Reducing the impact of ramping inflation and multi supply shortages in 2025 while managing costs in key areas will require a comprehensive, multi-source approach. By leveraging trade agreements, fiscal incentives, and optimizing supply chain strategies, businesses can mitigate rising costs, avoid tariffs, and take advantage of favorable tax rates and shipping costs. Here’s how to implement these strategies effectively:
1. Maximize Trade Agreements
Trade agreements between countries can offer preferential treatment by lowering tariffs, providing access to lower tax rates, and creating favorable conditions for international trade. These agreements can reduce the overall cost of goods and services, helping businesses manage inflation.
Key Actions:
- Understand Relevant Free Trade Agreements (FTAs): Ensure you're taking full advantage of any FTAs that your country has in place. For example, if you're operating in the U.S., the USMCA (United States-Mexico-Canada Agreement) might provide you with duty-free access to materials sourced from Mexico and Canada. Similarly, the EU's agreements with countries like Japan, South Korea, and others provide reduced tariffs for importing key goods like raw materials and industrial equipment.
- Use Preferential Tariff Treatments: Some agreements have specific rules of origin that allow products or raw materials to qualify for reduced tariffs or be entirely tariff-free if they meet certain criteria (e.g., if a certain percentage of the product is sourced from member countries). Work with a customs expert to ensure your products meet these criteria.
- Regional Trade Preferences: Many countries belong to regional trade organizations that offer more favorable terms. For example, the ASEAN Free Trade Area (AFTA) allows member countries to trade without significant tariffs. Look into whether your supply chains can take advantage of these regional deals.
Examples:
- The CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) between countries like Japan, Canada, and Australia, offers favorable trade terms for a wide range of goods, including IT and industrial equipment.
- The EU-Mercosur Agreement may help access lower tariffs for industrial and agricultural products from South America.
Action Steps:
- Consult with a Trade Lawyer or Customs Consultant to make sure you understand the rules of origin, tariff classifications, and compliance requirements of the agreements that impact your business.
- Regularly Review and Update Trade Agreements: Trade deals can evolve, so it's critical to stay updated on any changes in tariffs, new trade deals, or the expansion of existing agreements.
2. Leverage Fiscal Incentives and Tax Benefits
Many countries offer fiscal benefits, including tax breaks, grants, or subsidies, to attract investment in certain industries or to incentivize businesses to locate or source in particular regions.
Key Actions:
- Tax Incentives for Manufacturing & Sourcing: Certain countries or regions may offer tax relief for manufacturing or sourcing certain raw materials, commodities, or technology. For example, tax credits for companies that source from local suppliers or set up production facilities in special economic zones (SEZs) could lower overall operational costs.
- Customs Duty Exemptions: Some countries offer duty exemptions on specific industries or products. For example, the U.S. has a Generalized System of Preferences (GSP) program that eliminates tariffs on some products from developing countries. Countries like India, Vietnam, and others could be targeted for sourcing to benefit from such programs.
- R&D Tax Credits: For businesses importing IT and technology equipment, many countries, including the U.S., Canada, and EU members, offer R&D tax incentives for innovation. This can reduce the financial burden on technology-related purchases and projects.
Examples:
- In the U.S., the Foreign-Trade Zones (FTZs) allow companies to defer or eliminate tariffs on certain imported goods, which can be beneficial for raw materials or industrial equipment.
- In Singapore, businesses benefit from a range of tax incentives like the Productivity and Innovation Credit (PIC), which offers tax deductions for innovation-driven sectors, including IT.
Action Steps:
- Consult with Tax Advisors or Local Trade Authorities to identify available tax incentives, duty exemptions, or fiscal policies that your business can take advantage of.
- Monitor Changes in Fiscal Policies: Countries often modify or introduce new tax breaks, grants, or subsidies to attract investment, especially in times of inflation or economic uncertainty.
3. Optimize Sourcing and Multi-Sourcing Strategy
One of the best ways to mitigate the effects of inflation is to diversify your sourcing channels and reduce reliance on a single country or supplier. This will protect you from rising costs or tariff hikes in any specific region.
Key Actions:
- Diversify Suppliers: Identify alternative suppliers from countries with favorable trade deals. For example, if you're sourcing raw materials from China, consider diversifying to countries that are part of trade agreements with your region, like the ASEAN countries or countries in Africa if you're in Europe or the U.S.
