Tariff Considerations: What Businesses Need to Know

In an uncertain economic environment, challenges abound for businesses of all sizes and sectors. The uncertainty is nothing new, as for the last several months businesses have waited for action from the Federal Reserve on interest rates and contended with operating in an inflationary environment. But with a new administration in Washington, there’s now an additional disruptor on the horizon: global tariffs.

While it remains uncertain exactly how policy changes may impact businesses, the prevailing expectations are that tariffs could usher in higher costs and a wide range of business challenges for companies that sell imported goods or rely on international manufacturers – which means it may be important for businesses to take steps to be proactively prepared.

Working Capital Impacts

A tariff is considered a “customs duty” applied to targeted commodities or goods from specific countries. Tariffs are imposed at the port of entry, with payments due shortly after U.S. customs releases the goods. Additionally, some imported goods that were previously categorized as “duty free” may now be subject to tariffs.

These new payments can cause an immediate cash flow drain, which may require businesses to allocate more working capital upfront to cover unplanned import expenses. Keeping on top of any changes to tariffs is important and will help drive strategies for supply chain processes. Businesses may be unable to recoup the incremental tariff payouts until several weeks or months later, depending on their production schedule or payment terms with the end user or client. If a business has not built these advance costs into its forecast, there may be inventory disruptions, as well as higher overall costs that could lead to decreased demand for products.

Additionally, involving a customs broker serve a key purpose in helping companies clear goods coming into the U.S. through Customs. When tariffs are imposed, the broker will collect the incremental fees, which may increase the cost of the imported good substantially.

“There are some things businesses can do to manage their working capital and reduce risks in these circumstances, including leveraging trade finance, letters of credit, and other supply chain strategies,” said George Hoffman, an international product advisor manager in PNC Treasury Management. “It will really depend on a company’s specific situation, and that’s where it becomes important for businesses to work closely with their bank to figure out the best course of action.”

Supply Chain Versatility

Effective supply chain management takes on added importance when considering the increased costs that would result from the imposition of tariffs. In order to avoid passing on costs to consumers, which could ultimately have a negative impact on business performance, businesses may need to employ creative and practical strategies. These may include working with offshore suppliers to secure contracts that lower costs or talking with vendors about negotiating reduced costs for commodities. Businesses might also build resiliency by considering alternative suppliers, either domestically or in international locations that are less affected by tariff policy.

Transfer Pricing

For multinational companies with cross-border subsidiaries, proactive action on transfer pricing may be an effective step to counter higher costs resulting from tariffs. Transfer pricing is a practice that allows for pricing transactions internally between subsidiaries that operate under a common parent company. It essentially involves strategic management of the prices charged to another division of a company for goods or services.

“Companies with international subsidiaries should consider going through a transfer pricing analysis,” said Dave Olsen, regional president for PNC Bank Canada. “While this strategy would not necessarily fully offset any impacts resulting from tariffs, it could at least help ensure that you are paying the proper tariffs and provide clarity.”

Foreign Exchange (FX) Strategies

The relative strength of the U.S. Dollar (USD) as compared with other currencies is another factor that businesses operating internationally may need to consider. With the ongoing uncertainty, currency markets have been volatile and could likely continue to actively recalibrate pending further clarity on tariff policy.

In countries where tariffs are levied (where the imports originate), the currency is likely to depreciate, and this may lead to risk for businesses that transact in the affected currency. Businesses might consider working with suppliers to see if they would be willing to provide dual invoices (invoices that list both the USD to be paid or the foreign currency amount to satisfy the invoice), as well as potentially leverage spot trades, forwards, and options. FX options and options structures could also be a solution for mitigating risk, as these customizable solutions can be used at all phases of the hedging life cycle, whether a business is waiting to hedge or ready to implement.

“Analysis is what’s really important in this context, in terms of managing FX risk,” said Tim McCarthy, managing director in PNC Foreign Exchange. “Companies can benefit substantially by working with advisors, such as our specialists in PNC Foreign Exchange, to figure out how best to manage currency exposures and discuss how different trade structures are able to provide risk management.”

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