Why planning is essential in a tariff-driven retail economy

These policies can lead to increased operational costs, disrupted supply chains and altered pricing strategies, all of which can strain a retailer’s profitability and market position. The impact of tariffs is not uniform across industries; targeted tariffs on specific goods, such as apparel, footwear, electronics, steel and semiconductors, create distinct challenges and opportunities across retail categories.

With ongoing negotiations and a cross-agency approach involving the Treasury Department and the U.S. Trade Representative, understanding the long-term economic considerations of tariffs — such as their effects on trade deficits, supply availability and consumer prices — becomes crucial for retailers that operate in a highly competitive, low-margin environment.

As the stakes rise, retailers must navigate this complex terrain with agility and foresight to respond quickly to new developments.

The three levers of trade

In international trade, retailers must manage three critical levers: product classification, origin and valuation. Each directly influences duties or taxes on imported goods, shaping sourcing strategies and inventory flows.

1. Classification determines the duty rate a company must pay; for example, apparel and footwear often fall under categories with higher tariffs. Accurate classification helps prevent overpayment of tariffs, allowing businesses to maintain competitive pricing. During the Trump administration’s first term, the publication of Section 301 product lists meant that goods on these lists faced additional tariffs.
2. Origin is equally important. Goods sourced from countries with favorable trade agreements, such as qualifying products imported from Mexico or Canada under the United States-Mexico-Canada Agreement (USMCA), face lower tariff rates compared with those from countries such as China. Understanding and documenting the origin of products can significantly impact a company’s overall tariff exposure and inform sourcing decisions. To better manage products’ origins, many retailers have shifted production or finishing work to third countries to manage tariff exposure while balancing cost and speed.
3. Valuation is critical in calculating duties, as tariffs are most often levied as an ad valorem percentage of the product’s value. A higher valuation can lead to increased duty costs, making careful valuation planning essential, especially in retail’s current highly price-sensitive environment.

One effective planning concept increasingly relevant for retailers is the use of transfer pricing policies in related-party transactions. Adjusting these approaches can influence duty calculations and unlock savings or deferrals through mechanisms such as the US reconciliation program.

Managing tariffs effectively for retailers

For retailers, tariff management requires a strategic approach that encompasses accurate assessment and compliance across the organization.

To accurately assess tariff impacts, retailers should conduct an analysis of their procurement and inventory flows. This includes evaluating the percentage of goods affected by tariffs, understanding specific rates applicable to different product origins and classifications, and forecasting how these costs will influence consumer pricing and profitability. Leveraging data analytics tools can enhance this process, enabling businesses to model various scenarios and better understand potential financial outcomes in a fast-moving consumer market.

Collaboration across corporate functions is vital. Engaging teams from finance, procurement, legal, merchandising and supply chain fosters a comprehensive understanding of tariff implications and facilitates informed decision-making. This cross-functional collaboration is crucial for effectively managing the complexities introduced by tariffs and facilitating alignment with the strategic levers discussed earlier.

Compliance is another critical aspect of tariff management. In a regulatory environment characterized by ongoing changes and heightened scrutiny, businesses must remain vigilant. This is especially important in retail, where penalties or delays can directly affect product availability on store shelves. Investing in training and resources to empower employees responsible for compliance is essential, as the potential consequences of noncompliance can be severe. Organizations should consider implementing robust compliance management systems that streamline the monitoring of tariff changes and facilitate timely updates to internal processes.

Preparing for future uncertainties

In an unpredictable trade environment, a critical mistake for any company is to remain passive. Retailers must adopt a proactive approach, which includes identifying vulnerable categories, diversifying sourcing, and exploring alternative suppliers or production locations that may offer more favorable tariff conditions.

Engaging with congressional representatives and trade associations is also vital. Retailers benefit from engaging with trade associations to stay informed and advocate for sector-specific interests.

Retailers should consider flexible pricing strategies that enable swift adjustments. For example, implementing tiered pricing models or contracts with tariff clauses can help retailers manage costs while maintaining consumer loyalty in a competitive landscape.

Learning from industry leaders that have successfully navigated tariff challenges offers valuable insights. For example, a leading manufacturer and a food and beverage company exemplify the importance of agility and foresight in tariff management. Instead of waiting for executive orders, the manufacturer took action early on to make sure its import data was current and standardized, allowing it to run various scenarios amid constant changes. This proactive approach enabled the company to model scenarios at even the slightest hint of change. Similarly, the food and beverage company has been proactively studying the benefits of leveraging Foreign Trade Zones to lessen overall tariff liabilities and effectively navigate the complexities of evolving trade regulations. By understanding the nuances of tariff rates and trade regulations, businesses can better position themselves for success.

Ultimately, preparing for future uncertainties requires a commitment to continuous improvement and foresight.