With the new U.S. administration officially in office, discussions around tariffs and what they mean for businesses and consumers alike have been at the forefront of mainstream media. In their most basic form, tariffs are intended to be taxes on goods imported from other countries and are paid by the companies that import those goods — and then will often build those fees into the costs of the goods they sell. Depending on the type of tariff and/or percentage imposed, they can also be a major factor influencing the costs of shipping and logistics.
For companies looking to determine what new tariffs on goods from China — and potentially Mexico, Canada, and other countries — could mean for their businesses, it’s important to understand the different types of tariffs, how they may impact their shipments, and how working with the right logistics partners can help navigate the uncertainty surrounding them.
Understanding the Most Common Types of Tariffs
Governments typically impose tariffs as a means of protecting industries domestically (often for new or rising sectors), to balance trade between countries, to serve as leverage for trade negotiations, to respond to measures taken by other countries, or to protect national security concerns, generally by ensuring that critical materials or supplies are produced domestically.
Tariffs primarily fall into four categories:
- Ad valorem tariffs: These tariffs are charged as a fixed percentage of the total value of the goods being imported. They tend to raise the overall cost of the goods, as the additional amount is generally passed on to the end consumer, and may help to lower pricing competition with domestic products.
- Specific tariffs: These tariffs are designed to charge a fixed amount on every good that is imported and tend to vary based on the type of good (e.g., the tariff on electronics may be higher than the tariff on clothing). For a less expensive or lower-grade product, the tariffs are considered more severe as they tend to be a larger percentage of the overall value.
- Compound tariffs: A combination of both ad valorem and specific tariffs, compound tariffs combine a fixed fee for each individual good in addition to a percentage of its overall value.
- Tariff rate quotas: These tariffs impose a lower rate for an initial set amount of imported goods (or quota). Once the initial quote is reached, any additional goods receive a higher tariff rate.
While tariffs can be implemented for a number of reasons and are generally intended to protect domestic interests, they also have a number of implications for supply chains and overall shipping costs.
The Impact of Tariffs on Shipping Operations
Because tariffs can be imposed on large quantities of goods being imported, they can bring about a number of financial and operational hurdles that shipping companies must be prepared to navigate. Some of these challenges include:
- Higher costs: Tariffs are added onto goods being imported from countries that are affected, and the company importing those goods is responsible for paying the tariffs. As a result, the costs are often passed on to the end buyer or consumer, raising the cost of the goods and often lowering demand for them if consumers are able to find a less expensive alternative. This can also impact pricing strategies and affect revenue margins.
- Operational disruptions: Particularly if a tariff is imposed unexpectedly, shippers may be left scrambling to source products from different locations or secure different shipping routes in order to keep costs down and avoid tariffs, if possible. This can also lead to demand fluctuations, challenges with managing inventory, and potential shipment delays as shippers navigate the unknown.
- Documentation and compliance issues: Different tariffs create varying levels of complexity for the shipping process and can require additional paperwork, documentation, and customs procedures in order to be cleared to enter the country, leading to potential delays and interrupting the flow of the supply chain.
Navigating the Uncertainty
In order to best position themselves for success, it is important for shippers to have a firm understanding of what tariffs can mean for their businesses and to make a plan to mitigate potential disruptions while staying informed of any additional changes that may be on the horizon. For instances in which goods are imported from countries with high tariffs, shippers can start by diversifying the sourcing of specific goods from other countries rather than relying on one source, in addition to working with current suppliers to negotiate pricing to help offset some of the financial burden. Analyzing shipping routes and adjusting their strategies can also help to reduce the potential impact of tariffs.
Tariffs can present multiple areas of uncertainty for shippers, and being able to understand what they mean for the business is a key first step in helping to reduce any negative impact. For those seeking help to navigate the complexity, EFW has worked to become a trusted logistics partner for global shippers and can help provide clarity and understanding around global trade regulations. With tailored logistics strategies informed by data to help optimize shipping strategies and reduce costs, companies can rest assured that they have a true partner to help navigate any uncertain waters that may lie ahead.
Click here to learn more about EFW’s international shipping solutions and how they can help your team stay informed to mitigate any potential disruptions that may arise.
