Looking ahead to 2025, the potential for increased tariffs is top of mind for many executives. But despite widespread concerns, few leaders have developed robust plans to understand the second- and third-order effects and to steer their businesses through potential scenarios. Those who understand tariffs—and their likely impacts—will be better positioned to navigate the ambiguities of 2025 and beyond. In this article, we look at a brief history of tariffs, some recent examples, reasons why governments impose tariffs, and a range of responses that businesses can take to seize potential opportunities.
A short history of tariffs
Tariffs are nothing new, of course. At certain points in its history, the Roman Empire taxed imports of foreign goods at a rate 25 times higher than domestic trade. The current status quo of global trade has its roots in the 20th century. After the US stock market crash of 1929, Congress increased almost 900 tariffs, sparking tit-for-tat retaliation from other countries in the form of more tariffs. As a result, global trade contracted by two-thirds within five years. In 1947, to improve economic prospects in the wake of World War II, 23 countries signed the General Agreement on Tariffs and Trade, or GATT, which would be a precursor to the World Trade Organization (WTO). In the 21st century, the global consensus for expanding free trade began to ebb when, in 2001, China joined the WTO. This trend culminated in 2011 with the WTO’s Doha Round, during which countries failed to agree on lower agricultural and textile subsidies after years of negotiations.
Between 2016 and 2020, the world’s two biggest economies, the United States and China, collectively imposed tariffs on hundreds of billions of dollars’ worth of each other’s imports. President-elect Donald Trump has announced that his new administration will leverage tariffs in negotiations on a wide range of issues starting in 2025. Today, the average tariff rate is a relatively low 2.5 percent, down from 3.6 percent in 1993.
What are the two main types of recent tariffs?
Recently, major economies have targeted goods in particular industries or goods from a particular country with higher tariffs to advance national security and foreign policy objectives. As a baseline, imported goods are often subject to a general duty rate (this is a percentage or tax paid at the time of importation) before any sector- or country-specific tariffs are added. While the focus of this article is how business leaders can navigate the uncertainty around these higher tariff rates, companies may also explore strategies to minimize or postpone duties, such as using duty drawback, free-trade agreements, and free-trade zones, for example.
Sector-specific tariffs
Sector-specific tariffs are taxes levied on a particular type of imported good. These are frequently revised for a variety of reasons. One US sector-specific tariff in 2018 placed a 25 percent tariff on steel imports into the United States. Later that year, the United States permanently excluded Australia from the steel tariff and enacted a quota system for steel imports from Brazil, South Korea, and Argentina (meaning only imports below the quota are permitted). The tariff rate on steel from Türkiye was doubled to 50 percent in 2018, but then lowered to 25 percent in 2019. Also in 2019, steel tariffs were lifted for Canada and Mexico. In 2021 and 2022, under the Biden administration, imports below quota thresholds for key allies, including the European Union, Japan, and the United Kingdom, were also excluded from the tariffs (Exhibit 1).
Country-specific tariffs
Some tariffs are imposed as the result of government investigations into a particular country’s unfair or discriminatory trade practices, such as intellectual property theft, the forced transfer of technology, or cyberattacks. Many economies use these kinds of tariffs. For example, the United States imposed tariffs on $250 billion of Chinese imports in 2018, and an additional $112 billion in 2019 (though about $160 billion in other tariffs were also suspended that year). In another recent example, from 2018, the European Union responded to US tariffs on steel imports by imposing its own tariffs of up to 25 percent on over $3 billion in US goods (including steel, aluminum, bourbon, motorcycles, and jeans).
What factors may influence US trade policy?
Historically, as we have observed, there are a few reasons for imposing tariffs. While countries may deploy tariffs for other reasons in the future, the following precedents can act as a guide for leaders as they plan:
- Rebalancing trade and reducing trade deficits. Between 2016 and 2020, the Trump administration highlighted concerns regarding “persistent trade deficits” as a major factor influencing its trade agenda.1 In 2023, the United States’ five largest trade deficits (by size of deficit) were with China, Mexico, Vietnam, Germany, and Canada. Electronics, machinery, and transportation equipment were the main imports from these countries (Exhibit 2).
- Gaining leverage in negotiations unrelated to trade. Countries sometimes announce tariffs as part of negotiations over other matters such as immigration and defense spending, without ultimately imposing them. In 2018, for example, the Trump administration announced—but never implemented—tariffs on imports of EU cars and car parts, while simultaneously pressing European NATO member states to increase their defense spending. The next year, in 2019, the Trump administration announced tariffs on Mexico while negotiating a deal on immigration, then suspended the tariffs indefinitely once a deal was reached. Finally, in 2021, the Trump administration cited “an important security relationship” when announcing a tariff exemption for aluminum imports from the United Arab Emirates (which was nullified in February 2021 by the Biden administration before taking effect).2 Finally, in 2021, the Biden administration lifted tariffs on EU steel and aluminum imports in recognition of “the importance of the transatlantic relationship” and shared economic and environmental goals.3
- Protecting US sectors critical to national security and/or vulnerable to lower-cost foreign competition. In the past, governments have imposed restrictions on industries critical to defense and national security, such as steel production, where artificially low-priced imports may threaten to undercut domestic industry. Lower-cost production overseas may result in cheaper imports that reduce the competitiveness of domestic producers (and might drive them out of business). Indeed, negotiations over the steel and coal trade inspired the formation of the European Coal and Steel Community, a predecessor of the European Union.
