Smoother sailing for supply chains through the lens of trade and tax

In today's global business landscape, volatility, uncertainty, complexity and ambiguity—collectively known as VUCA—are more pronounced than ever. The post-Covid era has dismantled traditional geopolitical guardrails, creating a more challenging trade and tax environment, including supply scarcity and a general decrease in trust. For businesses, this means long-held assumptions about globalization, supply chains, technology and regulation are no longer reliable for multinationals to strategize and fund their visions for growth.

Adopting a multidisciplinary approach to these changes from trade, tax and supply chain management perspectives is important for companies to remain competitive, mitigate risks and unforeseen tax costs, and ensure compliance in a rapidly evolving global landscape. This blog will discuss the key elements of a multilayered approach to three interlinked areas: supply chain management, trade strategy and associated tax risk management.

The ripple effects of geopolitical changes on trade, tax and supply chains

The shifting dynamics of global power require companies to adopt a more strategic and adaptive approach. Trade tensions and tax policy reform are causing increasing disruption and instability to supply chains. This disruption, along with the remedial actions companies might take in response, can trigger collateral consequences, e.g., tariffs and additional taxes, leading to significant unforeseen costs. A proactive approach is essential to alleviate this ripple effect.

To adopt an integrated approach, it is important to have a fundamental understanding of each area—trade, tax and supply chain management—and how they intersect.

The evolving trade landscape

Strategic considerations for US-China and US-Mexico relations

Recent actions by the Biden administration have added more complexity to the trade landscape. Proposed increases to existing tariffs on Chinese-origin steel and aluminum imports, as well as new tariffs on other Chinese-origin products, are significant developments. These tariffs, ranging from 25% to 100%, target strategic US industries such as semiconductors, solar cells, electric vehicles and medical supplies. The Biden administration also proposed new tariffs on steel and aluminum from Mexico to the extent they are not melted and poured within Mexico—a sign that the United States continues to extend its trade policy reach vis-a-vis goods transiting its United States-Mexico-Canada Agreement (USMCA) trading partners.

The upcoming US election is creating even more uncertainty in the trade landscape. Depending on the outcome, we may see substantial changes in trade policies with significant implications for US-China and US-Mexico relations. These potential changes in US trade policy already are influencing business decisions. Some companies are postponing investments in regions like Mexico until there is greater clarity on the future trade landscape.

Not only are companies facing pivots in US trade policy, but they also must grapple with counteractions taken by US trade partners.

Adapting to changes in Mexico's trade policies

Recent changes in Mexico's trade policies have had significant implications for businesses. The Mexican government has imposed tariffs on imports from countries without free trade agreements, impacting many countries, including China. Additionally, the cessation of certain tariff relief for maquiladoras—companies that import raw materials on a temporary basis for manufacturing and re-export—adds another layer of complexity.

These changes are likely to increase the cost of finished products coming out of Mexico and complicate compliance with certain aspects of the USMCA, such as duty deferral provisions.

The potential rise of retaliatory tariffs

The imposition of retaliatory tariffs poses significant risks for businesses engaged in international trade. For example, the Office of the United States Trade Representative (USTR) recently requested dispute settlement consultations with Canada under the USMCA over Canada’s recently enacted Digital Services Tax (DST). If unresolved, these types of disputes could trigger retaliatory measures, including tariffs, and disrupting trade relations and business models, particularly in the digital services sector.

The importance of building resiliency into supply chains

Considering these challenges, building resilience and agility into supply chains is more important than ever. Supply chain resilience is not merely about having multiple sources for the same product, having sophisticated technologies to provide early risk detection, or knowing the origin of all supply capabilities. Rather, building resiliency ought to take a risk-based approach that balances costs, capabilities and supply assurance. This approach should involve identifying risks, assessing the probability and impact of those risks occurring and prioritizing and investing in the mitigation efforts accordingly.

Decisions affecting supply chains entail significant transaction costs, as personnel, assets — both tangible and intangible — and functions are transferred between jurisdictions in response to the changing trade and political landscape. Lack of visibility into such costs or underestimation of the aggressiveness in certain jurisdictions seeking to apply them can significantly impact the enterprise business case for change.

Why the role of tax is more pivotal than ever

Historically, tax departments played a different role in footprint decisions, focusing on creating business-aligned, efficient tax structures that would serve as a growth enabler. The current landscape, however, demands that tax functions take on a more strategic and protectionary role.

As discussed above, implementing supply chain resiliency may require a degree of course correction, such as redomiciling business operations, assets and personnel from one country to another in response to the external trade and political environment. The transfer of functions or assets can attract substantial taxes upon exit as well as unaccounted transactional costs for the movement of assets or provision of services. These costs are a critical component in the overall evaluation of location assessment and can directly impact enterprise return on investment and shareholder value.

Thus, from a tax perspective, it is important for companies to model various scenarios so that they can make informed decisions based on the anticipated impact of changes to the value chain. At the crossroads of changes between geopolitical and business change, the role of tax is more vital than ever. Companies must pivot from traditional value creation to strategic considerations that address the literal and figurative trade winds.

The importance of a multidisciplinary approach

Navigating the current trade and tax landscape requires a multidisciplinary approach. This involves integrating insights from tax, supply chain, customs and policy experts to develop comprehensive strategies. Proactive planning, scenario modeling and understanding the full spectrum of risks and opportunities are essential for making informed decisions.

Call to action

To successfully navigate the complexities of trade and tax in a VUCA world, consider implementing the following strategic steps:

1. Evaluate geopolitical risks: Assess geopolitical risks and their impact on your operations. Understand how global power dynamics affect supply chains and regulations.
2. Acknowledge megatrends: Stay informed about global trends influencing your industry. Monitor changes in US-China and US-Mexico trade relations and prepare for various scenarios.
3. Leverage trade data: Model tariff impacts using available trade data (e.g., Automated Commercial Environment (ACE), broker data, part level data, supplier/vendor data). Connect the dots between trade data and the available levers to affect tax and supply chain outcomes.
4. Look beyond tax implications: Integrate tax considerations with broader business strategies. Factor in potential tax costs like exit taxes and model different trade and supply chain scenarios for informed decision-making.
5. Build resilience into your supply chain: Develop a resilient supply chain strategy with risk assessment, strategic sourcing, and traceability. Evaluate the impacts of tariffs and reassess your sourcing strategies if necessary.
6. Empower decision-makers: Equip your leadership with tools and insights for informed decision-making. Use a multidisciplinary approach by integrating insights from tax, supply chain, customs and policy specialists.

Conclusion

In a VUCA world, staying ahead of trade and tax developments is important for maintaining a competitive edge. Businesses must adapt to the shifting geopolitical landscape, build resilient supply chains and leverage strategic tax planning to navigate these challenges effectively. By adopting a comprehensive, multidisciplinary approach, companies can better position themselves to thrive in an increasingly complex and uncertain global environment.

To hear our co-authors bring this issue to life, click here for a complimentary replay of our recent webcast.

For deeper insights from our trade and supply chain teams, consult:

How will the new Biden administration tariffs continue to alter supply chains?

Recent changes in Mexican tariff regime affect US companies with manufacturing operations in Mexico