The new US tariffs announced on April 2, including a “minimum baseline tariff” of 10% and higher “reciprocal trade tariffs” on goods from some 60 countries, expand the Trump administration’s trade targets from a few nations and sectors to the vast majority of the global economy. In addition to higher costs for US companies and consumers, two things are clear. First, we are entering a new era of trade and economic relations. The president’s tariffs, which are on top of levies already imposed, have moved well beyond a few bilateral trading relationships or sectors of interest. Second, uncertainty will be a defining attribute of much of global trade for the foreseeable future, not only with respect to the possibility of further tariffs (next week, next month, or next year) but also the stability and reliability of the US’s relationships with its trading partners and the resulting global ramifications.
Management decision making just got a lot more complicated. Every company, regardless of sector or location, needs to build tariffs and the related uncertainty into its planning and operating model. Here’s what we know right now and what it looks like it means for US and global businesses.
Every company, regardless of sector or location, needs to build tariffs and the related uncertainty into their planning and operating model.
What We Know
Before April 2, the second Trump administration had largely targeted or threatened tariffs on a few trading partners (such as China, Mexico, Canada, and the EU) and industries (like autos and steel and aluminum). Now, the president has imposed broad tariffs designed to level trade imbalances between the US and its international partners.
The new tariffs are planned to be rolled out quickly, with the 10% global baseline tariff going into effect on April 5 and country-specific tariffs on April 9. Canada and Mexico were exempted from the latest tariffs but are still subject to earlier levies, with certain sectoral and product-specific exemptions, as well as to the global steel and aluminum tariffs.
There are exemptions for certain products deemed important to the strategic interests of the US, including pharmaceuticals, semiconductors, and certain metals, minerals, and energy resources.
The new tariffs will “stack” on top of most tariffs already in place, with exceptions for the Section 232 tariffs (such as those on steel, aluminum, and automobiles). All imported autos were subject to a 25% levy under an earlier-announced Section 232 measure. The “reciprocal trade” tariff rates range from the 10% baseline up to 50% for Lesotho. The total tariffs on goods from China will jump to 54% (it did not receive Canada and Mexico’s exemption), and those levies could go as high as 74% if the proposed duty on countries buying Venezuelan oil is also imposed. There are exemptions for certain products deemed important to the strategic interests of the US, including pharmaceuticals, semiconductors, and certain metals, minerals, and energy resources.
We expect most affected countries to both attempt to negotiate with the Trump administration and retaliate with increased tariffs of their own or other trade and nontrade measures. The EU, for example, has announced a four-week window for negotiation before it retaliates. A new front in the tariff war could be opened with levies on US services (such as internet streaming services, cloud computing, and software), enormous parts of the US economy that have so far been kept out of the fray.
Subscribe to receive BCG insights on the most pressing issues facing international business.
What It Means
These are the biggest changes to the world trading system since the General Agreement on Trade and Tariffs came into effect in 1947. The president’s move seems to imply that the US will no longer follow the “most favored nation” (MFN) principle, which requires each member of the World Trade Organization to apply the same tariff rates for all its WTO trading partners (unless a free trade agreement is in force). Retaliation from many US trading partners would, in effect, mean the end of the MFN principle and mark the beginning of prolonged bilateral negotiations for country-specific tariff rates and implementation schemes. Each “deal” could be distinct with its scope limited to the parties involved. Factors in these negotiations could (and already do) extend beyond economic considerations to encompass such issues as border security, immigration, and national defense spending.
Developing a full understanding of peer companies’ tariff-affected cost structures is critical.
The new tariffs may provoke traditional trading partners to explore new alliances and develop deeper trade relationships that exclude the US. South Korea, Japan, and China are reportedly working on a joint response, for example, as are Canada and Mexico. Companies will have to monitor, analyze, and potentially try to shape many individual sets of “deals.” This will require reallocation of financial, human, and technical resources as well as the development or acquisition of new expertise.
Firms that have built “geopolitical muscle” should be much better prepared to confront the headwinds. Companies have set up teams to work through basic short-term mitigation plans, especially the possibilities for pricing pass-through and working with suppliers to share the cost burden. This is partly a competitive exercise, so developing a full understanding of peer companies’ tariff-affected cost structures is critical. Now, management teams also need to game out what permanent high tariffs would do to their supply chains and
manufacturing
networks. Relevant factors include:
- The stacking of tariffs means the impact will be much more severe than many thought, putting a premium on moving quickly to develop and implement mitigation plans.
- Are exemptions for countries and exclusions for products possible? The first Trump administration granted four types of exemptions from punitive tariffs, including individual-company exemptions for specific products and exemptions for an entire source country. But pursuing exemptions can be costly and time-consuming, with no guarantee of a favorable outcome, and exemption measures often come with expiration dates.
- The new tariffs could increase the strength of the dollar (although the initial impact was negative) and raise raw-material input prices, which means using the US as a manufacturing base for global exports becomes relatively less advantaged. Competitors from China, Europe, and other markets have a once-in-a-lifetime chance to take global share from US-based players, which must now figure out how to serve global markets from their non-US plants. US services may also come into tariff play.
- Should US companies expand their domestic footprints? Will foreign firms expand their foreign direct investment into manufacturing in the US? What will the dollar do? Will Congress cut corporate tax rates? Will the current tariffs be sustained over a five- or ten- year horizon? Can technologies such as robotics reduce labor costs in restored plants? Will the impact of deregulation over the next 12 to 18 months offset higher costs in other areas?
- If country-specific tariffs and bilateral negotiations become a new normal, the ability to maneuver among sources of supply and manufacturing locations takes on new importance. How do companies build greater resilience and flexibility into their supply chains and networks without overloading their cost structures? Long-held assumptions about low-cost production and the types of value that suppliers can add may need radical rethinking.
Global trade is entering a brave new world. Companies need to adapt quickly to the new realities of complexity and cost. The ability to do so will be a basis of competitive advantage for the foreseeable future.