- Creating or protecting jobs. Some economists believe that tariffs on imported goods could reduce competition for US producers, increase demand for US-made goods, and create jobs.4 Foreign companies that import to the United States may also choose to onshore production there. For example, US tariffs imposed in 2018 on washing machines prompted a US manufacturer to add 200 jobs in anticipation of increased demand; the same tariffs also prompted several foreign companies to shift more production to the United States, creating 1,600 additional jobs. (Many factors are at play here, though, and economists debate the interplay of economic impacts and the cost of adding jobs.)
How do the world’s largest economies implement and respond to tariffs?
In the United States, the president can enact tariffs. Congress has granted this authority via several statutes. First, the rarely used Section 338 of the Tariff Act of 1930 allows for tariffs up to 50 percent if a country is found to be engaged in discriminatory trade actions against the United States. Section 232 of the 1962 Trade Expansion Act allows for tariffs to protect domestic industries, and Sections 201 and 301 of the Trade Act of 1974 allow the president to respond to other countries’ trade practices. Section 232 tariffs require an investigation by the US Department of Commerce, Section 201 tariffs require an investigation by the International Trade Commission, and Section 301 tariffs require an investigation by the US Trade Representative. To implement tariffs more rapidly, a president might also invoke the International Emergency Economic Powers Act (IEEPA), though legal scholars are divided about the feasibility of using IEEPA since it has never been applied to trade.5 Section 122 of the Trade Act of 1974 also allows the president to impose tariffs up to 15 percent for 150 days without Congressional approval (for a look at how the US government has recently levied tariffs on Chinese goods, see Exhibit 3).
Other large economies have varying degrees of flexibility to respond to tariffs. In China, responsibility for trade policy varies depending on the importance of negotiations, though a new Tariff Law clarifies the power of a Tariff Commission under the State Council. China has not shied away from tariffs in response to Western measures but has also shown a willingness to negotiate with the United States. For example, in 2020, the Trump administration and China signed a trade deal in which China agreed to increase US exports in exchange for lower tariffs on Chinese imports. For its part, the European Union negotiates trade agreements on behalf of its 27 member countries. Countries then vote to approve via qualified majority voting, though in practice agreements have typically required consensus.
The impact of these tariffs varies and can be difficult to disaggregate from other economic trends. One trend that may be related to increased tariffs is that many organizations have shifted to new markets that are subject to fewer or lower tariffs. Between 2018 and 2023, US imports of Chinese electronics dropped 17 percent, but US imports from other Asia–Pacific countries increased by 20 percent (Exhibit 4).
How can leaders build resilience to changing tariffs?
For business leaders around the globe, geopolitics are shifting rapidly. The short-term future of trade policy is uncertain in all three of the world’s largest exporters—China, Germany, and the United States—which collectively account for $7 trillion of exports. What’s more, in recent decades, there has been significant fluctuation regarding what goods are subject to tariffs as lists are updated, revised, and renegotiated. In situations of ambiguity, leaders may find greater success by developing strategic and risk-based options rather than defaulting to reactionary responses.
Companies should factor in uncertainty regarding implementation timelines, since timing may be driven by not only foreign policy negotiations but also the mechanics of the regulatory regimes (and judicial reviews) that underpin tariffs. The recent US tariffs on steel and Chinese imports followed yearlong investigations that were announced in April 2017 and August 2017, respectively.6
Next, CEOs should seek to understand the implications of tariffs for their industries, supply lines, customers, and investments. These exercises can help identify strategic opportunities to create value, such as shifting commercial markets of focus, capital allocation, pricing strategies, and manufacturing bases. As part of a comprehensive analysis aimed at value creation, companies can take the following steps:
- Assess comprehensive supply chain vulnerability. This analysis should go beyond the surface level to understand first-, second-, and third-tier suppliers’ exposure to potential tariffs and retaliatory tariffs. Firms can examine the complexity and geography of each step in their manufacturing process—mapping goods’ countries of origin and total landed costs—to estimate the potential effects of tariffs. Scenario planning can cover potential impacts on both production and delivery, such as disruption of critical inputs, changes in cost, and whether manufacturers can absorb added costs. In addition to supply chain updates, leaders may ultimately consider shifts in product mix. Scenario planning can also include potential retaliatory tariffs.
- Explore alternate supply sources. Mapping out supply chains and assessing the feasibility and costs of switching suppliers can help inform leaders’ decisions on tariff responses. Some potential new markets may offer incentives to defray switching costs, which will be important factors in cost analyses. Understanding available subsidies (for example, India’s “Make in India” initiative), eligibility for investment incentives, and the ease of doing business in other countries can help CEOs decide whether a new supplier will be viable for their business.
- Evaluate potential demand shifts. Leaders can analyze how tariffs will affect consumers across their markets to determine whether new strategies are needed. This analysis can consider changes to market access; anticipate demand shifts in the short, medium, and long term; and assess the potential for higher operating expenses. Relevant analyses would cover whether suppliers can absorb some of the tariff to stay competitive and how much costs might rise from reorganized supply routes. Leaders can also assess elasticity of consumer demand to help understand market impacts of cost increases.
- Update market scans. Leaders can review supplier exposure for all the major players in their markets to better understand how tariffs may affect their competitors. If leaders evaluate these potential market shifts in advance, they could be better positioned to quickly seize unique opportunities and emerge stronger.
- Validate shifts in strategy. Tariff policy is difficult to predict, and shifts may be temporary. Hence, any strategy shifts made in response to tariffs should be grounded in rigorous analysis that supports long-term value potential and that can hold up to further shifts in trade policy.
Based on this analysis—and by rebalancing portfolios, revising operating footprints, and optimizing supply chains, talent practices, and technology and data stacks—leaders can prepare to seize the opportunities presented by global rebalancing.
