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Does the China+1 strategy now apply to U.S. allies of Mexico and Canada? With Trump’s latest announcement about immediate tariffs levied on imports from both Mexico and Canada on day one in Trump’s second administration, Consumer Packaged Goods (CPG) companies are rushing to evaluate their exposure to tariffs, increased costs for inputs, and potential implications to consumer demand.
Key Takeaways:
- CPG companies will be highly impacted by Trump’s proposals for increased tariffs by 25% on imports from Canada and Mexico in early 2025, which the key role of trade and investment across North America underpinned by the United States-Mexico-Canada Agreement (USMCA)
- Supply chain agility, which was pushed on CPG companies during Trump’s first term and amplified during the global COVID pandemic, will help offset economic losses and can help embed Sustainability, supply chain traceability, and ESG factors
- New suppliers will need to be identified, vetted, and onboarded by CPG companies in record timing to reduce tariff exposure; companies should prepare for higher production and transition costs and new quality control processes
- CPG companies should start adjusting financial projections immediately with assumptions for added costs to their operations and compressing of margins
Trump promises strict tariffs on day 1 for Mexican and Canadian imports
With Trump’s recent announcement of immediate and strict tariffs on Mexico and Canada as soon as he is inaugurated in January, CPG companies and their boards are immediately considering financial and operational impacts. On Truth Social on November 25, Trump unveiled plans to place a 25% tariff on all imports from Mexico and Canada.
Trump and his allies, which includes his candidate for Treasury Secretary, Scott Bessent, have argued that tariffs deployed during his first term didn’t boost inflation and that the upside would far outweigh the downside risks.
What were the Trade and Tariff landscape and achievements during the first Trump Administration?
During President Trump’s first term (2017–2021), his administration implemented a series of tariffs, primarily targeting China, which had a significant impact on industries, global supply chains, and U.S. trade relationships.
Principal tariffs and effects:
- China tariffs. The administration imposed 25% tariffs on $50 billion of Chinese imports, later escalating to 25% on an additional $200 billion worth of goods, impacting key industrial sectors like machinery, electronics, and chemicals
- Sector-specific tariffs. Tariffs were also placed on goods like washing machines, solar panels, and certain steel and aluminum products, aiming to support domestic production
- Supply chain disruptions. These tariffs led to higher costs for downstream industries, such as automotive and construction, which depend on steel and aluminum. U.S. steel prices rose significantly above global levels, putting U.S. manufacturers at a disadvantage in some cases
- Enhanced supply chain agility. Trump’s push on tariffs, along with the global pandemic, caused leading CPG companies to improve their agility – their ability to quickly adjust their operations, production, and inventory management to respond to the changing market demands and regulatory conditions, material shortages, consumer preferences
- Increased U.S. collection of customs, duties, and fees. When Trump first became president in 2017, the federal government collected $34.6 billion in customs, duties, and fees. That sum more than doubled under Trump to $70.8 billion in 2019, according to Office of Management and Budget records
What does the U.S. import from Canada and Mexico?
Canada is a major exporter of crude oil and other gas products to the US. Mexico was the United States’ top goods trading partner last year, surpassing China. This is especially the case in cars and automotive parts. Automakers with manufacturing operations in Mexico include General Motors, Ford, Tesla, Audi, BMW, Honda, Kia, Mercedes-Benz, Nissan, Toyota, and Volkswagen. As a result of Trump’s announcement, GM shares fell 9% and shares of Ford declined 2.6%.
The vast majority of U.S. produce imports come from Mexico and Canada, including avocados, cucumbers, potatoes and mushrooms. The U.S. spent $88 billion on agricultural imports from the two countries in fiscal year 2024, which ended Sept. 30.
What will the impact be on consumers?
Consumers will almost surely feel the impact through price increases. Trump campaigned on implementing 10% to 20% tariffs across the board, with 60% tariffs on imports from China. Economists have calculated that such tariffs could add between $1,900 to $7,600 to household costs, a 1.4% to 5.1% increase in inflation. That’s because companies would simply pass on the tariff costs to consumers. Executives from multiple American companies, including Walmart, Columbia Sportswear, and AutoZone have all said that they would ultimately have to increase their prices with tariffs.
