For the past few decades, the prospect of a trade war triggered by tariffs and other protectionist policies had never posed a serious risk to companies, but times have changed. With the United States announcing sweeping tariffs on all imports, as well as higher reciprocal tariffs on dozens of countries, uncertainty remains about how, when and to what extent other countries will respond, while experts expect far-reaching and significant impacts to both businesses and consumers.
Many risks will impact a wide range of companies as soon as they take effect. One of the most obvious concerns is cost increases, with many companies currently scrambling to determine how to pass the additional burden on to suppliers and customers without losing or alienating either one. Another risk is reduced overseas supply options and the possibility that, if suppliers in low-cost countries are cut off from doing the same level of business in the markets in which a company operates, they could end up supplying the competition.
Indeed, the complexity of global supply chains makes it difficult for companies to estimate their indirect exposure to tariffs if lower-tier suppliers are subject to them too. Companies will also need to perform more due diligence to determine whether existing suppliers will be subject to tariffs and potential tariffs that may apply to any new suppliers they onboard.
Experts believe companies should engage in risk-based contingency planning as soon as possible to identify the potential impacts and manage the shocks that tariffs could cause. A business that adapts quickly can use the threat of tariffs to refine its strategies, rethink and reinforce its supply chains, and explore new markets and opportunities.
“Forward-thinking companies have been preparing for tariffs long before the U.S. election and continue to refine strategies to mitigate or capitalize on them,” said Tyler Higgins, managing director at management and technology consulting firm AArete. “Businesses that integrate risk assessment into supply chain, procurement and pricing strategies will navigate tariffs more successfully than those reacting to policy changes.”
The Importance of Contract Management
The imposition of new tariffs can be disruptive as well as expensive. After the initial reaction to stockpile as much product and materials as possible before the rules take effect, the easiest short-term solution is for companies to try to come to an agreement with their existing suppliers on a way to split any additional costs they incur going forward. In the long term, companies may want to exercise their specific rights within existing supplier contracts to account for tariff-related cost increases or insert more favorable terms for themselves in future contracts to mitigate financial risks. It may also be useful for companies to review termination and renegotiation clauses so that they can switch suppliers if tariffs make current sourcing strategies unsustainable.
“Contracts are one of the most powerful assets businesses can leverage,” said Bernadette Bulacan, chief evangelist at contract management software vendor Icertis. Contracts should be the first resort for companies to fall back on, especially as “finding new suppliers and negotiating or renegotiating deals causes delays and leads to increased logistical costs and financial penalties,” she said.
According to Heewan Noh, associate at law firm Huth Reynolds, several types of contractual provisions may prove useful. For example, fixed-price contracts typically assign cost risk to the seller. Suppliers cannot unilaterally demand price adjustments if tariffs increase costs unless the contract allows cost-sharing mechanisms. Similarly, some contracts tie prices to commodity indexes, mitigating the impact of sudden market changes. An indexed pricing structure may provide protection if a supplier anticipates tariff risks. So-called “incoterms” can also work well. These international trade terms define which party is responsible for tariffs, duties and transportation costs. Some industries prone to extended supply chains, such as the automotive sector, rely on these kinds of contracts precisely because they are a useful starting point for establishing tariff responsibility. For example, they may specify that the seller covers export costs while the buyer covers import costs.
Companies should use supplier contracts that explicitly specify which party is the “importer of record” as it will then be legally responsible for handling all importing requirements, including tariffs and the payment of customs duties, Noh said. Contracts should clearly define which party is responsible for tariff-related expenses, eliminating ambiguity. Companies can also structure cost-sharing arrangements, where one party initially pays the tariffs but later receives full or partial reimbursement from the counterparty. Furthermore, contracts can include automatic renegotiation clauses that require the parties to revisit pricing if new tariffs, duties or other government-imposed charges are introduced post-execution. Companies can also include price adjustment rights in quotations or quote updates. This approach allows for pricing flexibility to account for sudden tariff increases, avoiding reliance on force majeure or commercial impracticability defenses, which courts often reject in tariff-related disputes.
