Tariffs – taxes on imported goods – can have adverse effects on your profitability and ultimately on end customers’ pricing. When it comes to imported steel and aluminum, and industrial products manufactured with those materials, tariffs range from 7.5% to 25%. According to our research on the geopolitical environment, we believe they will remain in effect for a while and possibly increase.
Although tariffs are intended to shelter industries from so-called “unfair competition” from certain countries by preserving and creating jobs, the effectiveness of these import taxes appears to be mixed, based on our reading of the research published recently by academic institutions and news organizations around the world. There are logical arguments for and against tariffs, some of which are backed by data.
The net effect, depending on tariffs and the percentage of commodities in your cost structure such as steel and aluminum that are subject to tariffs, is that it may make more sense to buy products from local providers with local supply streams to avoid those tariffs as much as possible. Doing so can also significantly reduce shipping costs from overseas suppliers, which in some cases have tripled recently.
By relying on domestic manufacturers, you can achieve these benefits:
- Less Exposure to Global Unrest. With conflicts and weather patterns affecting the shipment of goods worldwide, sourcing products domestically eliminates the need to pay an “extra” tax on top of the sales tax in your state, unless your facility is in Alaska, Delaware, Montana, New Hampshire, or Oregon.
- Lower Production Costs. By avoiding payment of a surcharge on imported goods, you reduce your overhead costs, allowing you to maintain or increase profit margins that would be lower or non-existent if you had to pay an extra “tax” on products sourced from overseas suppliers.
- Fewer Supply Chain Disruptions. Domestic suppliers often provide more reliable and faster delivery than their overseas counterparts, reducing lead times and minimizing disruptions caused by international trade issues. On a related note, tariffs can force manufacturers to hastily find alternative sources for assemblies, parts, and components, causing disruptions to production schedules. Because a manufacturer does not have a long relationship with the new supplier, switching supply chain partners can also be more expensive because of “rush charges” and can also result in the production of a lower-quality product.
- Higher Profit Margins. The inability of most manufacturers to pass on the full cost of tariffs to customers means that manufacturers often must absorb some of the cost, leading to reduced profit margins. This reality can affect the financial health of the business and lead to potential losses if the tariffs persist over a long period.
- Stronger Ability to Make Investments. With higher profit margins achieved by avoiding tariffs, manufacturers have more ability to invest in new technologies, facility expansions, and worker training. This “found money” can have long-term positive effects on a company’s ability to innovate and be competitive within its industry.
- Greater Ability to Innovate. Higher costs and supply chain disruptions can lead companies to focus on immediate operational issues to increase productivity for example, instead of investing in innovation, potentially slowing down the introduction of new products or processes. On a related note, working with local suppliers that have engineering capabilities can help innovate on materials used in your products to improve performance and reliability, as well as improve overall customer experience, leading to positive long-term value creation.
- Less Supply Chain Complexity. To mitigate the actual cost or potential risk of tariffs, companies have to rely on multiple suppliers, often in multiple countries outside of the U.S. Although this approach can enhance resilience, it is an arrangement that is more difficult to manage, has the potential to increase indirect costs with complex supplier validation processes, and has its own set of risks compared to relying on supply chain partners closer to home.
- Better Quality Control. Because domestic suppliers are subject to the same regulations and industry standards that you are, there is a higher probability that the assemblies, parts, and components you order will meet specifications and other requirements perfectly.
- Elimination of Currency Exchange Rate Risks. By sourcing products domestically, you eliminate the risk of currency fluctuations that can impact the cost of imported goods and ultimately your company’s ability to remain competitive.
- Greater Protection of Intellectual Property. Domestic sourcing reduces the risk of intellectual property theft, which can be a concern when dealing with overseas suppliers.
- Support for Local Economies. By purchasing from domestic suppliers, you are helping to create or sustain jobs in U.S. communities that promote economic growth in those cities and towns.
- Decreased Environmental Impact. When you source products domestically, the shorter shipping distances result in less energy consumption, which reduces your carbon footprint and allows you to operate at a level of sustainability that resonates with some customers.
Depending, again, on the percentage of steel, aluminum, and other commodities you use, and which are subject to tariffs, the case for keeping your supply chain close to home could be appealing. That’s because the uncertain geopolitical environment, rising costs, and longer lead times of international shipments have made the global business environment less predictable lately.
The specific reasons for this reality are many and include a pandemic, regional conflicts, and weather. Those recent events accelerated numerous trends that were already occurring, with reshoring, also known as onshoring, of industrial product manufacturing being one of them.
As a result, a resurgence in domestic manufacturing is underway, with construction spending having tripled from January 2020 to May 2024 and more than 750,000 new manufacturing jobs having been created between early 2021 and mid-2024.
To determine how you can avoid paying tariffs by strengthening your operations with domestic supply chain partners...
