Trade has not been a front burner issue within the 2024 election year echo-chamber, which has focused on immigration, the wars in Ukraine and Gaza, Russia, and inflation. However, inflation is related to tariffs, especially with the West’s reliance on China. Intuitively, in an environment where an administration is focusing on reducing inflation, applying additional upward pressure on costs won’t fly. Since President Biden took office, there has been chatter about removing tariffs to relieve inflationary pressures. However, a) the effects on consumer pricing would be minimal, given the Chinese government’s control of currency valuation and b) it would be politically difficult for Biden to lower constraints, given concerted efforts to frame up his relationship with China as being too friendly already.

That said, with the conflicts abroad, security will be a discussion point in the general election. A second term President Trump will want to appear strong towards China and tariffs are a proven tool to do just that. Trump has mentioned the possibility of a 10% universal import tariff and further confirmed that tariffs are on his radar with a claim that he could present tariffs exceeding 60% on ALL Chinese goods.

Congress is doing its part as well. In 2000, the Senate voted to give China permanent most-favored-nation (MFN) status, which is unique as most trade statuses are evaluated annually by the President and approved by Congress. The China Trade Relations Act, a bill written in 2021, would return China’s MFN status to annually renewable. This potential legislation is important as it touches on more than just trade, creating heightened inertia and momentum for passage. The bill expands the list of human-rights and trade abuses (usage of slave labor, hindering the free practice of religion, and economic espionage via the theft of intellectual property) that would disqualify China from this status. Summarily, this saber rattling in Congress indicates that it’s not going to get any less expensive to source in China.

With that landscape, there are actions that can be taken to reduce exposure that provide a level of diversification and contingency planning.

  •  Utilize legal caveats to tariff (and duty) costs, especially in DTC environments.
    • Section 321 is a US Customs trade code that provides the opportunity for US-based companies to fulfill consumer orders from a Mexican or Canadian warehouse, so no US import duty or tariffs are paid. With the proper partner, an alternative warehouse in Mexico (or Canada) can be set up in as little as 90 days and run in parallel with current US-based operations. Further, customers won’t even know the shipments originated in Mexico or Canada.  (“Not Just Duty and Tariff Avoidance, but Elimination”)
  • Mitigate country risk by investing in the diversification of your supply chain.
    • For more reasons than just tariff avoidance, a diversified supply chain provides choices, contingencies when things go south, and a constant competitive environment with your supply base. Further, specifically as it relates to China, cultural dynamics illustrate a high potential for volatility and instability in supply base (“Supply Chain Investments and the Importance of Diversification”)
  • Building on your diversification by investigating reshoring opportunities.
    • Driven by higher demand, Mexican infrastructure (both along the border and further in-country) has seen a high pace of development with opportunities for both green and gray field investments (in addition to “shelter” companies, where a US firm retains ownership and control of production assets, engineering, and supply chain, while the shelter company is the Mexican legal entity of record)

If you’re interested in hearing more, our team of strategic sourcing consultants at Forsyth Advisors has functional and fractional resources provide ongoing support.

Want to learn more? Reach out to our expert consultants directly