With U.S. President Donald Trump seemingly determined to fight off legal challenges to his tariff policies, they appear likely to remain in place for some time, reinforcing the need for multinationals to adopt a more strategic approach to the new trading regime.
Understandably, given the uncharted economic waters we are now entering, decision-makers have largely been holding off on a re-evaluation of corporate strategy. They have taken the view that with all the vacillation and question marks over tariffs, it is better to postpone significant strategic moves.
Response so far
Yet senior executives need to be on the front foot, certainly more responsive than they are. We have seen piecemeal actions, such as precautionary frontloading of inventories in the U.S. and other markets, halting or slowing down ordering, or delaying production adjustments and capital investments. Additionally, there have been incremental, short-term modifications to strategy, including piloting new sourcing options and adjusting pricing models to address immediate challenges.
However, such measures are not the long-term solution. Concrete steps are needed. Companies should consider a strategic response – involving a comprehensive evaluation of operations, supply chains, and market position – to enable them to adapt to the unpredictable business environment where tariff rates are one of the key input costs and drivers of uncertainty.
Demand and supply shocks
Even if country-specific tariffs don’t rise much above the proposed 10 percent base rate, companies must understand that this is not just a tax on final products, but also raises the cost of intermediate goods and raw materials. Therefore, it is much more expensive than a sales tax at the customer level. Put simply, companies face demand and supply shocks, similar to those that affected businesses at the height of the COVID pandemic.
Notwithstanding their uncertain legal validity, Trump has staked his mandate and reputation on tariffs. He is likely to continue to challenge court interventions, and, if that fails, explore other means of keeping his headline policies in place. Consequently, multinationals should prepare for country-specific tariffs to continue for the near to medium term. In contrast, sectoral tariffs (such as those on steel, pharmaceuticals, and automobiles) are likely to remain unaffected by court rulings.
As a starting point for a robust strategic response to demand and supply shocks, companies should consider a playbook of measures that will help them react more effectively to volatile market and sourcing conditions.
Caution over data
At the outset, it is important to be cautious of early indications in hard and soft data. Consumer and business sentiment has cratered in the U.S., but the hard data shows customers continuing previous spending patterns. There is a disconnect between how people feel and how they act. Companies may have anticipated a slowdown due to the increased costs associated with tariffs, yet demand appears to be normal.
Therefore, don’t take data at face value. What you are seeing this month, for instance, in terms of sales growth, is not necessarily what you can expect next month. Many companies will likely have to adjust their pricing, reduce product inventory, lay off employees, or make other decisions that will drive higher prices or alter the types of products they sell. Even if companies choose to incur cost increases, it means they are likely to be less profitable and will thus have less money to spend on new products or factories.
Shorter decision-making timeframes
Not knowing what will change from one month to the next, businesses will have to adapt to shorter planning and decision cycles. From a management perspective, this is quite tricky. Gathering all senior stakeholders together for an annual strategic assessment can be challenging, and doing so monthly will require significant organisational flexibility, urgency, and alignment. Decisions regarding pricing, investment, purchasing of products, and spare parts all have to be made in a much shorter timeframe than companies were accustomed to. Senior executives might find themselves with one strategy for July, another for August, and yet another for September.
Similarly, there is a need for a more agile approach to supply chains. Companies should consider shifting their focus from global efficiency and scale to resilience. This might be similar in scope to the supply chain diversification many firms undertook to address the massive disruption caused by the pandemic. Having multiple suppliers may be less efficient and drive up cost structures, but it markedly reduces vulnerability.
Introduction of indirect costs
Managing the now more complex demand and supply dynamics will also introduce indirect costs, which must be factored into any cost analysis. Companies may need to hire trade specialists, lawyers, and economists whose expertise they would previously have only drawn on once or twice a year, and invest in technology that can assist with inventory optimization and the management of quality and reliability across multiple suppliers. To reduce the cost of cross-border shipments, they may need to rethink their regional distribution networks, which could require new or expanding regional distribution centers.
Contracts with customers and suppliers will need to be rewritten. There is a significant risk of being stuck with pre-tariff prices, which may leave companies transitioning from being highly profitable to mildly profitable or even unprofitable altogether. Contracts could include “tariff pass-through mechanisms” that automatically adjust prices based on changing tariff rates for particular products. They could also include specific pricing scenarios, where prices change under certain conditions, or buffers that raise the cost of all products by a nominal sum.
Smoothing prices
In addition to reviewing contracts, businesses may also consider mitigating the sticker shock of a tariff increase by spreading it across other products or accessory items, a process known as price smoothing. For instance, a video game company could maintain the prices of its consoles but increase those of accessories and software. Or a big U.S. beverage company may choose to offset the rise in the cost of bottles imported into America by marginally raising the prices of its products in other markets. Alternatively, companies may focus on the sales of products less subject to tariffs. An American auto firm, for example, could switch from selling economy vehicles from Mexico, subject to high tariff rates, to less affected luxury models whose customers may be less price-sensitive.
As senior executives study these strategic considerations, they should pay attention to how their decision-making is communicated. It is essential to keep discussions and outcomes confidential, as disclosing sensitive information on matters such as pricing, supply chains, and contracts could lead to negative publicity and reputational damage. A decision to regionalise suppliers may not go down well in China, while a move to pass tariff costs to consumers in the U.S. risks a consumer backlash.
It is typically better to keep things under the radar and introduce measures without fanfare. At the very least, carefully consider the potential reactions of stakeholders and how these might be mitigated before making announcements.
In the current climate of uncertainty, companies should strive to transition from piecemeal actions to strategic assertiveness, making operational decisions that may need to be reviewed and adjusted on a monthly basis. Those who continue with a wait-and-see approach risk falling behind more proactive rivals. The latter could benefit from a more efficient supply chain and more favorable pricing, thereby increasing their market share. Decision-making amid volatility is no easy matter, but companies must rise to the business challenges posed by Trump’s tariffs to stay ahead of the game.
About the Author
Antonio Martinez Castillo is the Managing Director for Americas and Global Economics Research at FrontierView, a FiscalNote company. He has been advising global corporates for over a decade on strategic planning, market monitoring, and contingency planning in international markets.