Companies often believe that clauses like force majeure or commercial impracticability may offer opportunities for renegotiation or relief if substantial tariff changes occur. Both serve as defenses to contractual performance, meaning that the affected party is not considered in breach for failing to fulfill its obligations if a qualify event renders performance impossible or impracticable. However, these legal doctrines do not inherently provide a means for securing price increases and, as many companies found with the COVID-19 pandemic, they do not always offer the level of protection companies desire. While suppliers often invoke them in commercial negotiations to justify price adjustments, courts around the world have generally been unwilling to allow companies to withdraw from contractual commitments solely due to higher costs, whether from tariffs or any other factor.
Supply Chain Diversification and Tariff Engineering
Besides tightening up and enforcing contract terms, there are a range of other options companies should consider. High on the list is supply chain diversification. Depending on the sector they are in, some companies are more highly exposed to the threat of tariffs than others, which may necessitate immediate changes to offset any financial impact. To counter that risk, companies should assess whether they can shift sourcing to suppliers in countries with lower or no tariffs, including options like nearshoring, reshoring or “friend shoring,” which is when organizations select partners in countries that are geographically closer and/or are members of the same trade bloc. Companies could also consider sourcing materials and components from multiple countries to reduce reliance on a single source that may be subject to tariffs. For this to work effectively, however, it will require thorough mapping of supply chains to find out where tier 2, tier 3 and lower-tier suppliers are based and how reliant the business is on them.
According to David Warrick, executive vice president at supply chain risk tech vendor Overhaul, companies need to negotiate more flexible contract terms moving forward to allow for quick supplier changes when necessary. They should also leverage dual sourcing agreements so that they can switch between suppliers to focus on sourcing goods and services from lower tariff countries. As the Trump administration has quickly made clear, companies must move quickly to add tariff risk to their risk registers and monitor regional trade agreements so they can respond as rapidly as some of these policies are changing. Some experts believe companies need to go even further and actively engage with policymakers and the Office of the United States Trade Representative to influence tariff policies and seek exemptions or reductions reductions. They could also consider engaging with lobbying groups to attempt to influence trade policy or apply for tariff exclusions.
Monitoring changes in tariff policies may also allow businesses to engage in “tariff engineering.” This is when companies modify product design, classification or assembly locations to take advantage of lower tariff categories or duty-free entry. To ensure they comply with the U.S. International Trade Commission’s Harmonized Tariff Schedule, which determines the tariffs imposed on different types of goods, companies can work with customs brokers to ensure they classify their products accurately.
Similarly, making good use of foreign trade zones (FTZs) and bonded warehouses can also be a smart move for some companies. An FTZ is a secured location in or near customs and border protection (CBP) ports, where product can be stored, exhibited, assembled, manufactured or processed without any duties being applied. This allows for duty deferral if the goods are eventually withdrawn into the U.S. customs territory or potentially no duties at all if the goods are shipped to another country.
Bonded warehouses provide similar benefits by allowing businesses to store imported goods under bond, deferring duty payments for a maximum of five years until the goods are removed for consumption. If the products are exported, no duty is owed.
Other programs can vary in their level of complexity. For example, through duty drawback programs, businesses can claim refunds on fees, custom duties and taxes paid on imported goods that are later exported or incorporated into exported products from the United States or destroyed. As it involves imports and exports, this is a complex process, but it can offer real duty savings for certain types of transactions.
Similarly, the U.S. Goods Returned program may allow some companies to claw back expenses. For goods that were initially exported abroad and then returned to the United States, such as for servicing, warranty services or value-added activities, companies may be able to declare an entered value equal to the value added abroad. If this is a common importing practice for the business, companies should check to see if they are taking proper advantage of the opportunities the program affords to minimize tariffs, Noh advised.
