Today’s global economy is highly interconnected. In the midst of this interconnectedness, tariffs are often used to push policy actions forward. However, this unique kind of tax also directly influences business strategy, pricing, and risk. Understanding tariffs and how they impact your operations is essential for smart financial planning and effective risk management, especially when it comes to commercial insurance.
What are tariffs?
Tariffs are taxes or duties imposed by a government on imported or exported goods. They are typically used to protect domestic industries from foreign competition, raise revenue, or retaliate in international trade disputes.
There are several types of tariffs:
- Ad Valorem Tariffs: Charged as a percentage of the product’s value (e.g., 10% on imported electronics)
- Specific Tariffs: Fixed fees based on quantity (e.g., $5 per ton of steel)
- Retaliatory Tariffs: typically used in response to another country’s tariffs.
These tariffs can have different impacts on various kinds of industries. For U.S. businesses that import products or supplies, tariffs can translate to increased costs, operational challenges, and supply chain complexity.
Understanding Tariffs and How They Work
The mechanics of a tariff are relatively straightforward. When an imported good enters the country, the importer is required to pay the tariff to the customs authorities. These costs are usually passed along to downstream buyers, such as manufacturers, retailers, or directly to consumers.
Example: If your company imports aluminum parts and a 25% tariff is imposed, your material costs rise. You may then choose to increase prices or absorb the loss, both of which can impact profit margins and competitiveness.
Over time, this ripple effect can distort business planning, contract pricing, and inventory management, particularly for industries that rely heavily on global suppliers.
Why Tariffs Matter to U.S. Businesses
U.S.-imposed tariffs can have far-reaching effects across American business sectors. Though some industries may benefit from protective measures, most businesses rely on some element of international trade. Here’s how tariffs can impact businesses:
Supply Chain Disruption
Tariffs often prompt businesses to reassess their supply chain partners, leading to delays, extended lead times, and variations in product quality.
Rising Input Costs
Imported goods and materials subject to tariffs can become significantly more expensive, impacting everything from raw materials to finished goods.
Inventory Management Challenges
To avoid increased prices, businesses may stockpile goods ahead of tariff rises. However, this can create storage issues and increase insurance risk.
Uneven Competitive Landscape
Small businesses often struggle to quickly adapt to tariff changes, making them more vulnerable than large businesses with multiple global sourcing partners.
Insurance Implications of Tariffs
As tariffs reshape the global economy, they also have a direct impact on a company’s insurance needs and risks. Some of the most affected areas include:
Freight and Cargo Coverage
Tariffs put supply chains under strain, causing delays and reroutes. This ultimately increases the risk of lost and damaged cargo. Businesses may need to expand or adjust their cargo insurance limits and conditions.
Business Interruption Insurance
If a tariff results in a disrupted supply chain or halted operations, businesses might face revenue losses. However, not all policies cover disruptions caused by government actions. Reviewing and updating business interruption coverage is critical.
Commercial Property and General Liability
Tariff-related inventory fluctuations, such as overstocking or downsizing, can affect the risk profile of your property and liability policies. More inventory means more chances to lose inventory.
Customs Bonds and Financial Guarantees
Importers affected by tariffs may also require financial instruments, such as customs bonds. These can be backed by surety providers or insurers, introducing another layer of consideration for coverage.
Mitigating Tariff-Related Risk
Tariffs are largely out of your control as a business owner, but how you respond to them isn’t. Here are proactive steps your business can take in understanding tariffs and managing risk:
- Diversify Suppliers: Instead of using one supplier, spread sourcing across multiple countries and regions to reduce risk.
- Review Insurance Policies Regularly: Ensure your commercial coverage aligns with your current exposure and supply chain setup.
- Enhance Inventory Strategies: Consider just-in-time alternatives or reassess warehousing needs with a risk consultant.t
- Monitor Trade Policy Trends: Stay informed about new or changing tariffs that could impact your sector.
- Work with Insurance Advisors Who Understand Trade: An experienced broker can help tailor policies that reflect the current realities of international business.
As the global economy grows increasingly more complex, understanding tariffs is a practical necessity. From rising costs to operational disruptions and changing insurance needs, tariffs can affect every part of your business.
A Partnership Where Understanding Meets Action
Since 1947, Coughlin Insurance Services has committed its resources to assist distributors, importers, and exporters, ensuring they are protected against the unpredictable nature of the food trade industry. As specialists who understand the nuances and vulnerabilities of the global food distribution network, we have fine-tuned our insurance solutions to cater to this industry’s evolving dynamics. Our affiliations with the Association of Food Industries (AFI), National Frozen & Refrigerated Foods Association (NFRA), and the Peanut and Tree Nut Processors Association (PTNPA), reinforce our commitment to safeguarding your business with unparalleled expertise. We ask you to consider a partnership where understanding meets action.
You may have been recommended to us by one of our many satisfied customers, or you may have searched online for “Food Industry Insurance near me.” However you found us, we’re happy to welcome you. To discuss your needs and objectives and how we can help your company, please contact JJ Van Aman, Vice President of Sales at email: jj@coughlinis.com or tel: 973-598-5884, or reach out for a free insurance quote today!