After major tariff announcements in April, escalating and then de-escalating rates between the US and China, and a temporary “pause” in the rest of the world, US tariffs are entering a new phase. The tariffs announced by the US administration in recent months have led executive teams around the world to reexamine their supply chains and markets and to reconsider the framework of global trade.

US tariff policy has more clarity than in April, and relative risk levels across trading partners are emerging. However, exact tariff rate for any given product and country remain subject to change and renegotiation over the coming months and years, and the full details on individual deals have yet to be released (or agreements signed). Retaliatory tariffs, though relatively limited to date outside of China, may yet create escalatory cycles and the secondary effects on world trade outside the US are only beginning.

Companies have now largely recognized that the period of trade liberalization, which took off in the 1990s and has been a defining element of global business, is drawing to a close. This extends beyond US policy: The era of ever-freer trade and connectivity has been fragile for years and is now moving rapidly into reverse (see Figure 1). Canada, South Korea, the European Union and others are using tariffs on Chinese steel and electric vehicles in particular, signaling a broader rise in global protectionism beyond the US. The companies that thrive will be those that can quickly retool for a world in which the free movement of goods, capital, IP, and people cannot be taken for granted. 

Our observation from conversations with companies around the world is that, while some have grasped this broad global shift and begun significant supply chain adjustments, many remain indecisive, waiting for certainty on tariff rates before responding. This is a risky strategy. Though a string of announcements and deals are coming into force, none will be written in stone, and further adjustments to the trading system outside of US trade are likely. Companies must begin making bigger strategic changes that allow them to manage a potentially prolonged period of volatility in global trade.

To adjust to the new normal, all companies now need to reset their commercial and operational efforts within a post-globalization strategy. Uncertainty will persist, and companies will need to invest in adaptability and resilience to handle it. For those that rely on globalized supply chains for goods, matching supply and demand cost-efficiently is now much more critical, with trade policy and uncertainty pushing companies to look for suppliers closer to home.

Amid shifting supply chains, excess capacity from China and other large exporters will seek new markets, possibly leading to a glut of products in some markets and sectors, with potential for protectionist shifts around the world aimed at shielding domestic industries. Companies also will need to prepare for demand swings, as tariff policies and macro conditions continue to shift.

Firms must take this moment to reassess their operations and commercial focus and adopt a long-term view. Companies around the world need to plan beyond tomorrow and create a blueprint to thrive in the longer term, factoring in continued flux in trade policies and regimes—not just in the US, but globally. Although the shock effects from the scope and size of the announced tariffs are commanding attention, the knock-on effects could be more profound.

Understanding the uncertainty

While the details of future US trade policy remain uncertain, it is clear that three key intersecting objectives lie at the heart of the administration’s actions: establishing balanced and “fair” trade, restoring the diversity of the US industrial base, and strengthening national security.

It’s not yet clear if the announced tariff actions will achieve these goals, but if they do not result in material progress, the White House is likely to turn to further tariff or nontariff policies. While country-level tariffs have drawn the most attention, some products have seen specific policy measures, largely based on their intersection with the Trump administration’s goals (see Figure 2). In the most sensitive product categories, centered on high tech and security, nontariff policies—including incentives, export bans, and heavy regulatory focus—have been in place for years in both the US and China. 

Figure 2

Recent US administrations—both Republican and Democrat—have already deployed a wide array of nontariff policies for critical technologies (incentives, export restrictions, IP restrictions, etc.), and these may ramp up further in tech and other industries. Retaliatory actions may also come in nontariff forms, and other countries may respond in kind, depending on what they think might influence the US administration and where they have material imports.

What happens next?

As we noted in our previous brief (“From China to Trouble”), Mexico and Canada’s deep trade connections with the US, as well as the advantages of a combined US–Mexico–Canada bloc as a larger economy with access to lower-cost labor and a broader set of natural resources, make the logic of a low-tariff deal clearest for all sides. Still, there is no guarantee of how negotiations will play out or how long they will take.

Other large economies, such as Japan, the EU, the UK, and India, have more options, but they will need to balance domestic priorities against pressure from the US or China.

Smaller economies near China will face difficult trade-offs—with high reliance on global trade today, significant trade with both the US and China, and the potential for the US to pressure them to restrict Chinese goods for low-tariff access. We also expect that China’s domestic priorities will likely make a comprehensive low-tariff deal with the US very challenging to reach.

Initial deal announcements should not be taken as long-term guarantees. In particular, if a country sees its trade surplus with the US significantly expand after a deal, there could be real risk of renegotiation or additional tariff measures.

Business reactions

Companies have begun making some moves in response to tariffs—and with the recent set of deals, we expect more will start acting. However, few are accounting for trade shifts beyond US tariffs. Deals with complex rules of origin, and new tariffs by countries fearing excess global capacity, may disrupt their own manufacturing sectors, making free-flowing global trade more difficult. Firms need to take action to prepare for a permanent change in the global system. Companies should think beyond just US tariff policy to broader restrictions on the movement of goods, people, IP and capital around the world. This approach includes:

• Understanding your exposures. How will your customers and suppliers be affected? What global business practices might be at risk?
• Building the options. What short-term levers can you pull to mitigate tariffs and manage your costs? What longer-term investments must you consider in a post-globalization world?
• Measuring the risks. What predictions are embedded in each approach? What is your confidence level for those predictions?
• Building adaptability and resilience. How can you be more adaptable and respond faster to change? Where do you need to invest in resilience because you have less confidence in your predictions?
• Defining the macro strategy. How do you build your options into a coherent strategy? What are your short- and long-term plans?