04 Jun Five Ways for Businesses to Reduce Tariff-Related Risks

Tariffs—taxes imposed on imported goods—may be introduced for several reasons, namely to protect domestic industries, correct trade imbalances and advance foreign policy goals. As such, tariffs imposed by the United States can fluctuate based on the latest geopolitical developments. While tariffs are intended to protect U.S. companies by limiting foreign competition and fueling increased domestic production and sales, they may lead to higher input costs, particularly for raw materials and parts. These increased expenses could get passed along supply chains and, in some cases, drive up insurance costs, especially in segments where asset and replacement values are directly affected (i.e., commercial property and auto). In light of rising tariff concerns, companies must implement strategies to reduce their exposures and manage insurance costs. Here are five tips for businesses to consider.

Diversify supply chains

Businesses should conduct detailed risk assessments to identify vulnerabilities in their supply chains, particularly those related to international trade and tariffs. Upon identifying these risks, companies can benefit from diversifying their supply chains to limit trade-related exposures. This may involve selecting alternative suppliers from regions with more favorable trade practices or shifting production operations through methods such as near- shoring or reshoring.

Implement operational improvements

By adopting artificial intelligence tools and data analytics solutions, businesses can bolster supply chain visibility, forecast disruptions and improve operational efficiencies, thus helping reduce tariff-related risks. Additionally, developing comprehensive contingency plans to address supply chain disruptions caused by tariffs is imperative. Companies can also work with legal professionals to ensure compliance with evolving global trade policies, thereby minimizing the risk of fines, delays or reputational damage.

Modify contracts

When establishing or renewing contractual agreements with suppliers and other vendors, businesses should carefully evaluate the wording in these documents and include specific clauses regarding tariff-related risks. Cost-sharing clauses can be particularly beneficial, as they divide the responsibility of paying tariff-induced expenses among multiple parties.
Regularly reviewing and updating contracts to reflect changes in trade policies and tariff regulations can also help these agreements remain effective.

Leverage tariff mitigation measures

Sourcing goods and raw materials from regions with fair trade agreements can help busines-ses minimize tariff impacts, as these agreements aim to reduce tariff burdens between participating countries. Operating in foreign-trade zones is another solid strategy, as these areas allow companies to defer or reduce tariffs on imported goods. In addition, tariff engineering tactics (e.g., altering production processes, swapping raw materials and changing product designs) can help businesses reduce import costs and manage tariff expenses more effectively.

Review insurance policies

To ensure adequate coverage and better manage tariff-related exposures, businesses should clearly document their supply chain and operational risk management strategies for insurers. Regularly reviewing and adjusting insurance policies is also crucial to maintaining adequate coverage, and businesses may need to consider increasing deductibles or exploring
self-insurance options to better manage premium costs. Depending on their exposures, companies might benefit from purchasing specialized coverage, such as trade credit, contingent business interruption or political risk policies, to protect against tariff-related risks.

Tariffs can pose significant challenges for businesses, affecting supply chain stability and insurance costs. Implementing these risk management strategies can help companies better navigate the complexities of global trade and reduce their tariff-related exposures. Contact us today for further guidance.