Tariffs are no longer a distant policy issue; they are an immediate and complex challenge affecting most businesses. Leadership teams need to act decisively to navigate this disruptive landscape and plan for the broader implications in a fragmented global economy. Both short-term decisions and long-term strategies are essential to mitigate risks and capitalize on shifting opportunities.

It helps to put tariffs in context, as symptoms of a larger geopolitical trend: the move from a globalized world to a post-global one. After decades of integrating markets, electorates are pushing back against policies of economic integration, with many nations implementing or considering more protectionist policies, to the detriment of nations that rely on exports. Fragmented markets are more costly for businesses and punish mistakes of prediction or forecasting more severely.

Beware the lure of simplistic answers

Predicting the precise impact of tariffs is a fraught exercise. Currency adjustments, retaliatory tariffs, and shifting trade flows create ripple effects that defy linear calculation. Efforts to quantify these impacts can sometimes yield false precision, leaving businesses ill prepared for the complexities ahead. Strategic responses require a balanced grasp of uncertainty, not blind reliance on models or assumptions.

In general, a tariff is just a specific instance of a government tax that raises government savings (government revenue minus government spending), at the expense of different sectors of the economy: Households may incur higher prices, businesses may generate lower profits, and foreign trading partners may take a hit to their balance of trade. Which sectors ultimately bear the cost of a government’s change in policy is determined by a complex mix of supply and demand balances that vary across products and within those products’ value chains. 

In the event of a broad increase in tariffs, it is virtually impossible to fully anticipate the net effect of the policy. We can, however, say it’s unlikely that the cost of the tariffs will be fully borne by either consumers or foreign entities. While the global economy is in a very different place than it was in 2017, back then tariffs had a negligible impact on US consumer price inflation; at the product level, though, the impact was varied, and it changed over time as well. 

Beyond that, any changes in US tariff policy will produce many effects and countereffects, both within the US economy (e.g., the creation of domestic substitutes) and outside the US economy (e.g., the diversion of trade flows from tariffed to non-tariffed countries). While these effects would undoubtedly disrupt business plans and operations, they will also tend to mitigate the macroeconomic effects.

More broadly, inflationary pressures from tariffs may be lower than many leadership teams assume (see Figure 1). To use an example of a highly disruptive scenario—the immediate imposition of 100% import tariffs on China—the net inflationary shock is likely to be substantially less acute than the post-pandemic inflationary shock when supply was globally constrained while demand was stimulated.

Figure 1

Act now, plan now: A double-edged imperative

Winning in this new world order requires action on two fronts: the immediate and the long-term.

Act now

Businesses can mobilize around three key imperatives:

• Understand your value chain—upstream and downstream—and where it crosses borders. Develop a view of your competitors' exposures and where you are more or less exposed.
• Determine the breakpoints that will force a business shift—what tariff levels, for what duration, would change decisions?
• Identify where you have negotiating and pricing leverage and where you need to develop it.

It’s vital to assess tariff exposure at a company level, as the implications will vary significantly between companies even within one industry. Automakers, for example, have divergent pathways depending on the setup of their supply chains. They can act to optimize their existing footprint, by reshuffling volumes to make US production for the local market and assemble to their maximum capacity at US sites. They can also invest in increasing the flexibility of their existing manufacturing footprint, to ramp volumes up and down as conditions require. And they can reevaluate future large-scale investments in their existing footprint.

Plan now

In a world of fractured trade, long-term success hinges on strategies that emphasize prediction, adaptability, and resilience. A key element involves developing hedges and optionality to buy yourself room to maneuver.

Having mapped their value chains as part of “Act now,” companies can take a more disciplined approach to understanding their exposures more broadly. The process of understanding supply chain exposures, for example, may reveal challenges of monitoring and analyzing potential disruptions and the need to build that capability quickly to deal with volatility.

The first step is to align around your company’s worldview. Given the global realignment, analyze your company the way an activist investor would. What is the two-page deal thesis that describes what drives the value for this market? What critical markets, products, and suppliers are required and fundamental to the valuation of the company? Scanning that deal thesis, what are your company’s critical exposures?

Prediction. This capability involves generating beliefs about the future of your industry with enough conviction to trigger actions that can create competitive advantage. Realistically, precision will remain elusive amid the countervailing forces unleashed by tariffs, and the greater risk is overconfidence. Instead, focus on which impact matters to your business. How large is the potential impact to your revenue and margins in an extreme but plausible outcome?

• Will we face a new tariff/cost barrier, and if so, what is the magnitude and how long will this last?

Adaptability. Being adaptable means changing the business faster than competitors are changing. The most successful companies will also match their adaptation to the rate of change of the policy environment, which is evolving fast in this case.

• Will our overseas competitors react by lowering price and outhustling us in our current markets? If so, can we find other markets? Will those be sufficient?

Resilience. Companies with superior resilience survive shocks better than their competitors do. If companies can’t adapt quickly enough, their ability to build resilience becomes paramount. The extent of pain they can endure—and their strategies to mitigate it—needs to shape the response. This will depend on time horizon as well: The capacity to absorb pain does eventually time out.

• Do we buy a business whose main source of value is “if things go wrong”?

Navigating complexity, securing opportunity

Tariffs are manifestations of a broader economic realignment, one that will reshape how businesses operate. Companies that respond with urgency and sophistication will not only weather the disruption but position themselves as leaders in a post-global era. For those that hesitate, the costs could be steep—and irreversible.