- Nearshoring and Reshoring: As tariffs and transportation costs rise, reshoring (bringing production back to the home country) or nearshoring (moving production to nearby countries) can help you avoid costly tariffs and inflationary shipping rates.
- Strategic Stockpiling: Where possible, purchase and stockpile key materials or equipment at today’s prices before inflation or tariffs increase costs further.
Examples:
- ASEAN Countries (e.g., Thailand, Vietnam) are part of the Regional Comprehensive Economic Partnership (RCEP), which reduces tariffs for goods traded among these nations. Businesses in the EU or U.S. can consider these regions for sourcing raw materials and industrial equipment at a lower cost.
- Mexico can be a low-cost alternative to China for industrial equipment and raw materials, benefiting from the USMCA for tariff-free or reduced-tariff access to U.S. markets.
Action Steps:
- Establish Long-Term Relationships with Suppliers in countries with favorable trade terms to lock in better pricing and ensure access to the best materials.
- Evaluate Sourcing Costs Regularly: Monitor changes in the cost of raw materials, shipping, and duties in key regions to make sure you’re staying ahead of rising inflation costs.
4. Negotiate Better Shipping Rates
Inflation often leads to increased shipping and logistics costs. To minimize this impact, it’s crucial to negotiate better shipping rates and improve supply chain efficiency.
Key Actions:
- Collaborate with Freight Forwarders: Engage with logistics partners to secure the best shipping rates and optimize transportation routes. Consider working with freight forwarders who have strong connections with major carriers and can negotiate bulk shipping discounts.
- Use Multimodal Transport: By combining air, sea, and land transportation, businesses can reduce overall shipping costs while ensuring timely delivery of goods. Multimodal transport can also help in mitigating the effects of supply chain bottlenecks that often drive inflation.
- Consolidate Shipments: If you're importing from multiple suppliers or countries, consider consolidating shipments to reduce per-unit shipping costs.
Examples:
- Major shipping companies like Maersk, DHL, and FedEx often offer volume-based discounts, and entering into longer-term contracts can secure better rates.
- Digital Freight Platforms such as Freights can help businesses compare shipping rates and find the most cost-effective carriers for different routes.
Action Steps:
- Negotiate Volume Discounts with logistics providers for consistent shipments or long-term contracts.
- Explore Regional Warehousing: Using regional hubs or warehouses located closer to end markets can help reduce shipping costs and inventory holding times.
5. Utilize Hedging Strategies for Commodities and Currency
Hedging against price increases in commodities and raw materials can be an effective way to control costs during inflationary periods. Additionally, hedging against currency fluctuations can protect your business if you’re sourcing materials internationally.
Key Actions:
- Commodity Futures Contracts: For volatile commodities like oil, metals, or agricultural products, locking in prices through futures contracts or options can help protect against price hikes.
- Currency Hedging: If you’re dealing with suppliers in countries with fluctuating currencies, consider using financial instruments to lock in favorable exchange rates and avoid currency-related inflation.
Examples:
- Using commodity futures to lock in prices for raw materials such as steel, oil, or grains can prevent unexpected cost spikes.
- Currency forward contracts can be used if you're importing from countries with currencies subject to high volatility, such as Brazil, Russia, or Turkey.
Action Steps:
- Work with a Financial Advisor to explore hedging options that suit your business, especially for key raw materials and currencies that might be impacted by inflation.
- Regularly Review Your Hedging Strategy to ensure you're staying protected from commodity and currency volatility.
5. Fiscal Benefits by Country
Governments often offer fiscal benefits, such as tax incentives, subsidies, grants, and reduced tariffs, to encourage businesses to invest in specific industries or regions. These incentives can help mitigate rising inflation and lower operational costs.
Key Fiscal Benefits:
United States:
- Foreign-Trade Zones (FTZs): Allow U.S.-based companies to import raw materials or finished goods without paying duties. This can help reduce costs for industrial equipment and commodities.
- Research & Development (R&D) Tax Credits: If you’re in IT, tech, or innovation sectors, R&D tax credits can offset costs associated with technology development.
- Investment Tax Credits (ITCs): Tax breaks for capital investments in renewable energy or industrial machinery.
European Union:
- Customs Union: Within the EU, there are no tariffs between member countries. This is particularly useful for sourcing raw materials and industrial equipment from EU states without worrying about tariffs.
- VAT Exemption on Export: Goods exported from the EU are typically exempt from VAT, which can help lower the total cost for businesses involved in cross-border trade within the EU.
