Tariffs Red Alert: Risk Professionals Must Act Now
- New tariff policy has unleashed ripple effects across industries, inflating costs, elevating credit risk, and straining supply chains.
- Companies that do not address tariffs face shrinking profit margins, diminished competitiveness, and, in severe cases, insolvency or bankruptcy.
- Best practices are outlined for how risk professionals should plan strategically.
2025 tariff policy – enacted under the International Emergency Economic Powers Act (IEEPA) – marks a seismic shock for U.S. and international companies. Understanding these tariffs is a critical matter of corporate risk management. We're outlining important knowledge for companies to navigate this landscape, and why credit, supply chain, and finance teams must work together to mitigate financial risk.
What Are Tariffs & Reciprocal Tariffs?
A tariff is a tax imposed by a government on imported goods – effectively serving as a consumption tax. Tariffs are calculated as a percentage of the value of the goods being imported. For example, a 10% tariff on $100,000 worth of imported goods would result in a $10,000 tax that must be paid before those goods can enter the country.
There are two primary types of tariffs:
- Ad valorem tariffs – These are calculated as a fixed percentage of the value of the imported goods.
- Specific tariffs – These are levied as a fixed fee per unit, such as $300 per metric of a particular good.
Why Tariffs Matter to Risk Professionals
Tariffs are a business cost burden and risk multiplier. For supply chain professionals, tariffs directly affect the price of imported goods and cost of goods sold (COGS), creating immediate profitability headwinds. The United States imposed a 10% baseline tariff on all countries alongside new massive reciprocal tariffs, according to the Harmonized Tariff Schedule of the United States International Trade Commission. A 90-day pause was provided for trade negotiations with all countries, except for imports from China, which have an effective tariff of 145% as of April 14, 2025. The table below shows the effective tariffs for some of the United States' largest trading partners.
| Country/Region | Baseline Tariff | Effective Tariff | 2024 Imports |
| China | 20% | 145% | $439 billion |
| Vietnam | 10% | 46% | $137 billion |
| South Korea | 10% | 25% | $143 billion |
| Japan | 10% | 24% | $148 billion |
| European Union | 10% | 20% | $606 billion |
Tariff policy and rates remain fluid and subject to negotiation between governments, but these costs cannot be ignored. For example, the 145% tariff rate on China is a devastating blow to businesses dependent on sourcing from the region. This dramatic cost surge severely undermines the viability of China as a sourcing hub.
Companies that do not take steps to diversify their supply chains risk erosion of profit margins, a decline in competitiveness, and, in extreme cases, the threat of insolvency or bankruptcy. And even if companies diversify away, there are the risks that those costs are still going to impact upstream suppliers that do not make the switch but need to pass along the higher prices to their customers.Strategic Supply Chain Response to Tariffs
Companies are using several risk mitigation strategies to deal with tariffs:- Source from Financially Durable Suppliers: One immediate solution is to shift sourcing to lower-tariff regions or domestic sourcing if the total cost is lower. As companies seek to replace suppliers from China, companies need to identify financially durable alternative suppliers.
- Cost-Sharing with Suppliers: Some firms attempt to negotiate shared responsibility for the tariff burden with their vendors. Although helpful, not all suppliers can bear cost sharing due to thin profit margins.
- Pursuing Tariff Exemptions: Businesses may apply for temporary exemptions or exclusions, particularly for goods with no readily available substitutes. However, this is often a time-consuming and uncertain process.
- Passing Costs to Customers: In some industries, raising prices may be feasible but only to a point. Excessive price hikes risk reducing demand, losing market share, or driving customers to competitors with better cost structures.
Credit & Finance Professionals Take Action
Tariff-induced cost pressures are causing financial strain on companies up and down the value chain. This is where credit risk professionals play a crucial role. Companies unable to manage tariff cost increases may experience:
- Risk scoring & rating downgrades
- Shrinking profit margins
- Liquidity shortfalls
- Higher bankruptcy risk
Cross-Functional Collaboration: The Key to Resilience
Do not address tariffs in a silo. It spans procurement, credit, finance, operations, and executive leadership. The most resilient companies engage collaborative teams that leverage quality data to communicate narrative strategies to the C-suite. Identify third parties who have built robust databases of supplier information by industry, end markets and financial metrics.
Understanding new tariffs in conjunction with portfolio risk assessments and counterparty reviews is part of a shared enterprise risk strategy. Organizations that embed tariff considerations into their planning will be better positioned to:
- Adapt to tariff policy shifts
- Avoid prolonged and elevated costs
- Protect against financial loss from the credit and supply side