U.S. businesses reliant on foreign imports have seen their average tariff rate increase from 2% at the beginning of the year to 24% as of April 11, according to Bloomberg. This has left many businesses, including those in the consumer products industry, considering what actions to take to mitigate the increased costs due to tariffs.
Passing on costs or absorb them
Some consumer businesses could plan to maintain current foreign trade partners and pass on expected increased costs to their customers, especially if they feel competitors may also be experiencing the same cost adjustments and need to increase their prices also. However, if cost increases are high enough and customers are unwilling to buy, sales will decrease, affecting profitability. Businesses are then left to evaluate how long they can wait for conditions to change, such as tariff rates decreasing, or whether they should make changes to reduce their costs.
Likewise, some businesses may plan to just absorb the costs incurred by tariffs. However, even if a retail business, for example, takes on the entire cost of a 10% tariff increase—the current rate of U.S. imports, excluding those from China—it would require a 4.9% retail price increase in the U.S. for some retailers, according to Bloomberg. In contrast, the considerably higher 125% tariff on imports from China would require a price increase of 60%. See the impact comparison in the chart below for 11 major U.S. retailers.
For businesses that find their current imports too costly with the new tariffs to be profitable, let alone competitive, they may consider moving production to another foreign country with decreased tariffs.
Weighing manufacturing locations
In 2018, the trade tensions between the U.S. and China prompted many companies to shift their manufacturing operations from China to Vietnam, causing exports from Vietnam to the U.S. to surge 35% in 2019. Last year, Vietnam became the sixth-largest exporter to the U.S., according to Statista. But now, U.S. companies importing from Vietnam have seen their import tariffs go from roughly 5% at the beginning of the year to 46% as of April 2, and then back down to 10% after a 90-day pause was announced beginning April 9.
In response, many manufacturers have paused the building of factories there, according to the Los Angeles Times. The Vietnamese province of Binh Duong saw export orders worth more than $708 million get canceled over four days before the 46% tariff was to take effect. At the same time, spot rates to ship a 40-foot container to the U.S. West Coast from Vietnam jumped in April approximately 23%, according to data from Xeneta, as businesses try to get goods into the U.S. before tariff rates potentially change. However, import volumes into the U.S. are forecast to decline as exports from China decrease due to tariffs. Without clarity on whether countries will experience a 10% tariff or a much higher percentage after the 90-day pause is over, businesses are left uncertain as to which action will result in the lowest costs.
Domestic production: A costly and complex alternative
Alternatively, businesses may choose to move their production domestically if that provides the cheapest option. However, there are many challenges to overcome to make that choice possible.
Unless businesses can find an existing domestic manufacturer to produce their products, the alternative is to build a factory or wait for a third party to build additional factories, which takes time, money and materials.
The cost to build a factory can range between roughly $3 million for a small 30,000-square foot factory to over $50 million for a larger facility, according to RSMeans Data. Construction loans are heavily affected by the federal funds rate, which is currently elevated at 4.25% to 4.5%, leading to high borrowing costs. Builders must also obtain permits, zoning and land use approvals, requiring several months to over a year to obtain. After that, construction often takes between two months to three years for a larger complex.
Additionally, while most building materials used in construction are produced domestically, some materials are imported, which now costs more due to tariffs. For example, steel is the primary material used in the structural framework of factories. According to the American Iron and Steel Institute, 23% of the steel used by the U.S. in 2024 was imported. On March 12, the administration reinstated the full 25% tariff rate on steel imports from all countries, an increase from exemptions and quota arrangements for many major trading partners previously.
Domestic production is certainly an alternative, but it could be a costly and arduous endeavor for many consumer companies challenged with other business complexities and profitability concerns.
Strategies to combat tariffs
While managing the impact of tariffs can be a daunting task for many consumer businesses, there are strategies to consider to help combat the impact on costs.
Businesses should consider whether it is possible to change materials or intermediate goods to reduce their exposure while still maintaining quality.
Additionally, businesses could leverage consumers’ expectations for price increases to grow their margins even across products unaffected by tariffs and compensate for margin losses elsewhere.
As tariff costs lead to a jump in prices, consumers’ budgets will not increase as immediately. Businesses should consider changes in their product offerings to ensure continued alignment with affordability.
Lastly, businesses should look to technology for help. Artificial intelligence and other emerging technology solutions can increase productivity and save labor, reducing overall costs. In addition, AI can enhance supply chain efficiency and resiliency, address inventory management challenges, automate processes, provide analytics, and more, all to benefit cost management and aid profitability.
