How Your Business Can Adapt to Tariffs—and Come Out Ahead

Now, many of those same firms are facing another seismic supply-chain test that may have profound effects on the ways they source materials and products.

On April 2, President Donald Trump announced sweeping tariffs, including a baseline 10 percent tax on all imports and higher import taxes for about 60 countries.

To be sure, those tariffs are still wending their way through the courts and being negotiated in trade talks. And, working through executive orders, Trump has already changed his tariff policies repeatedly since reentering the White House. But tariffs on imports to the United States are still likely to end up higher than before, according to Sunil Chopra, professor of operations at the Kellogg School.

“I can’t predict what the tariffs will be,” he says, “but we’re not going back to the old days.”

For business leaders, a parallel with Covid is the need to rethink their supply chains, Chopra notes. But he cautions that Trump’s tariffs are among a host of factors reshaping global trade. Tariffs between non-U.S. countries, for instance, will probably continue to fall, Chopra says.

So how can manufacturers adapt to the uncertain new reality of international tariffs? Chopra offers some suggestions.

Shift to alternative sourcing locations

One aspect of the recently imposed U.S. tariffs is relatively straightforward, according to Chopra—companies need to reckon with the extra cost as they would any other rise in expenses. A tariff of, say, 20 percent on imports from a particular country adds 20 percent to the cost of bringing products from that country.

“If you’re just thinking of the numbers, you can think of this as a transport cost increase from a foreign destination to the U.S.,” he explains. “Whether we call it a tariff or a transportation-cost increase, the net effect is the same.”

The United States previously imposed tariffs on imports from China in 2018, Chopra notes. When that tariff went into effect, global supply chains reacted in part by shifting some sourcing away from China. For example, Apple shifted sourcing to India and Vietnam. The 2020 Covid supply-chain shock also drove Apple to diversify its sourcing, Chopra notes.

For manufacturers with more than one supply source, deciding what to do in the face of tariffs is “the easy part,” Chopra says. When tariffs are higher on imports from one country than on those from another, companies that source from multiple locations can simply choose to source more from the locations that work best for them.

“In fact, the first thing that Apple did when the U.S. imposed higher tariffs on China this time was to start flying more phones from India to the U.S.,” Chopra says, “because the tariffs on India were much lower than the tariffs on China.”

Chopra says he would be surprised if Apple doesn’t eventually raise prices to some extent too, given that production in India is more expensive than in China.

Companies that were considering changes anyway have seized the tariff situation as a moment to implement them. Chopra mentions one company that had production capacity in both Canada and the United States. U.S. sales had grown to more than 70 percent of its overall market. So the company will lean into the tariff uncertainty.

“What they have decided to do is go ahead and shut down the Canadian facility and expand the U.S. facility,” Chopra says. “Now, this is actually taking a bet. It will pay off if the tariffs stay in place. But it will have added to costs if the tariffs do not.”

In the meantime, the company—a maker of water fountains for public parks—has already raised its prices to match the cost of tariffs. Indeed, if there is scarcity, manufacturers almost have no choice but to do so, Chopra says.

If you don’t have current alternatives, build them

For companies that don’t have more than one supply source, the tariff uncertainty presents an opportunity to explore the possibilities.

“Most companies are going to take a wait-and-see approach,” Chopra says. “But to me, ‘wait’ doesn’t mean ‘do nothing.’ Wait means looking for optionality—which, if you didn’t build it earlier, now there is another reason to think about building optionality.”

The problem, he explains, is that building optionality is costly in the short term and only pays off in the long term, so it’s common for business leaders to take what he calls “the ostrich approach.” Chopra suggests getting their heads out of the sand, despite the short-term expense.

“My advice to most companies at this stage would be, this is actually a very good time to be thinking about what optionality you should be building,” he says.

Companies should factor in broader shifts in global trade patterns. Chopra says that the U.S. share of global trade will probably shrink, while tariffs between non-U.S. markets such as the United Kingdom and India, or India and the European Union, will likely keep going down.

“Tariffs between the U.S. and other countries will be higher than before,” Chopra says. “Tariffs between other countries will be lower than before. So in a very fundamental way, that is completely different from Covid.”

Take a holistic view

When considering building alternative sourcing, Chopra advises companies to take into account all of the risks they have experienced in the last several years. Tariffs are merely another reason companies must think about how they structure their production.

Chopra was recently in conversation with leaders of a company which had been planning to shut down its plant in China and open a plant in Mexico. They likely won’t reverse that decision overnight due to the new U.S. tariffs on products from Mexico, according to Chopra.

“Even with the tariffs, the math doesn’t change,” he says. “So don’t let tariffs be the sole driver. Think of them as an additional risk and say, ‘Given these risks, is it worth having more optionality than we currently have?’”

For example, manufacturers of refrigerators and washing machines for the U.S. market have found that it makes sense to make their products in the United States because of the high transportation costs of such products and the improved ability to match supply and demand with local sourcing.

Similarly, many European and Japanese automakers have added production capacity in the United States over the last 20 years, and not because of tariffs. BMW, for one, produces its X5 model for the entire world from the United States.

“When you have such a large market, it makes sense to produce in that market.”