On April 2, US President Donald Trump unveiled elements of the “America First Trade Policy”, a broad review of trade policy that introduces a new wave of reciprocal tariff measures on all imports to the US. Effective April 5, this policy established a minimum blanket tariff rate of 10% on all US imports.
Additionally, from April 9, a country-specific ad valorem tariff rate would be applied to nations with the largest trade deficits with the US. Key US trading partners will be significantly impacted: imports from the European Union, Japan, South Korea and Switzerland will face reciprocal tariffs ranging between 20% and 30%. That said, on April 9, Trump announced a 90-day pause on the higher country-specific reciprocal tariffs for certain trading partners and the tariff rate for China will be increased to 145%.
Certain goods will not be subject to these new reciprocal tariffs, including the previously announced 25% ad valorem tariff on all automobile and automobile parts imports that went into effect on April 3; goods subject to ongoing investigations (such as copper, pharmaceuticals and semiconductors); and imports from Canada and Mexico.
The new tariffs will likely lead to higher production costs in the US and consumer prices, potentially reducing demand for Asean exports to the US and vice versa. The escalation of trade measures may prompt retaliatory actions from affected countries, further complicating trade relationships and increasing the cost of doing business. Many countries, such as Vietnam, have started negotiations, of which the outcomes remain uncertain.
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What does this mean for businesses, and what are the immediate actions and longer-term measures that can help them position themselves well in navigating the trade uncertainties?
Immediate considerations
The starting point for businesses is to have a clear view of the transaction flows that could be affected. This should cover the sale of goods into the US, as well as purchases from the US that might be impacted by any retaliatory tariffs.
In any tariff rate change, businesses must evaluate whether they will absorb the tariff burden or pass it on to customers in accordance with contractual terms. This decision often hinges on the price elasticity of demand for the products and market competition. Absorbing the increased tariff erodes profit margins; passing it on to customers could lead to higher prices and potentially reduced demand. Clear and transparent communication with customers on the rationale for change is therefore crucial.
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Tariff rate changes will typically require companies to update pricing models and billing systems to ensure compliance with new regulations. Thorough scenario planning is needed to assess the potential impacts of various tariff scenarios on companies’ operations and the likely responses of their customers and suppliers.
At the same time, companies need to identify opportunities to reduce duty costs. The quantum of customs duties to be paid is a function of three factors: the nature of the goods, the country of origin and the value of the goods imported.
For most importers, reassessing the value of goods is a good starting point. The “first sale” rule presents a strategic opportunity for US importers. By permitting importers to use the price of the initial sale — i.e., the value used between the manufacturer and a middleman — for customs valuation, companies can reduce the financial impact of increased import duties.
Alternatively, by deferring title transfer to US distributors or customers until after products have been imported, it may be possible to use a lower transaction value. The benefits of this option should be evaluated against the administrative requirements of changing the importer of record and any potential permanent establishment risks. Companies that use product transfer prices to capture the value of all goods, services and intellectual property (IP) rights provided to US distributors should consider if the components could be unbundled and charged separately as separate charges for the use of IP rights may attract royalty withholding taxes.
The new US tariffs are likely to elevate the cost of doing business and cause significant global disruption, which can challenge companies in managing transfer pricing policies. It is important to review whether the arm’s length margin can still be achieved and whether any reduced trade and shifts in supply chain activity will impact their ability to meet incentive obligations.
With uncertainty in the business outlook, companies may postpone investments, delay the launch of new products and implement cost-cutting measures. For companies bound by commitments from existing tax incentives, such as project obligations, volume, manpower or local business spending targets, they should engage with the government agencies earlier to potentially renegotiate existing incentive terms and reduce the risk of retroactive benefit clawbacks.
Longer-term considerations
The current trade tensions further underscore the importance of a resilient supply chain that is agile in addressing future risks.
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During the first Trump Administration, some companies implemented a “China+1” strategy, with additional facilities typically set in Southeast Asia. As the new global trade landscape unfolds, it is timely to rethink their production location sites, and if Southeast Asia remains viable compared to near-shoring or onshoring options in the US. They also need to consider if production should be maintained in-house, use a network of outsourced manufacturers or develop strategic joint ventures. Where production is kept in-house, it is necessary to evaluate if a robust manufacturing network can be built sufficiently quickly or if acquisitions are required.
Beyond the supply chain, in the longer term, companies will need to consider alternative markets for goods, even though finding a replacement market as large as the US may not be easy. This requires researching and identifying emerging markets with favourable trade conditions, developing tailored marketing and sales strategies, and leveraging trade agreements and partnerships.
The geopolitical stability and low interest rates in the past have allowed companies to focus on profit maximisation and revenue growth by lowering the cost of production and having open access to many markets. In a world of rising supply costs, reduced market access and currency fluctuations, the decision-making process for many companies will look different. Managing downside risks will be increasingly important and companies may need to trade higher profits for greater certainty, especially where existential risks are a growing concern.
Recognising the challenges that the US tariffs will present, businesses will have to proactively address the impact sooner than later. Yet, it is unlikely that the current state of affairs will be the end game — preparedness and flexibility to ride the winds of change will be key.
Chester Wee is EY Asean international tax and transaction services leader, and Paul Griffiths is partner, operating model effectiveness, at Ernst & Young Solutions LLP. The views reflected in this article are those of the authors and do not necessarily reflect those of the global EY organisation or its member firms
