Higher tariffs are coming. Canada and Mexico are already facing tariffs of 25%, and China an extra 10%. The potential exists for further increases. Whatever the final tariffs become, don’t expect them to be a minor ripple in the pond. If you’re an importer, they’re aimed at you. Are you going to be ready?
Forewarned, forearmed; to be prepared is half the victory.
It’s more than buying and selling…
If importing and selling a product was easy, everyone would do it.
Life as an importer is no picnic. There’s a language to learn (…and this doesn’t mean Cantonese or Mandarin). There are concepts to master. And you need to keep up with changes to both.
Underpinning the language and concepts are your costs. You want to be successful? You have to know your costs.
And as we get closer to January 2025, it’s looking like your costs are about to jump.
It’s more than the cost of materials and labor…
Costs are a drain on your profits – like holes in the bottom of your water bucket. Those holes are a fact of life, after all, nothing in business is free.
To deliver a product to market, you’ll always lose some water (profit) along the way. If those holes are larger than they need to be, you’ll be leaking more water (profit) than you need.
You must understand your total cost – from your manufacturer’s factory gate to your point of sale. The manufacturer’s labor and materials are the bulk of your product’s cost. But there’s also the unpredictable double-edged sword of geography and politics.
Once your product is ready to ship, the rest of your costs are lining up and ready to rise. How far they go depends on the arrangements you make, and those arrangements you must accept.
• What will the supplier pay for, and how much?
• What direct costs will you cover, and how much?
• What will your freight forwarder or import agent pay for, and how much?
• What import duties or tariffs will you pay, and how much?
You’ll pick up the bill for everything along the supply chain. When you know your supply chain costs, you’ll be able to reduce those you control to cope with the ones you can’t control. Your focus will be on making those holes as small as they can be by managing your controllable costs.
This is where you make real money. Using a simple profit margin of 10%, a $10 sale is a dollar earned. But when you cut $1 in costs, that $1 goes straight to your bottom line. A dollar saved is a dollar earned.
Know your costs to reduce your costs.
So, how do you know who is paying for what along your supply chain?
Incoterm (International Commercial Terms) make this possible. They’re how you understand responsibilities and costs between a buyer and seller. They define where one party’s responsibilities and costs end, and the others begin. Incoterms do not create a contract of sale or replace national laws.
They clarify who handles the key supply chain activities of:
• Transportation – who arranges and pays for the shipment of goods?
• Insurance – who covers potential losses or damages during transit?
• Ownership transfer – when will the ownership of the goods transfer from the manufacturer to you?
• Export and Import clearance – who handles the customs procedures and documentation and pays the duties/tariffs?
Your incoterms determine your direct import costs. You might not have the time to arrange each shipment and leave it to the manufacturer for a single invoice. Or you might want to do it yourself and receive each invoice. The lower the number of direct costs you bear, the higher the hidden costs of importing.
The more costs you can see, the more costs you can control. Those are the holes in your bucket you can work on to minimize.
Who is putting the biggest holes in your bucket?
The cost of these key supply chain activities will vary according to who arranges and pays the provider.
Transport: If the manufacturer arranges and pays, they may have better carrier rates. They may have higher volumes or established relationships. If you take this on, you may have more flexibility in choosing carriers and services, but you might do so at a higher cost.
Drivers of Freight rates: demand for carrier space, availability of containers, fuel costs, and exchange rates.
Insurance: like transport, one party might be able to drive a better deal over the other. But the devil is in the details. The cost might be lower, but does it give you the coverage you need? Drivers of Insurance costs: the route, the shipping line, the shipper’s level of security, the port of loading, the insurer’s risk appetite, and prevailing global, political and/or climate events.
Transfer of Ownership: Time is money, and timing is a critical factor in your supply chain costs. It comes down to your willingness to trade cost for control.
• The earlier the transfer (e.g. EXW, FCA) the greater your potential cost. You are covering more of the direct costs of transport, insurance, and customs clearance. If you don’t have the experience, volumes, or relationships, you could be paying more. Against this, you will have greater control over your product’s supply chain. You could select a more efficient route and reduce the shipping lead time which reduces cost.
• The later the transfer (e.g. DAP, DDP) the lower the potential cost where the manufacturer has the volume you lack to secure better rates. But, you forfeit control over your supply chain to the manufacturer who might select a longer, or riskier route than you’d like.
Export & Import Clearance: This is where politics comes into play. At the stroke of a pen, the work you do to manage your costs and minimize the size of the holes in your bucket can be undone in an instant. This makes managing your controllable input cost critical to minimize its impact.
• Export duties are negligible to non-existent. After all, every country wants to increase their exports.
• Import duties (tariffs) can open a big hole in your bucket.
What are tariffs and who pays?
Tariffs are a tax on your imports.
They vary according to several factors including;
• the imported product’s harmonized tariff schedule (HTS) code,
• the country of origin,
• the value of the goods, and,
• whether or not a trade agreement exists with the exporting country.
The tariff can be paid in part or full by any or all parties – the exporter, importer, or customer.
1. To maintain market access, the exporter may absorb all or part of the tariff that the import customer must pay. This reduces the exporter’s profit margin.
2. So as not to lose demand by passing it on to your customers, you may absorb all or part of the tariff as the importer. This reduces your profit margin.
3. Finally, you might have the ability or be forced to pass on the tariff in full to your customers. The consumer has no choice but to pay more for your product or switch to a now relatively less expensive local alternative.
Tariffs vary by name and intention but have always had the same effect. The consumer pays more. Where to go from here? More tariff increases are coming. In anticipation, understanding and controlling your supply chain costs is critical. By mastering Incoterms and proactively managing your controllable costs, you can best set yourself to face their impact. We’ll cover the points above in more detail in the coming articles. In the meantime, remember, every dollar saved is a dollar earned.