Mexico as an earlier beneficiary of previous China tariffs will now face threats
Mexico’s Economy Minister Marcelo Ebrard warned that the cost to US companies of the tariffs on Mexico would be “huge.” “Around 400,000 jobs will be lost” in the United States, he said, citing a study based on figures from US carmakers that manufacture in Mexico.
It is unclear whether these threatened tariffs on Mexico and China will ever materialize. However, given the threat, it is now up to Mexico and Canada to act on it. This may be a negotiating ploy, but given the potential costs the 25% tariff would pose to many U.S. industries, Trump has now placed himself in the position of relying on Mexico and Canada to act in order to avoid these harms.
How are CPG companies preparing?
- Adjust financial scenarios and projections for 2026. CPG companies should start adjusting financial projections immediately with assumptions for added costs to their operations, inflationary pressures, and compressing of margins
- Assess supply chain risks. Evaluate exposure to imports, especially from Mexico, Canada, as well as China, and explore diversifying suppliers or relocating production to tariff-exempt regions (e.g., Mexico and Canada under USMCA). Updating the company’s supply chain strategy should be a top priority
- Accelerating China+1 strategies. Many CPG companies are working to accelerate the implementation of their China+1 strategies. Mike McCullen, CFO of Yeti, has said that the company is working with current suppliers and evaluating new partners. The company is in the process of a supply chain initiative that will result in half of its drinkware capacity being located outside of China by 2025
- Creating Mexico+1 networks and evaluating new suppliers. The answer to China+1 for many CPG companies was either to look for an alternate in ASEAN or past the U.S.’s southern border in Mexico. Now with Mexico facing tariffs, CPG companies will have to consider a new matrix of geographies to source, integrate, and assemble components for their end products
- Pre-ordering strategically. CPG brands are pre-ordering inventory to take advantage of current rates. Prioritize orders by price efficiency, freight rate charges, and anticipated shipping delays for certain goods
- Ensure supply chain traceability. Use technology to ensure compliance with evolving trade laws and to track materials through the supply chain, minimizing risks associated with forced labor or other compliance issues
- Optimize operations and agility. Companies are investing in lean manufacturing processes, automation, and other operational efficiencies to absorb rising material costs and reduce dependency on tariff-affected products. While designing for agility, leading companies embed sustainability and ESG factors into their strategies
- Prepare for labor shortages. CPG companies are planning for both tariffs and labor shortages. Given the complexity of food and material production, farmers and manufacturers may struggle to find enough workers if Trump delivers on his vow to deport undocumented immigrants
Questions for the board room:
- What due diligence has been done to evaluate tariff exposure to Canada and Mexico, as well as China?
- How can we accelerate China+1 strategies and optimize for tariff threat reduction in Canada and Mexico?
- What lessons about supply chain agility did we learn in Trump’s first term that can be applied to his second? How can we accelerate the implementation of supply chain agility strategies?
- How are we embedding ESG and Sustainability goals (e.g., human rights, traceability, emissions reduction, circularity) into the enhanced supply chain agility measures?
- How resilient are our modified supply chains to climate and ESG risks?
- What is a practical timeline for making improvements to our supply chain to reduce tariff exposure?
- What can we purchase now in advance of tariff implementation to offset the expected economic losses?
Additional Telesto Resources:
- Navigating corporate climate action under a second Trump administration – 7 focal points for business leader
- Adapting to new trade realities: The impact of USMCA on CPG company board’s priorities
- Preparing for climate litigation: What board members need to know
- Faros, our climate risk assessment tool, helps your organization identify emerging climate threats as they become more common and disruptive and position your assets to protect operational continuity, hedge against rising insurance costs, meet regulatory disclosure requirements, and incorporate climate risk into asset acquisition and disposal.
- Prism, our ESG benchmarking tool, helps your organization to rapidly strengthen its sustainability, climate, and ESG performance and disclosures through in-depth benchmarking of industry peers and identification of gaps and areas of distinction.
