Board series: Navigating U.S. tariffs as a global company

Much of this reconfiguration started in the first of President Trump’s terms when he wanted to “turbocharge” the removal of global industrial supply chains from China. Companies that nearshored to Mexico and Canada during the first Trump administration to diversify from China faced hurdles with the challenges to the North American trade deal, USCMA, and many faced drops in stock prices and calls from investors.

With enhanced tariff measures in his second term, global companies are evaluating the costs and feasibility of relocating production to avoid increased duties. Protectionist policies have highlighted the fragility of global supply chains, especially for critical materials like rare earth elements essential for technology and manufacturing sectors.

Heavy equipment manufacturers feel the pain

Companies like Caterpillar and Komatsu have experienced disruptions due to tariffs on imported steel and aluminum; but also retaliatory measures due to their global operating footprint. Caterpillar has 60 primary locations across 25 states in the U.S. (significantly in IL, TX, and IN). Internationally, the company operates 59 locations in countries like Australia, Belgium, Brazil, Canada, France, Germany, India, Indonesia, Italy, Japan, Mexico, Poland, Russia, Singapore, South Africa, UK, and China. Its manufacturing, marketing, logistics, services, R&D, and dealer locations total more than 500 locations worldwide.

Of special concern is China, as it is one of Caterpillar’s key markets, and with import duties it will be much harder for them to compete. Caterpillar’s challenges in China started during Trump’s first term:

• In 2018, China imposed additional duties on American products as retaliatory measures. This resulted in $100 million in increased costs for Caterpillar
• In 2019, the EU drafted a list of US products, including machinery from Caterpillar to target for retaliatory tariffs. As a result of the trade war, Caterpillar’s Asia-Pacific unit fell by 22%. The company’s revenue and earnings missed forecasts
• In 2025, China announced a 10% tariff on imports of US farm equipment, impacting Caterpillar and Deere & Co

Meanwhile, Komatsu, second only to Caterpillar globally in construction equipment, has expressed concern on the risk of retaliatory tariffs by Canada. “We are an exporter in America,” Komatsu’s CEO Hiroyuki Ogawa said, adding that Komatsu’s U.S. exports have surpassed imports by about $1 billion a year since its 2017 acquisition of Milwaukee-based mining machinery maker Joy Global. Furthermore, Komatsu leadership expects global demand to be flat in 2025 due to rising costs, price hikes, and stifled demand.

The automotive sector has North American dependencies

The administration’s imposition of a 25% tariff on imported goods has impacted the auto sector. The U.S. is one of the largest markets for many companies like Toyota, BMW, and Mercedes. To take the example of Toyota confronting the imported vehicle tariffs, Toyota increased production in the U.S. as a measure to offset cost increases.

• Inflationary pressures. Toyota has worked to offset the increases in raw material costs by adjusting pricing strategies, implementing cost-cutting measures, and focusing on manufacturing efficiency
• Political risk. In response to the Biden Administration’s incentives to drive EV production and sales, Toyota made significant investments in EV and hybrid lineups. That strategy is now being tested under the Trump administration’s efforts to halt the buildout of EVs
• USMCA and tariffs on Mexican imports. Toyota had adapted its operations to comply with USMCA rules, increasing North American sourcing of parts and adjusting its manufacturing to reduce tariff impacts. Now, the Mexican manufacturing locations might come under scrutiny, leading to uncertainty about the operating footprint

As hedging strategies, companies are actively responding through localized production, multi-sourcing, technological innovation, automation, and process simplification.

Factoring in the cost of climate change

New in 2025, companies that operate in the steel, aluminum, and other building materials sectors will be required to navigate China’s carbon emissions compliance market in 2025. Last year in China, payments for emissions started on its National Emissions Trading System (ETS) and a voluntary greenhouse gas emissions reduction trading market. The framework will grow to include petrochemicals, paper, and other types of metals. Companies based overseas with operations in mainland China will have to take part in the carbon trading system.

In the EU, the Carbon Border Adjustment Mechanism (CBAM) has recently been streamlined. The European Commission will propose exemptions for “the vast majority” of companies covered by the European Union’s carbon border levy. This is part of an effort to cut red tape for businesses and would focus the levy on only companies importing goods with a mass-based threshold of 50 metric tons per year. For 2026, the policy will impose costs at the EU border on emissions embedded in imported steel, aluminum, cement, and other goods.

What measures can global companies take?

These large and global companies are taking rapid measures to provide their stakeholders with some level of confidence.

• Expanding domestic manufacturing. To avoid or mitigate tariffs, companies like Toyota are expanding their U.S. based manufacturing footprint. Toyota expanded its production capacity in Tennessee and Kentucky to accommodate models like Tundra and RAV4
• Localizing critical components. Be it raw inputs, critical minerals, or more complex inputs like semiconductors, local sourcing has quickly become a priority
• Redesigning machines and processes. As a cost-mitigation strategy, Caterpillar has redesigned its machines to require fewer parts
• Engaging with policymakers frequently. Meeting with U.S. Trade Representatives to discuss the impact of tariffs and work towards exemptions can be a part of the strategy as well as for maintaining the terms of the USMCA. Caterpillar had already moved some of its manufacturing facilities to Mexico and Canada (under the auspices of USMCA) and about half of its revenue comes from North America
• Expanding partnerships. Partnering with Utility companies and government entities to expand infrastructure for future growth should be a part of the domestic/nearshoring strategy

In the Trump 2.0 era, executives must adapt to the fluctuating landscape of U.S. trade, regulatory, and consumer trends. Prioritizing local production, innovating to simplify manufacturing components and processing, lobbying for favorable policies, and ensuring proactive risk management will help companies thrive in a competitive and uncertain environment.

Questions for the boardroom

With so much unfolding, business leaders have more questions than answers. 2025 will grapple with the increasing bi-lateral arrangements, as well as a patchwork of exemptions and rules. In this spirit of increased diligence and monitoring, we offer the following prompts:

• Exposure analysis. Where is your supply chain most exposed to tariffs and other forms of trade barriers? What are the best strategies for global market entry, local production capabilities and diversification? How can we pivot more quickly and cost effectively?
• R&D. To what extent should R&D be accelerated for new products, technology, materials, operating footprint, emissions reduction, and supply chain traceability?
• Non-tariff barriers. Beyond duties and levies, what are other forms of non-tariff barriers to trade that should be considered (e.g., import/export bans, quotas, rules of origin, standards, FX restrictions) and evaluated?
• Regulatory. How have you prepared your organization for new compliance requirements in 2025? How can our multi-sourcing and diversification strategy streamline regulatory impact?
• Political risks. What are the top political risks for the organization and how can they be best managed? How often should these risks be managed given the pace of trade policy change?
• Inflationary pressures. How has the organization ensured contingency into the financial pro-formas? What other cost-saving measures are available to offset the expected cost increase due to trade restrictions?
• Pre-competitive advocacy. What opportunities does your organization have to engage in peer-group, industry-specific advocacy?

Board members should act with a forward-thinking mindset and play out worst- and best-case scenarios for their companies. Management should be given the flexibility to act on behalf of shareholders to secure the company’s license to play in markets like the U.S. These volatile times also allow for companies to grow in different ways, and that narrative to the investor base should be clear and well defined.