In a world driven by e-commerce and next-day shipping, it's easy to overlook the complex global network behind everyday purchases. Through a balance of free trade agreements and tariffs, global trade has flourished for years. For businesses, especially those based in North America, this allows an opportunity to source manufacturing internationally, reducing costs and timelines while maintaining quality. Although this can boost revenue and growth, it also exposes these businesses to elevated risks.

While there have been several disruptions over the years, the recent escalation of tariffs pose a significant threat to global trade. For businesses operating in a global market, it could harm their business structure and increase costs for both themselves and their customers. At Brash Product Development, we’ve been helping launch businesses for the last decade. In this article we will share our insights on how tariffs can affect a business and strategies we use with our clients to mitigate global trade risks. By evaluating your business operations and applying these strategies you can better shield your business from risk exposure.

Tariffs and Their Effect on Businesses

Tariffs increase costs within a business’s supply chain, which includes manufacturing, assembly, shipping, and logistics. On average, supply chain operations cost a business 10–20% of a their revenue. Any business importing raw materials or finished goods may face tariffs if their home country applies tariffs to the exporting nation. It is the importing parties' responsibility to pay the tariff, forcing them to choose between absorbing the higher cost, thereby reducing their profit margins, or passing the cost on to customers.

Optimizing Your Supply Chain

How can businesses strengthen and future-proof their supply chains? Successful supply chains strike a balance between efficiency and adaptability, tailored to each business’s unique needs. Through lean supply chains, domestic development and sourcing, and agile international manufacturing, businesses can build supply chain operations that quickly respond to changing global trade conditions.

Lean Supply Chains

Cutting supply chain complexity and size reduces the risk of disruptions and inefficiencies. For a business, this means focusing on the essential elements. Ask yourself: Does my business need a physical hardware component, or could it run on existing software platforms as a mobile or web app? How can I streamline my product’s physical components to reduce costs and complexity in my supply chain?

Recently, we had a client come to us with a hardware and software project. While the hardware simplified user experience, the concept worked on any smartphone. We recommended that the client focus on developing the app, with the option of exploring hardware once they had launched and were generating higher cash flows. This allowed the founder to focus on building stronger software rather than dividing resources between software and hardware. It also helped them build their brand while keeping upfront costs and complexity lower than a hardware-software project.

While not every company can be software-exclusive, the same theory of “less is more” can be applied to the complexity and parts of physical goods. Often, we help clients simplify their projects by reducing parts and optimizing materials and manufacturing. By carefully evaluating manufacturing and assembly, you can reduce costs without compromising design.

Domestic Supply Chains

Although sourcing and manufacturing in North America can be more expensive than in Asia, there are strategic ways to localize certain parts of the supply chain.

One key strategy is to keep R&D domestic. Through advancements in small-batch rapid prototyping tools such as 3D printing, North American development is now highly accessible. For most of our clients, we produce fully functional proof-of-concept models without outsourcing plastics. Additionally, sample hardware or 3D models are not subject to tariffs since they have no commercial value, allowing for inexpensive exchange within North America or abroad. These models can be used to secure funding before businesses take on global trade risks, helping them avoid import costs and complexity. Often, using this approach accelerates development timelines by avoiding lengthy international shipping.

When moving to mass manufacturing, the options in North America diminish. Labour costs are significantly higher in North America than overseas, and for most businesses, it is not financially advisable to manufacture domestically. However, in some cases, such as large sheet metal enclosures, domestic production remains viable, and advances in technology continue to make domestic options more accessible each year.

If more than 50% of manufacturing costs, whether from sourcing, production, or assembly, are spent in the United States, the product can be classified as 'Made in the USA,' offering additional marketing and branding benefits.

While the tradeoff is often the upfront cost, sourcing locally provides advantages beyond tariff savings. From a sustainability standpoint, sourcing locally can reduce a business's emissions by 20%–80%, while also reducing packaging and waste. It also allows businesses to minimize future supply chain risks, by shortening travel routes, resulting in a more reliable operations for stakeholders. A PwC and MIT study found that even minimal supply chain localization can provide significant benefits including, improved resilience, increased efficiency, faster market responsiveness, and enhanced quality control.

Agile Supply Chains

As previously discussed, there are situations, particularly with high-quantity goods, where domestic production is not cost-effective. In these cases, manufacturing overseas remains necessary, but there are strategies to help optimize the supply chain and minimize associated risks.

One of the largest upfront costs for a new business is tooling, which covers the mould needed to create high-quantity goods. For most products, especially plastics, tooling costs are lowest while maintaining quality assurance in China. Although initial costs in China may be appealing, tariffs, along with other geopolitical factors, can make it a less desirable long-term manufacturing. To mitigate this, we have helped many clients start their manufacturing in China and gradually move it domestically or to a lower-sanctioned country as their cash flow grows. In some cases, the entire production is moved, while in others, we suggest producing certain items—such as hardware components—in China and then assembling them with plastics in a lower-sanctioned country. With everything being shipped out if the lower sanctioned country we can still avoid some of the tariffs from China.

Relocating manufacturing also comes with associated costs, and in some scenarios, it may be in the business’s best interest to begin production in a lower-sanctioned country. The Philippines, Indonesia, Vietnam, and Malaysia offer similar services at slightly higher prices than China. Especially for large-scale products, where the per-unit tariffs of China will be very high, it may be a better production strategy to pay a higher upfront fee for long-term savings. Additionally, for certain materials and processes, such as fabric and soft goods, Indonesia or Vietnam may offer better prices and expertise. Choosing manufacturers with multiple factory locations can be advantageous when initiating agile supply chains. However, this is often at the cost of higher minimum order quantities.

While China is still the most competitive manufacturing partner for most products, it’s wise to explore other options during the quotation phase and again after a few production runs. This allows businesses to diversify their manufacturing and ensure the supply chain is running as efficiently as possible.

Minimizing Tariffs for Customers

If a business sells physical goods to customers in countries with import tariffs those customers may be charged an additional tariff on the items.

For businesses that sell products involving both software and hardware, one effective strategy to minimize the impact of tariffs is to move all costs to a service charge. Instead of charging separately for hardware, companies can include the hardware cost in the software or service fee, which is not subject to tariffs. This allows the customer to pay the same overall price while avoiding the tariff on physical goods.

In addition to this approach, there are tariff exemptions, such as the de minimis exemption, that can help businesses reduce costs. For example, the de minimis exemption allows goods imported from Canada or Mexico to the U.S. under a value of $800 to bypass tariffs. Though there have been discussions about removing the de minimis exemption, businesses in Canada and Mexico should still consider strategically pricing goods below the $800 threshold to take advantage of this exemption, while it remains in effect.

Striking a Balance

While geoeconomic risks cause considerable turmoil and uncertainty, they also present opportunities. Now, more than ever, business operators should evaluate the efficiency and risk exposure of their supply chain operations. Though there is no one-size-fits-all solution, most businesses will benefit from a combination of supply chain strategies tailored to their needs. For smaller, less expensive goods, the impact of tariffs on overseas production may be minimal compared to the costs of domestic production. However, for larger items or goods with expensive materials, tariffs can significantly affect the bottom line, and businesses must carefully evaluate their strategies moving forward. By making strategic adjustments, businesses can better position themselves for growth and economic prosperity, while minimizing tariff effects.

Navigating tariffs and supply chain challenges can be complex, but you don’t have to do it alone. At Brash Product Development, we specialize in designing agile, cost-effective supply chains that help businesses thrive, no matter the economic climate. Contact us today at hello@brashinc.com to explore your best path forward.