Doing Business in an Era of Tariffs and Trade Wars

Running an international manufacturing company comes with a unique set of challenges today. The days of completely frictionless global trade are largely behind us. With governments around the world applying new import taxes and heavily regulating cross-border commerce, companies are seeing their profit margins threatened. However, smart manufacturers are not just accepting these extra costs. They are actively restructuring their operations to protect their bottom lines.

The Reality of Modern Import Taxes

Over the past several years, governments have aggressively used tariffs as a tool to protect domestic industries. The most notable example is the ongoing trade tension between the United States and China. Under Section 301, the US has placed tariffs ranging from 7.5% to 25% on hundreds of billions of dollars worth of Chinese goods.

In May 2024, the White House announced even steeper penalties, including a massive 100% tariff on Chinese electric vehicles, a 50% tariff on solar cells, and a 25% tariff on steel and aluminum products. The European Union has also stepped in, implementing the Carbon Border Adjustment Mechanism (CBAM) to tax imported goods based on their carbon footprint.

With these massive fees eating into revenue, manufacturers have been forced to get creative. Here is exactly how global businesses are mitigating the costs of these trade wars.

Adopting the "China Plus One" Strategy

For decades, China was the undisputed factory of the world. Now, companies are diversifying their risk through a strategy known as “China Plus One.” This means a company maintains its operations in China to serve the local Asian market, but it builds secondary manufacturing hubs in other countries to export goods to the US and Europe without facing extreme tariffs.

Vietnam and India have been the biggest winners in this shift. Vietnam offers lower labor costs and shares a border with China, making it easy to move raw materials. Companies like Nike and Adidas have moved massive portions of their footwear and apparel production to Vietnamese factories.

Meanwhile, tech giants are heavily investing in India. Apple currently manufactures over 14% of its iPhones in India through partners like Foxconn and Pegatron, up from just 1% in 2021. By spreading out production, these brands avoid getting caught paying 25% penalties when bringing devices into western markets.

Nearshoring to Mexico

Another powerful mitigation strategy is nearshoring. This involves moving production closer to the final consumer market. For companies selling heavily to the United States, Mexico has become the premier destination. In fact, Mexico surpassed China as the top exporter of goods to the US in 2023, sending over $475 billion worth of products across the border.

By manufacturing in Mexico, companies take advantage of the United States-Mexico-Canada Agreement (USMCA). If a product meets the strict rules of origin under this agreement, it can enter the US duty-free. Global auto manufacturers like Ford, General Motors, and Nissan have spent billions expanding their Mexican facilities to build cars and source parts without paying steep overseas import taxes.

Tariff Engineering and Product Reclassification

Sometimes, avoiding a tariff is as simple as slightly changing how a product is made. This completely legal practice is called tariff engineering. Customs agencies classify imported goods using a complex system of codes, and different codes carry wildly different tax rates.

If a company imports a jacket with a certain type of waterproof coating, it might face a 27% import duty. If the manufacturer alters the design to include a specific type of synthetic material, customs might reclassify the jacket into a category that only carries a 7% duty. Companies like Columbia Sportswear have used these design tweaks for years to legally lower their tax burdens. Manufacturers employ trade lawyers to study the US Harmonized Tariff Schedule, looking for small design modifications that can save millions of dollars at the border.

Operating Inside Foreign Trade Zones

For companies that must import heavily taxed components, Foreign Trade Zones (FTZs) offer a major financial shield. An FTZ is a secure area located in or near a US port of entry. Legally, the US government treats these zones as being outside of standard US commerce.

When a company brings foreign parts into an FTZ, they do not have to pay import duties right away. They can store, assemble, or process the goods tax-free. They only pay the tariff when the finished product officially leaves the zone and enters the domestic market.

Automakers rely heavily on this system. BMW operates a massive manufacturing plant in Spartanburg, South Carolina, which sits inside an FTZ. When BMW imports parts from Germany to build an SUV, they delay paying taxes. If they build the SUV and immediately export it to another country, they never pay the US import tax on those parts at all. This saves the company millions in cash flow every quarter.

Frequently Asked Questions

What is the difference between a tariff and an import tax?

They are effectively the same thing. A tariff is a specific type of tax that a government places on goods and services imported from other countries. The goal is usually to make foreign products more expensive, encouraging consumers to buy from domestic businesses.

Will manufacturers absorb tariff costs or pass them to consumers?

It depends on the industry, but companies usually pass the majority of these costs onto consumers. When raw materials like steel or finished products like electronics face a 25% tax at the border, the manufacturer will raise the retail price of the item to protect their profit margins.

What does “rules of origin” mean in trade?

Rules of origin are the criteria used to determine the national source of a product. Under free trade agreements like the USMCA, a product must have a certain percentage of its parts made in North America to qualify for tax-free status. If a car is built in Mexico but 80% of its parts come from China, it will not meet the rules of origin and will still face tariffs.

Can small businesses use Foreign Trade Zones?

Yes. While large corporations like auto manufacturers and oil refineries are the most famous users of FTZs, small and medium-sized e-commerce and logistics companies can also lease warehouse space inside an FTZ to delay paying customs duties on their inventory.