Import tariffs—which are also called customs, import duties and import fees—are taxes levied against products imported into one country from another country.
Both your business and your supply chain are impacted by import tariffs if you use imported materials (either as part of what you sell to customers or as part of your capital equipment) or if you export any products to other markets.
If you export products to other markets/countries, then the import tariffs that impact your business aren't paid by you—per se—but by whomever buys your goods.
So how do import tariffs impact your business? Let's look at a few areas with the most at stake, in terms of import tariff impact:
- Cost of goods sold (COGS)
- Capital equipment
- Annual budget planning
Cost of Goods Sold (COGS)
The value of your supply chain in large part depends upon the cost of goods sold or COGS of each of the products within that supply chain. The value of your COGS also drives:
- Supplier pricing and negotiations
- Inventory value
- Profit margin
When you work with suppliers who have production facilities outside your country, you should make sure that you consider import tariffs as part of their price quotes.
The generally accepted purpose of import tariffs is to attempt to level the playing field of domestic products—especially as those domestic products face competition from low cost manufacturing locations. A 5 percent import tariff on teddy bears (approximately), however, rarely drives the price up so much that it discourages the ongoing importation of plush toys.
In most cases, a nominal import tariff is considered when you compile your cost of goods. For example, if you buy Product A from a low cost manufacturing country for $1 and you calculate that it costs you ten cents to ship Product A from your low cost manufacturing country to your own, you know that your cost of Product A is actually $1 plus 10 cents.
And your supply chain pro's realize and will tell you that Product A has a 5 percent import tariff, so you need to add five cents to that.
So if you sell Product A for $2, your supply chain pro will tell you that the difference between your cost of goods sold and your sales price is 85 cents ($2 minus $1.15) not $1 (which would be your sales price less Product A's purchase price).
If you have one thousand pieces of Product A in your inventory, the total purchase price of that inventory is $1,000 (i.e. the $1 purchase price times the one thousand pieces). However, your inventory isn't just valued at how much that inventory costs—but also by how much it cost you, in total, to get it to you.
That includes any import tariffs you paid.
Why is that important? The value of your company is largely based on the value of your inventory (along with capital assets, intellectual property, brand value, etc.). If you've paid an incremental 5 percent or 10 percent for import tariffs, those are real dollars that should be added to your company's value.
Your finance folks should have a general ledger account for import tariffs. Your supply chain folks will be able to tell you what values to put into the import tariff general ledger account. Import tariffs are an important factor when considering profit margins.
Import tariffs are not immovable objects, however, and they have been known to change quickly and unpredictably. When import tariffs are raised, that has an impact on the importer and also the country exporting that product. Rising import tariffs are ostensibly used to make domestic products more competitive but can have more global consequences—as they have an impact the broader economy (they typically drive domestic prices higher) and can kick off trade wars (the exporting country is likely to retaliate in some fashion).
Import tariffs are an important cost driver in a global supply chain and sudden changes in those tariffs can have unintended consequences to supply chain costs.