurants; Arizona, New Mexico, and Ohio make it illegal to bring a bottle of wine into a restaurant but you can buy liquor almost anywhere. Internationally, it is even more confusing: in some parts of Mexico, you cannot buy (on-premises or off-premises) alcohol the week of an election, and in Canada, not only is alcohol heavily taxed, but it can only be sold at limited times, but marijuana is entirely legal countrywide.

As nonsensical as this all seems, government economic regulation rarely changes quickly, whether at the national, state/provincial, or even local level. This makes it easy for businesses to predict their impact and/or build regulatory requirements into their pricing models.

Imposed Tariffs

Regardless of whether you support the current MAGA push, it is disruptive because it cuts away at the regulatory rulemaking process in which changes to government processes are vetted through notice and either hearings or advocacy filings by interested individuals in a process that sometimes takes years. In fact, the current U.S. Treasury regulations on tariffs were almost instantaneous. For example, tariffs were imposed on Chinese, Canadian, and Mexican goods last Tuesday, then rescinded some of them last Thursday, and then announced over the weekend that they would be reinstated. How can you figure out what to do?

I work with numerous e-commerce organizations, and this type of policy shift has a significant impact on their supply chain analysis. I also work with Canadian and Mexican clients who now need to determine whether paying double-digit tariffs when selling to U.S. consumers will enable them to compete competitively in the United States. Considering even the largest of enterprises cannot plan for that type of impactful whiplash policy shift, what is an emerging company supposed to do?

What Not To Do In Uncertain Economic Times

The first thing is that you (and I) cannot freak out. The older I get, the more I realize that we are rarely alone in our business predicaments, especially when it comes to macroeconomic policies. Also, while freaking out is a natural reaction, it doesn’t move the ball forward.

You should also not put your head in the sand and hope for the best. In this environment, those who are adaptable will survive. Adaptability in business is the ability to pivot when necessary and embrace change, ensuring longevity in a rapidly evolving world.

Tariff Adaptability

The first step to adaptability (in my book) is to research and map out the options. Then, you modify your business plan quickly to account for the changes in the environment.

For our eCommerce clients, the problem that tariffs pose is that approximately 50% of eCommerce goods are sourced from China, and tariffs on Chinese goods have increased by approximately 35% over the last couple of weeks. This means that a little less than a majority of goods purchased on eCommerce websites have just become 35% more expensive to procure.

Tariffs explained

The situation is complicated, which presents opportunities for the adaptable eCommerce seller who is willing to carefully analyze all their options and execute quickly to outmaneuver the competition. Some examples of how to mitigate the effect of tariffs include:

• Ship Chinese goods to U.S. free trade zones (FTZ). FTZs are designated areas where goods can be imported, stored, processed, and exported without being subject to traditional customs duties, taxes, or regulations until they leave the zone and enter the domestic market. By shipping goods into a free trade zone, you can defer your tariff payment. For example, say you shipped a container of yo-yos from China costing $50,000. If you shipped to your current warehouse, the tariff you would pay under the new tariff scheme is roughly $17,500. However, suppose you estimate that you can distribute the inventory over 36 months, pulling inventory from the FTZ to your inventory, e.g., three times over 36 months. In that case, you pay $5,833 per pull, thus easing the tariff burden.
• Procure goods from other countries with lower or no tariffs. Although this may be more challenging if the Trump Administration imposes worldwide reciprocal tariffs, it may be wise to consider procuring from other large industrial countries, such as India or Vietnam.
• Reverse engineer/reassess your shipped goods to procure parts from different ports to rely less on tariffed parts.
• Take a short-term hit and refrain from raising your prices despite an increase in costs to maintain market share.
• Raise consumer prices to maintain margins and watch your competitors closely.

Conclusion

Regardless of the path you choose, you should not be sitting around and doing nothing. While I realize business is complex, even when you can read the tea leaves relatively, the tariff situation is going to reward the adaptable entrepreneur who does their homework and then makes informed decisions on the least destructive solution. Are you an adaptable entrepreneur?

Contact EmergeCounsel today for a free consultation!