A new tariff paradigm: How businesses can respond

A multi-trillion-dollar upheaval

For a sense of how broad the impact is, Trump’s initial tariff actions on Canada, China and Mexico affect approximately $2.2 trillion in trade activity. Additional 25% global tariffs on steel and aluminum imports, including steel and aluminum-derived products, went into effect on March 12, further roiling trade with Canada and prompting the European Union to announce retaliatory measures that will take effect in April, barring a deal. The recent U.S. stance marks an aggressive escalation, as the administration’s stated goal is to shift more production and consumption to the U.S. while raising revenues to accommodate lower domestic taxes.

Those actions come on top of tariffs still in place from the first Trump administration – largely on Chinese products – which have been augmented by additional 20% across-the-board tariffs on Chinese products. In addition, new tariffs on Canadian and Mexican products have been announced most of them at a 25% rate (with a 10% rate on Canadian energy imports). Currently, some of these tariffs have been paused until April 2, though Trump as of March 13 says he remains committed to moving forward on additional duties.

U.S. trading partners have responded with both resistance and retaliatory measures. 

• Canada quickly countered Trump’s Canadian import tariffs with 25% counter-tariffs on approximately $21 billion (USD) worth of targeted U.S. products. Following the March 12 steel and aluminum tariffs imposition, Canada doubled the total number of American products tariffed, to $41.6 billion (USD). Canada has also threatened  to leverage essential exports to the U.S. – which is the largest consumer of Canadian oil, among other commodities – to bring the new trade war to an end, though a temporary détente was reached to prevent 25% export taxes on electricity generated in Canada and exported to the U.S. Then-Prime Minister Justin Trudeau commented he would impose an additional $86 billion (USD) in retaliatory tariffs in late March if the U.S. tariffs aren’t lifted, while Ontario Premier Doug Ford has threatened to outright cut off electricity supply from his province to areas in New York, Michigan, and Minnesota that utilize Canadian-generated electricity.
• China: In response to the initial 10% tariff raise Trump placed on Chinese products effective Feb. 4, China retaliated with its own 15% tariffs on U.S. coal and liquified natural gas, and 10% tariffs on crude oil, farm equipment, and some automobiles, as well as restrictions on critical mineral exports to the U.S. and retaliatory actions against select U.S. companies. After the March 4 additional 10% across-the-board tariffs from the Trump administration, China’s government retaliated with tariffs of up to 15% on more U.S. products, with an emphasis on the agricultural sector, a major area of trade between the two countries.
• Mexico: President Claudia Sheinbaum has promised a response with details to come, with Mexico’s government reportedly weighing retaliatory tariffs of 5% to 20% on U.S. products, but there has been less official detail than with Canada and China. Like Canada, the retaliation could be a combination of U.S.-specific export taxes and tariffs on U.S. products.
• The European Union plans to reinstate retaliatory measures it enacted to similar metal tariffs from the first Trump administration on April 1, with another round of retaliatory measures planned for mid-April, after consultation with member-states, as the current steel and aluminum tariffs from the new Trump administration expand upon the previous ones. In total the EU said it expects to impose duties on U.S. exports worth up to 26 billion euros (or over $28 billion).
• Australia, Brazil, Japan, South Korea, and other countries affected by the steel and aluminum tariffs (or upcoming tariffs promised on April 2 but not yet specified) have not yet retaliated but are weighing options.

In addition to the initial round of duties on the U.S.’s three largest trade partners, Trump continues to promise additional tariffs:

• “Reciprocal tariffs:” Tariffs at a rate which will factor not only foreign tariffs on American products, but also value-added taxes and non-tariff barriers (regulations, bans, etc.) that affect U.S. products. Trump said that retaliation by Canada could also lead to an escalation of U.S. tariffs on the northern neighbor, and presumably responses from China and Mexico could lead to increased duties on products from those countries as well. Other countries, in particular those in Europe, are likely to respond.
• 25% tariffs on auto imports, semiconductors, pharmaceuticals: Also floated in public comments by Trump.
• Additional retaliation to tariffs imposed and other actions taken by countries whose products are at the receiving end of new U.S. duties.

If the U.S. moves forward with an all-country reciprocal tariff regime, that could disrupt the entire global trade system, affecting global supply chains and export demand.

Though the full extent of these tariffs has yet to be felt, if all of them even end up in place, U.S. manufacturers and importers have already seen surging input prices in anticipation of tariffs. Steel prices jumped from 12% to 15% in February before the metal tariffs even took effect. Tariffs have injected significant uncertainty into corporate planning and the broader economic outlook, requiring more than normal planning and contingencies.

