What’s a tariff?

A tariff is simply a tax — when one country imposes a tariff on another (as the US has done with China and is threatening to do with Canada and Mexico), then products imported from those countries are subject to a tax. Like most trade policies, this can get pretty complex, so it’s not a flat tax for everything imported from that country but can vary by category.

Tariffs can be imposed for various reasons — to generate revenue for the exchequer, protect domestic production, and politically wrangle with other nations. Among the most famous tariffs were the Corn Laws in England enacted in 1815 to keep out cheaper food grain to benefit the wealthy landowners, most of whom dominated the Parliament (surprise, surprise!). This didn’t work out too well for the regular folks, especially the urban poor in the throes of the Industrial Revolution, who had to deal with astronomical food prices. The Corn Laws were repealed, and it was a watershed moment for the free trade movement.

What’s up with tariffs in the United States?

The US administration has imposed an additional 10% tariff on all imports from China, effective February 4, 2025. Canada and Mexico are threatened with 25% tariffs on most imports — these tariffs have been temporarily suspended following negotiations. There’s likely more coming. As expected, China has retaliated in this tit-for-tat trade game, and there may be further escalations in the trade war. There has also been talk of tariffs targeting the European Union.

How’s this going to work out for your customers?

Not too well, I’m afraid. Getting a room full of economists to agree on anything is rare, but we may have found that one common ground. GDP will shrink, jobs will be lost, and prices will increase. Just about everything — from food to smartphones to housing – will cost consumers more, and the annual estimates range from $800 to north of $3,000 more in household spending. To put it more simply, a $20 Barbie will now cost more than $30, and you may have to skip the guacamole at next year’s Super Bowl bash as avocado prices from Mexico take a hit.

How’s this going to work out for brands?

If a company’s supply chain involves importing from a country with a tariff imposed on it, it will see an increase in costs. The most obvious strategy to avoid this tax is to buy from somewhere else. For example, Apple has been moving production from China to India for some time as part of its de-risking China strategy, and the company can continue to minimize the cost impact by shifting sourcing away from China. But it’s not always easy. Consider alcoholic beverage company Diageo, for whom the United States is a huge market, with its tequila brands a source of strong growth — tequila must originate in Jalisco or one of a few other regions in Mexico, so the company is out of luck in being able to diversify its supply source.

What’s a marketer to do?

A tariff-driven cost increase is no different from how any cost increase plays out in marketing strategy. The company can absorb some of the cost if the margin allows it and the economics make sense — if consumers have other options and will substitute away from these goods at higher prices. Otherwise, some or all of the cost increases will be passed on (as the economists predict will happen). Here are some ways to work through a tariff-driven price increase:

  1. Get smarter about pricing and price up to segments generally more insensitive to increases. But be careful, as tinkering with prices can have the unintended consequence of lousy PR: We’ve seen it with surge pricing, shrinkflation, and, now, “surveillance pricing.”
  2. Be transparent about why you need to take a price increase, mainly because there will likely be a parallel narrative about corporate price gouging, especially if popular discontent with increased prices casts a shadow on the current administration.
  3. Be creative about alternatives such as bundling up for value or trading down to minimize sticker shock. Big-ticket item manufacturers and retailers can get creative with financing schemes that ease the burden for prospects.
  4. Build a better moat because it will insulate against price-switching behavior. In the short term, this could beef up loyalty programs that induce customers to stick around. In the long term, this is yet another clarion call for building brand equity that creates greater stickiness and dampens competitive switching.

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To learn more about the new administration’s new policies and their global macroeconomic effects, read my colleague Michael O’Grady’s blog post and report, The Potential Impact Of A New US Administration And Policy On Tech Spend.