- Regional Development Aid: The EU offers various incentives for businesses that invest in economically disadvantaged regions of the EU, including subsidies or tax breaks.
Singapore:
- No Goods and Services Tax (GST) on Export: Exports are exempt from the country’s GST, which reduces costs for businesses shipping raw materials and finished goods internationally.
- Investment Allowance (IA): A fiscal benefit where businesses can claim a portion of their capital expenditure on machinery and industrial equipment.
Australia:
- Free Trade Agreements (FTAs): Australia has several FTAs (including with China, Japan, South Korea, and ASEAN countries) that reduce tariffs and improve access to markets.
- Export Market Development Grant (EMDG): This program reimburses businesses for some costs associated with expanding into overseas markets, including marketing and promotional expenses.
China:
- Preferential Tax Rates for High-Tech Enterprises: If your business operates in the IT sector, China offers tax incentives to encourage innovation and technology development.
- Duty Exemption for R&D-Related Imports: Materials imported for research and development purposes can be exempt from duties.
Mexico:
- USMCA Tariff-Free Access: Mexico benefits from the USMCA with tariff-free access to the U.S. and Canada for certain goods, including industrial equipment and raw materials.
- Manufacturing in Mexico (IMMEX Program): The IMMEX program offers tax incentives for foreign businesses setting up manufacturing operations in Mexico, including exemption from value-added tax (VAT) on imported materials.
India:
- Special Economic Zones (SEZs): Companies operating in SEZs can benefit from income tax holidays, exemptions on customs duties, and other fiscal incentives.
- Customs Duty Exemption on Certain Raw Materials: India provides duty exemptions on key raw materials required for the manufacturing of goods that will be exported.
Brazil:
- Manaus Free Trade Zone: A tax-exempt region in Brazil that offers significant reductions on the import taxes for industrial goods and raw materials.
- Industrial Innovation Incentives: The Brazilian government provides tax credits to businesses that invest in industrial innovation and technology development.
Vietnam:
- Preferential Tax Regimes: Vietnam offers tax incentives for companies investing in key sectors such as manufacturing, technology, and export-oriented businesses.
- Free Trade Agreements with the EU and Japan: Reduced tariffs on commodities and industrial products under various FTAs.
6. List of Tariffs by Country
Here’s a summary of the tariffs by country, particularly for raw materials, commodities, IT, and industrial equipment:
CountryKey Tariffs/Customs Duties
United States
- Raw Materials: Varies by product; some metals and machinery face up to 25% (e.g., steel and aluminum).
- Industrial Equipment:Generally low tariffs (0–5%), but certain sectors (e.g., electronics) may face higher.
European Union
- Raw Materials & Commodities: Tariffs generally range from 0–12%, depending on the material (e.g., metals).
- Industrial Equipment: Many industrial goods face no tariff within the EU customs union.
China
- Raw Materials & Commodities: Varies; steel and aluminum may face 10–20%, but certain materials are duty-free.- Industrial Equipment: Duty rates on machinery and industrial products can range from 3% to 12%.
Mexico
- Raw Materials: No tariffs under USMCA for many categories, but non-USMCA countries may face 5–10%.
- Industrial Equipment: Low tariffs, especially under USMCA (0% for many products).
Japan
- Raw Materials: Generally 0–5%, but higher for agricultural products (up to 30%).
- IT & Industrial Equipment: Low (1–5%) tariffs for most industrial products.
India
- Raw Materials:Varies (10–20%) for raw materials like coal, steel, and minerals.
- Industrial Equipment:Typically 7.5%–12% for industrial goods and machinery.
Vietnam
- Raw Materials: 0–10% depending on the material (e.g., metals, chemicals).
- Industrial Equipment: Typically 0–10% tariff, but some machinery may face higher rates.
Brazil
- Raw Materials & Commodities: 0–15% depending on the product; higher on some processed goods.
- Industrial Equipment: 0–14% for machinery and electronics, depending on the product category.
Conclusion:
To effectively manage the impact of inflation in 2025, businesses need to be proactive in using multi-source solutions, leveraging trade agreements, and taking advantage of fiscal benefits to reduce costs. By optimizing supply chain operations, diversifying suppliers, and using financial instruments like hedging, businesses can better manage rising costs for raw materials, commodities, IT, and industrial equipment. The key is to stay informed about trade policies, engage with the right partners, and act strategically to mitigate inflationary pressures.
