There’s looking more beneath the surface of the Trump Administration’s tariffs than the obvious cost increase, according to experts at EY.
“What I think companies are just now starting to realize is that there is actually a ripple effect to this,” Al Paul, EY Americas operating model effectiveness leader, said during a recent briefing with reporters. The tariff itself, he said, is like “the pebble that’s thrown into the pond, and then it starts to ripple out and impact the rest of the organization.”
That first ripple hits an organization’s treasury function and that could impact an organization's ability to grow. Less cash circulating inside the company could mean less ability to internally finance things like research and development.
“Tariffs are costs; they're cash. Somebody has to pay it,” Paul said.
Above and below. In a follow-up interview with CFO Brew, Paul separated the impacts between above- and below-the-line costs. Tariffs are above the line because “they hit directly to [the] cost of goods sold,” he explained. Farther down the path are costs associated with adjusting supply chains, which may mean hiring more people who are skilled in procurement, distribution, logistics, or related areas.
“But if you don't have the cash to pay them, what are you going to do?” Paul said. Companies choosing to automate some processes still face the cost issue, plus the time it’d take to implement the automation, he said.
There are also legal and IT costs to consider, Paul said. The “importer of record” is the one directly responsible for the tariff, which is “a matter of contractual assignment” and could be a distributor, manufacturer, or a related third party, he explained.
The new tariffs may prompt some negotiations to change who the importer of record is in some instances, which requires reworking of contracts and insurance policies. That’s where the lawyers get involved.
All those contractual changes will also require updates to enterprise resource planning systems. “Some system somewhere has to capture that [change],” he said, in order to track who needs to be paid, by how much, and on what dates. This kind of reconfiguration isn’t as simple as flipping a switch, either. Hoo boy, is it not.
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“I have seen cases where to change the name of a supplier in an ERP system, it took six months to redesign,” Paul said.
Change management. Tariffs could have consequences that are significant, measured both in cost and time.
For example, a company that specializes in developing semiconductors but outsources its production overseas may now consider reshoring that work and bringing it in-house, Paul said. Doing this isn’t as simple as choosing a site and sticking a shovel in the ground, he said. There is a whole process involving site visits, identifying local workforces with the right skills, and negotiating with governments on potential incentives.
All the while, Trump’s trade policies seemingly change by the day. Take the announced 25% tariffs on Canada and Mexico for example. Those tariffs were supposed to go into effect in early February, but the administration delayed them for a month. Will they be delayed again, and by how long?
That kind of uncertainty may make these long-term (and expensive) operational pivots difficult. In the face of the unknown, Paul said he works with clients to come up with “rapid assessments.” Such an assessment lays out potential scenarios ranging from new tariffs to interest-rate changes, and list some options for how an organization can respond.
“You need to understand on your options, what is the cost to implement, what is the time to implement and any disruption operationally that takes place because of that implementation, what is the expected return on investment for that…and how quickly can I recover what it cost me, whether it was in cash or disruption for the implementation,” Paul said. “Then you have a nice playbook. It may not be the answer [and] may not be plug and play, but it actually gets you pretty far along the way as to not having to do a last-minute analysis when something comes up.”