Assessing the economic impact of tariffs: adaptations by multinationals and traders to mitigate tariffs

Purpose The purpose of this paper is (1) to inform academics and company strategists about the utility or dangers of tariffs and (2) to examine possible strategic adaptations by multinationals and traders to mitigate tariffs. Design/methodology/approach This paper is a comprehensive review of arguments pro and con tariffs. How traders and multinational companies can mitigate tariffs is a core section of the paper. Findings While enumerating the pros and cons of these tariffs, most apolitical observers conclude that, overall, their economic and political costs typically greatly exceed the benefits. Since the USA is, by far the biggest importer, its tariff policies can affect most other exporting nations. An Appendix examines the root causes of the threatened upsurge in US tariffs under the Trump administration, stemming from concerns about globalization’s impact on domestic US manufacturing. Increased US tariffs will likely spur retaliatory tariffs from trading partners, with a possibly grave impact on world trade. Research limitations/implications Each of the positive and negative effects of tariffs comprehensively covered in this review paper can be the subject of empirical investigations. Tariffs have multiple effects, on producers who depend on imported inputs; on consumers of the final product; on exporters whose shipments may diminish; on governments who may choose retaliatory tariffs; on the configuration of international supply chains; and on exchange rates. While economists have created stylized models to assess the overall impacts, there is no comprehensive conclusion except that past studies show net detrimental effects of tariffs. Practical implications This paper is designed to identify possible adaptations by multinationals and traders to mitigate tariffs such as marginal increases in inventories, diversification of suppliers by number and geography, passing through price increases depending on price elasticity of demand, deepening relationships with suppliers, nonmarket strategies and lobbying, investing in more automation, product and process innovation and a reduction in service or product varieties. None of these adaptations, however, are easy or costless. Social implications In most cases, if not all, the economic burden of tariffs (as an incremental tax on imports) is passed on to eventual consumers of the imported products. In some instances, these higher import costs can exacerbate or trigger inflation. With retaliatory action by affected export nations, the detrimental effects of tariffs can spill over to several countries. Originality/value For readers of business research journals, there has not been much discussion of the impact of increased tariffs. This paper presents a comprehensive review of the benefits, costs and risks for international strategies and organization.