Author: Matt Cunningham
“Tit-for-tat tariffs” are making major headlines daily, specifically those aimed at China by the U.S. under Section 301 of the Trade Act of 1974. Politics aside, the two main objectives of tariffs in general are:
- To produce revenue for the tariff-imposing government and
- To protect domestic industries.
The tariffs over recent news cycles focus on the second objective, aiming to protect U.S. domestic industries by making it more expensive for foreign goods to enter our country. Through a multi-stage process, the new tariffs have impacted everything from soap to aerospace products — with the current tariffs coming in at a hefty 25% for affected goods.
Whether or not you agree with the approach or the politics behind it, these tariffs will have an impact on businesses, and particularly manufacturers, and their financial reporting.
How Will Tariffs on Foreign Imports Impact Your Manufacturing Business?
Here are a couple financial facts for manufacturers to consider relative to the tariffs:
- If your company is sourcing goods from foreign suppliers or company-owned facilities, the cost of those goods will rise.
- If your company manufactures in the U.S., sells to foreign customers and the foreign country has similar retaliatory tariffs in place, the effective cost of those goods to the foreign customer will increase.
If your company falls into one of the above categories, you should already be thinking about how a diverse foreign and domestic portfolio of suppliers and customers can help shield your operations from major disruptions.
If, on the other hand, your company sources, produces and sells domestically, there should be no direct impact. Potentially, your domestically produced goods may even become more attractive as the cost of foreign alternatives increases.
How Should Your Manufacturing Business Account for These Tariffs?
Tariffs on imported raw materials or finished goods are an additional cost tacked onto those goods. The cost of these tariffs should be added to the total cost, just as you would for freight, duties or other costs incurred to bring the goods to their existing condition and location. Think of the tariffs in the same way you would a freight surcharge. These are, hopefully, temporary increases in the cost of purchased goods. While temporary, they still must be included when calculating the cost of inventory on hand at the balance sheet date.
But beyond understanding that your costs will rise, if your company is currently relying solely on foreign suppliers it will be important to decide what you are going to do about it, if anything. What will your strategy be? Wait it out, assuming they are short-term inconveniences? What if they’re here to stay? There’s no way to know for sure, but finding an alternative domestic supplier might be a path to seriously consider.
In the end, will the tariffs accomplish what they set out to? If companies begin using domestic suppliers or production facilities, or perhaps they shift foreign operations or suppliers to a company not located in a country with tariffs, then it would seem the tariffs have hit their mark. Time will tell.