Business considerations and adaptations

Given this new environment of disruption and uncertainty, businesses that are or expect to be affected by the tariffs likely have little choice but to concentrate on particular business functions to maintain stability.

Supply chain adaptations

The new emphasis on tariffs accelerates trends toward nearshoring and supply chain diversification, particularly to nearby countries with existing free trade agreements with the U.S. such as in Central America. Nearshoring supply chains to Mexico and Canada had been very attractive under the United States-Mexico-Canada Agreement (USMCA), but now the new U.S. tariffs on those two nations complicate this, with many U.S. businesses publicly expressing hope the new tariffs are temporary or negotiable.

Companies with supply chains in China may look at “China +1” strategies – keeping some production there but expanding capacity in Southeast Asia or India to mitigate risk. Diversification includes having multiple supplier options for key products. Even higher-cost domestic options can be a hedge against a foreign source that becomes too expensive because of tariffs. Building a base of redundant sources can increase costs in the short run, but many companies now view it as long-term “insurance.” 

Companies can elect to hold more inventory of critical items as a buffer against tariffs or border slowdowns, despite the working capital hit. Businesses should evaluate if they can redesign products to use more locally available materials or fewer imported components – engineering a solution to a trade problem. Having more agility in supply chain management becomes a competitive advantage, as companies that adapt fastest will secure alternatives before supplies become scarce.

Intercompany pricing and compliance

Tariffs complicate transfer pricing for multinationals, since an overseas affiliate of a multinational sells goods to its U.S. entity, that transfer price now effectively includes a tariff cost at import. Companies in this situation may need to adjust intercompany prices so that the U.S. entity doesn’t bear a disproportionate cost, which could make it unprofitable and trigger red flags with tax authorities.  One strategy is to allocate tariff costs across the value chain, such as having a foreign related party share some cost via price reduction or using transfer pricing adjustments at year-end. Any such moves must be done carefully to remain arm’s-length and avoid costly administrative processes to correct pricing.

Multinationals can and should align customs and tax reporting. Lowering customs value (for example, unbundling certain royalties or services from the product price so they aren’t tariffed) must be consistent with transfer pricing policies and be documented to avoid customs penalties or tax adjustment. Customs compliance is also critical – companies should ensure correct classification and country-of-origin determination to avoid overpaying or misapplying tariffs. In short, finance, tax, and trade compliance teams need to collaborate closely so that intercompany agreements, transfer pricing policies, and customs filings are synchronized in the new tariff environment.

Global tax structures

Tariffs are prompting companies to revisit the efficiency of their global operating models. Companies may discover that their current supply chains are suboptimal when the new tariffs are factored in.  Supply chain exposures to China, Canada and Mexico can lead to higher costs and associated margin pressures.  This interplay means companies are focusing more on a “total landed cost” analysis including tariffs and taxes. In this environment, companies may want to restructure value chains aligning to countries with favorable trade status with the U.S. to maintain cost synergies. Some companies might consider bringing certain high-tariff production to a domestic location using tax credits or incentives (e.g. research and development credits, foreign-derived intangible income provisions, or state and local tax breaks for manufacturing) to offset the increased cost.  Other companies may consider M&A opportunities to diversify their risks.

The OECD’s Pillar 2 global tax minimum of 15% adds another layer of complexity. Companies must ensure that a supply chain shift doesn’t alter their effective tax rate, create double taxation, or materially change their cash tax positions.  Pillar 2’s complex global minimum tax mechanism will make those determinations more daunting. The Trump administration has signaled the U.S. will pull out of the OECD process and threatened retaliatory actions including tariffs and Section 891 retaliatory taxes in response to digital services taxes – the precursor to the OECD global tax negotiations.  This means additional uncertainty, and moving pieces, for companies operating internationally.  It also may mean future trade policy complications for non-U.S. countries adopting Pillar 2. 

Optimal global structuring now requires a multi-factor approach that balances corporate tax, tariffs, value added taxes, and logistics.

Pricing, brand positioning, customer perception

Tariffs likely lead some companies to re-examining their pricing and brand positioning strategies. For instance, companies can surgically adjust prices on their tariff-impacted items while keeping others stable. A targeted approach such as this can help preserve overall value perception. Communication is key: companies can be transparent explaining tariff-related price hikes on their website or store signage to effectively manage customer perception.

Brands with strong margins can consider absorbing tariffs to avoid losing market share or brand loyalty, or altering their products slightly to cut costs. These tactics aim to maintain price points attractive to customers, but companies should guard against too much cost-cutting, which can risk quality – a pitfall brands must avoid to not damage reputation.

