With confusion reigning, supply chains are seeking out ways to adapt to the new tariff landscape. A recent report from Grant Thornton offers some advice on how to do this.
Supply Chain Reconfigurations
The report offers the following analysis: (excerpted below)
The new emphasis on tariffs accelerates trends toward nearshoring and supply chain diversification, particularly to nearby countries with existing free trade agreements with the U.S. such as in Central America. Nearshoring supply chains to Mexico and Canada had been very attractive under the United States-Mexico-Canada Agreement (USMCA), but now the new U.S. tariffs on those two nations complicate this, with many U.S. businesses publicly expressing hope the new tariffs are temporary or negotiable.
Companies with supply chains in China may look at “China +1” strategies – keeping some production there but expanding capacity in Southeast Asia or India to mitigate risk. Diversification includes having multiple supplier options for key products. Even higher-cost domestic options can be a hedge against a foreign source that becomes too expensive because of tariffs. Building a base of redundant sources can increase costs in the short run, but many companies now view it as long-term “insurance.”
Companies can elect to hold more inventory of critical items as a buffer against tariffs or border slowdowns, despite the working capital hit. Businesses should evaluate if they can redesign products to use more locally available materials or fewer imported components – engineering a solution to a trade problem. Having more agility in supply chain management becomes a competitive advantage, as companies that adapt fastest will secure alternatives before supplies become scarce.
Regulatory and audit focus
A volatile tariff environment requires stronger oversight and controls. Auditors (internal and external) will closely watch how companies reflect tariff impacts in financial statements. For instance, inventory on the balance sheet should include any duties paid, but could cause tight margins to go negative resulting in inventory write-downs. Revenue recognition, specifically determining the transaction price, might be affected if companies implement surcharges or passthrough charges. Disclosure in MD&A sections of 10-Q and 10-K filings or annual reports should address material tariff impacts and risks – the SEC may scrutinize whether companies are adequately informing investors of exposure to trade policy changes.
Companies must ensure they are not violating trade laws, such as re-routing goods through third countries (trans-shipment) to dodge tariffs and falsifying country-of-origin information. Compliance officers should tighten supplier audits and certifications of origin to avoid inadvertently buying goods with falsified origin, in addition to monitoring their company’s compliance with tariff/duties requirements.
We’ve seen an increase in companies engaging legal firms to assist with this. Internal audit teams should consider including tariff management in their audit plans: monitoring processes to maximize drawback claims, updating ERP systems with new tariff codes/rates, and inspecting that tariff-specific strategies and compliance are operating effectively.
Boards and audit committees will likely demand risk assessments related to tariffs – including scenario analyses and contingency plans. They may also want assurance that management is monitoring early warning signals of policy change (e.g. following Treasury announcements, engaging trade counsel). Strategic partnerships or joint ventures create new risks and monitoring requirements that should be of interest to audit committees. Finally, some companies are looking into trade disruption insurance, including policies that cover losses due to supply chain disruption. Legal and risk advisors should review contract clauses, and new contracts might explicitly include or exclude tariffs as force majeure events.
