Tariffs endgame, economic powerplay or political gamble?

Tier 1 Priorities: Even with a clear focus on China, there are other interconnected priorities that are worth considering as part of the administration’s trade strategy.

• Exit of high-end manufacturing from China. Most recently, President Trump has pushed the Chinese tariff from 104% to 125%; China has responded with retaliatory tariffs of 84% on imports of U.S. goods. Tensions have flared for more than a decade over export dumping, market access for U.S. firms, intellectual property theft, currency manipulation, and industrial espionage. This appears to be the stickiest of objectives for the Trump administration and most likely to endure politically in the U.S. due to bi-partisan support
• Freer trade across North America and Europe. Presidential advisor Elon Musk said he hoped to see complete freedom of trade between North America and Europe. He also expressed his appeal for freer movement of people between the continents as well
• Political leverage. With much contingent for President Trump’s legislative success on his long-term relationships with Elon Musk, he will feel pressure to heed Musk’s warnings on trade

Secondary priorities that track to President Trump’s whole-of-government national security agenda:

• Ensure critical mineral access. Be it Greenland, Ukraine, or plans for domestic production, President Trump is looking to lessen its foreign dependency on critical mineral imports (rare earths, graphite, lithium, etc.) from China
• Pass fiscal agenda. Tariffs may serve as a bargaining tool for President Trump with Congress to pass his aggressive fiscal policy to extend his tax cuts. He may offer to soften his approach if Congress passes his tax cut plans
• Weaken countries under China’s sphere of influence. ASEAN countries like Vietnam and Cambodia have been accused of “non-tariff cheating,” pointing to the country’s value-added tax and its use by Chinese manufacturers to evade U.S. tariffs. By directing high tariffs on ASEAN countries, the administration may be more focused on breaking their ties to Chinese capital
• NATO re-negotiation. Renegotiate U.S. contribution to NATO’s common funding shared by member nations, which has been based on their Gross National Income (GNI) with each country contributing a percentage

Other factors that have been identified by the current administration:

• China military deterrence. China has warned the U.S. that it is ready to fight “any type” of war after hitting back against President Donald Trump’s mounting trade tariffs. China also announced last month that China would boost its defense spending by 7.2% this year. China ramping up it’s hard power runs counter to the U.S. bi-partisan push for Chinese military deterrence
• Reduce national debt. President Trump is counting on tariffs to raise federal revenue to cut taxes and reduce the national debt
• Protect domestic critical industries. Tariffs serve as a means to incent and require self-sufficiency in the U.S. economy by relocating and strengthening critical industries (steel, aluminum, timber), manufacturing, and the production of critical minerals even if large multinationals resist and have recessive financial performance
• Protect dollar value. As the currency of the world and with U.S. treasuries a historically premier safe-haven asset, President Trump is looking to create long-term advantages in keeping the U.S. the currency of choice by making the U.S. economy more competitive and free trade freer
• Incent domestic manufacturing boom. The Trump administration has promised domestic job growth due to the onshoring of “millions of jobs” over time
• Secure U.S. borders. Through tariffs on Mexico and Canada, through Executive Order, President Trump looks to mitigate the “extraordinary threat posed by illegal aliens and drugs”
• Presidential legacy. Some analysts highlight President Trump’s desire to secure his reputation – willing to stand up for his America-first agenda in a way others haven’t

Actions management teams can take: The next few weeks will bring enormous challenges for management teams worldwide. Strategies that worked a year ago no longer make sense.

• Assess the impact with robust, diverse data sets to determine tariff exposure and their impacts to the business
• Undergo no-regret cost-saving measures to mitigate short-term loss and an ability to endure more uncertainty
• Consider devaluation and re-pricing strategies in accordance with global trade rules to reduce tariff burden
• Bolster communication and crisis management teams and readiness
• Build in greater political risk sensing capability into the organization’s ERM and review alongside environmental security risks
• Invest in training or upskilling key governance personnel
• As a longer-term consideration, determine options for strategic relocation to avoid tariffs
• Consider Sustainability and ESG requirements across jurisdictions as supply chains are reconfigured

Questions for management teams:

• What percentage of your supply chain is exposed to new tariffs?
• Can you absorb the increased cost of doing business, or will you have to adjust the pricing? Pass the costs to consumers?
• How are your competitors faring from more favorable trade conditions?
• Where do we have the greatest exposure to tariffs in Asia? Other markets? How are we mitigating short-term cost considerations and long-term political and financial risk?
• How do we expect our customers to respond?
• How do we evolve our communications and crisis management in an environment that is increasingly uncertain?
• How can we work with peer organizations to reduce industry-wide risks and advocate more effectively?
• Do we prioritize reshoring and supplier diversification in a scenario that the current tariffs hold, or do we prioritize cost and a long-term return to globalized free trade?
• With a potential decoupling from Chinese suppliers and technology, how will our core business be impacted? How will our cost structure be impacted? How will our suppliers be impacted?