Our observations are that no one outside of a very small circle surrounding Donald Trump knows if his campaign promise of a 10% universal tariff and up to 60% punitive tariff on Chinese imports is an instance of “promises made – promises kept” or a negotiating ploy. We certainly do not know how fast the tariffs would be imposed or if they would be phased in. Given the lightning pace of his cabinet announcements, we suspect a rapid implementation should be assumed. Three thoughts on this topic:
1. Lessen Supply Chain Exposure to China
ITR Economics’ economists have been speaking on the topic of nearshoring, onshoring, and lessening ties to a China-based supply chain for over a year. If you have not sought out the opportunities that come with nearshoring and onshoring, it is not too late. The trend is likely to continue, if not accelerate, with the potential of high tariffs looming. We encourage companies (and investors) to distance themselves from China, or at least minimize the supply chain exposure – even if the threat of tariffs is only a negotiating tactic – because of the geopolitical risks associated with China’s negative demographic trend, highly leveraged economy, and property market bust.
2. Be Careful Regarding Playing the Mexico Gambit
Keep in mind that businesses should be careful about an over-reliance on using Mexico as a manufacturing platform (whether US owned, Chinese owned, or European owned) because the agreement between the US, Mexico, and Canada (USMCA) is expected to be reviewed in the summer of 2026. 2026 is also the mid-term elections, and low-cost-labor goods coming in from Mexico could become a hot political issue.
3. Be Relentless in Cutting Costs and Aggressive With Price Increases
The imposition of tariffs will cause B2B and B2C prices to rise. More power to you if you are able to pass the cost increase through the economic chain. However, not everyone is able to do that. Accordingly, cut costs and/or increase efficiencies. Living in the age of nationalism is going to dictate this need even if tariffs are not imposed. Differentiating yourself from the competition in a numeric way will provide you with some market strength regarding the regularly scheduled price increases that should be a part of your margin strategy.
Conclusion:
We are confident that revenues will rise for most businesses over the next five years. The imposition of tariffs, if they occur, will make that more difficult for some versus others. Strategize now on a) how much you will be impacted, b) what cost cutting measures you can take without impinging on your longer-term strategy, and c) making sure you have the brand strength to navigate the uncertainties and trade eddies that are out there.
Two Items to Keep in Mind
- ITR Economics will not need to reforecast the macroeconomic trends because of tariffs. They tend to be microeconomic in nature. We will of course adjust as necessary for our individual consulting clients engaged in EVP™ programs.
- The Fordney-McCumber Tariff Act of 1922 raised the average import tax to 40%. It would take seven more years before the country stumbled into Depression. “Beggar Thy Neighbor” as a trade policy was born from that legislation.