Companies can turn tariffs into a branding opportunity by emphasizing American-made aspects of their products. Brands that must hike prices on their products may face consumer frustration, so how they handle the narrative matters. Customer-facing messaging might stress that increases are due to government policy, not company greed, though there’s a fine line in not appearing to “blame” too much and alienating customers who support the tariffs in principle. Companies may want to include a tariff surcharge line item rather than a permanent price increase, which keeps the tariff cost transparent. Companies also should monitor shifts to un-tariffed substitute products or competitors, as market share can change quickly in these circumstances. The bottom line is that pricing and customer strategy decisions under the new tariffs shouldn’t be made in isolation but with an eye on competitors’ moves and consumer tolerance.

Merger and acquisition possibilities

The tariff environment could affect the M&A market by creating opportunities, while also threatening valuations and deal certainty. When evaluating an acquisition, due diligence now must scrutinize the target’s supply chain exposure to tariffs and how resilient or adaptable it is. Buyers might require a tariff risk discount in valuation or focus on earn-outs tied to profitability, which is intrinsically linked to how well the target navigates tariff impacts. For manufacturing targets, questions about reshoring plans and supplier diversification are now standard in deal negotiations.

Due diligence efforts also should include evaluating a company’s customer base and customer contracts, developing an understanding of the company’s ability to increase price to offset increased costs due to tariffs. Potential buyers should evaluate this ability to increase prices, both in magnitude and timing, to maintain gross margins in a tariff-affected environment.

Parties may include tariff-related clauses in purchase agreements. For example, a material adverse change clause could specifically exclude or include major tariff enactments. A delay in negotiations or conditions precedent that pushes a deal closing past a tariff imposition date could trigger purchase price adjustments around inventory value changes or retrospective liabilities.

Post-merger, companies could look for supply chain synergies that optimize tariff exposure. Essentially, tariff mitigation becomes part of synergy realization. Opportunistic acquirers could find potential for synergy success.

Overall M&A volumes could be influenced by tariffs. Some healthy deals might be put on hold due to uncertainty, while other scenarios might spur M&A deals, such as those involving distressed companies hit hard by tariffs or by vertical integration. Companies also might forge new alliances with suppliers in tariff-friendly countries and encourage cross-border M&A. Such partnerships can be complex but offer a strategic win-win under the new rules.

Regulatory and audit focus

A volatile tariff environment requires stronger oversight and controls. Auditors (internal and external) will closely watch how companies reflect tariff impacts in financial statements. For instance, inventory on the balance sheet should include any duties paid, but could cause tight margins to go negative resulting in inventory write-downs. Revenue recognition, specifically determining the transaction price, might be affected if companies implement surcharges or passthrough charges. Disclosure in MD&A sections of 10-Q and 10-K filings or annual reports should address material tariff impacts and risks – the SEC may scrutinize whether companies are adequately informing investors of exposure to trade policy changes.

Companies must ensure they are not violating trade laws, such as re-routing goods through third countries (trans-shipment) to dodge tariffs and falsifying country-of-origin information. Compliance officers should tighten supplier audits and certifications of origin to avoid inadvertently buying goods with falsified origin, in addition to monitoring their company’s compliance with tariff/duties requirements.  We’ve seen an increase in companies engaging legal firms to assist with this. Internal audit teams should consider including tariff management in their audit plans: monitoring processes to maximize drawback claims, updating ERP systems with new tariff codes/rates, and inspecting that tariff-specific strategies and compliance are operating effectively.

Boards and audit committees will likely demand risk assessments related to tariffs – including scenario analyses and contingency plans. They may also want assurance that management is monitoring early warning signals of policy change (e.g. following Treasury announcements, engaging trade counsel). Strategic partnerships or joint ventures create new risks and monitoring requirements that should be of interest to audit committees.  Finally, some companies are looking into trade disruption insurance, including policies that cover losses due to supply chain disruption. Legal and risk advisors should review contract clauses, and new contracts might explicitly include or exclude tariffs as force majeure events.

Next steps

The new tariff environment touches nearly every aspect of business operations and the uncertainty about their implementation should lead companies to consider redoing contracts to adjust automatically by assigning risk to company pricing based on various tariff scenarios. Accordingly, companies seeking to adjust and thrive should adopt a holistic approach – combining supply chain agility, strategic tax compliance, and solid compliance monitoring. The strategic, financial, and operational challenges demand cross-functional action.

By staying informed and being proactive in implementing the kinds of measures discussed above, businesses can mitigate risk and even find opportunities in the uncertain future. Each step – from re-pricing products to redrawing supply lines – should be documented and executed with an eye on both the bottom line and stakeholder expectations, keeping the business resilient in the face of evolving trade policies.