Another way to handle temporary imports to secure duty savings is to use a legal tool called a temporary importation under bond (TIB), which facilitates duty-free import into the United States for eligible goods being re-exported. TIBs cover a specific range of products and are good for a period of one year, though they can be extended in certain circumstances. They must be accompanied by a bond equivalent to twice the duty otherwise attributed to the import, but they allow companies not to pay duties for up to three years.
Insurance and Risk Management Considerations
Insurance policies may also provide some protection from tariff impacts. For instance, political risk insurance and trade disruption coverage may protect against sudden tariff changes and supply chain shocks. Political risk insurance provides coverage for businesses from financial losses caused by adverse government actions, and certain policies may be broad enough to cover retaliatory acts from foreign governments, such as reciprocal tariffs.
Trade credit insurance, meanwhile, protects businesses against non-payment by customers due to insolvency, default or political risks. In the context of tariffs, such insurance coverage helps mitigate risk by ensuring companies can still receive payments from financially strained buyers impacted by higher costs. This would therefore reduce cash-flow disruptions and enable more flexible payment terms in uncertain trade environments.
Additionally, supply chain insurance can protect businesses against disruptions caused by events such as supplier insolvency, transportation delays or geopolitical issues. In the context of tariffs, this kind of insurance product helps mitigate risk by covering financial losses from supply chain interruptions, allowing companies to maintain operations and secure alternative sourcing without significant financial strain.
Companies also need to step up their own risk identification and risk management strategies to help offset the negative impacts of tariffs. First, Warrick recommended that risk managers conduct an immediate risk assessment to understand their organization’s exposure to tariffs across the entire supply chain and map their supply chain to identify vulnerabilities and alternative sourcing options. A big part of such an exercise will likely need to include determining which of the goods, materials and suppliers that are susceptible to tariffs will have the greatest impact on business operations and costs. Furthermore, risk managers will need to evaluate alternative sourcing options to identify domestic and international suppliers that are less affected by the new regime.
Warrick believes companies should have a workable tariff strategy so that they can determine whether to absorb costs or pass them on and determine whether to change supplier sourcing. Risk managers may also need to upskill to understand hedging strategies, such as future contracts on commodities affected by tariffs, so that they can recommend suitable practices for leadership to consider.
Risk management must work with other key operational and assurance functions like legal, finance, procurement and operations to develop cohesive strategies to address tariff impacts. This collaboration ensures that all aspects of the business are aligned and responsive to trade policy changes, Noh said, adding that risk managers should oversee the implementation of measures such as supply chain diversification, contract renegotiations and compliance audits to mitigate any adverse effects.
“By proactively addressing potential vulnerabilities, companies can enhance their resilience against trade disruptions,” Noh said. Risk professionals should also monitor regulatory developments. “Staying informed about policy changes, such as executive orders and trade agreements, allows risk managers to anticipate and prepare for shifts in the trade landscape. Regular engagement with industry news and government publications is essential for timely responses,” she said.
Experts also believe risk professionals need to ensure that management has better real-time information about tariff and supply chain risks so that they can make more informed and agile decisions for different scenarios. For example, software tools can help businesses “analyze consumer behavior and competitor pricing to make targeted, strategic pricing moves instead of imposing blanket price hikes,” said Edward Peghin, managing lawyer at Pace Law Firm.
The imminent threat of escalating tariffs around the world is naturally a key concern for companies. Businesses can also treat the situation as an opportunity to improve governance and increase resilience as they address the financial risks that tariffs are likely to pose. Forward-thinking companies can use the exercise as an opportunity to explore how they can gain greater visibility into and take greater control over their supply chains, which may provide more long-term assurance.
“Tariffs can be more than a setback,” Peghin said. “But when approached with the right attitude, they can serve as a driver for smarter sourcing, stronger supplier relationships and long-term growth. Businesses that embrace adaptability and strategic planning will not only overcome tariff changes but may even gain a competitive advantage.”