I recently shared a blog post on the prospects for a global tariff war, and what that could mean for the risks facing companies and other organizations around the world. I urged internal auditors and risk managers to identify the emerging risks that newly imposed tariffs could present to their organizations’ supply chains, contracts, demands for manufactured goods and ultimately profitability. On March 4, U.S. President Donald Trump ordered 25% tariffs on many goods from Canada and Mexico and an additional 10% on goods from China. Canada and China immediately imposed matching tariffs on the U.S., and Mexico’s president is expected to do the same.

For those readers who missed the earlier blog post, I am resharing it below:

Beleaguered risk managers and internal auditors have been challenged in unprecedented ways in the 2020s. Boards and executives have looked to them for warning signs of emerging risks and assurance on the effectiveness of risk management during a prolonged period of extraordinary risk velocity and volatility. If anyone thought the second half of the decade would offer a respite, the emerging threat of global “tariff wars” are swiftly proving them wrong.

The Trump administration’s recent imposition of new tariffs on China—and its stated intentions to do so for Canada, Mexico, the European Union, and others—inject uncertainty to manufacturing and distribution strategies. While still more saber rattling than action, the new tariffs could become significant disruptors in 2025, particularly if (and when) the targets of those tariffs retaliate with tariffs of their own. Organizations must quickly assess how new tariffs could impact operations and pivot to manage their impacts. However, changes to manufacturing and distribution strategies must be carefully considered. The complexity of intertwined risks associated with international trade could make rash actions dangerous to long-term goals and heighten risks in unexpected ways.

In 2024, I focused many of my blog posts on what organizations can do to effectively operate in an era of permacrisis. As I defined in the second edition of my book, Agents of Change: Internal Auditors in the Era of Permacrisis, the term refers to the dizzying sense of lurching from one unprecedented event to another. While tariff battles can’t be described as unprecedented, the disruptions they create are sure to aggravate and complicate risk management efforts for organizations that manufacture goods for export or rely on or sell foreign-made products.

A fundamental and oft-repeated point in those blog posts is the necessity for accurate information to craft effective strategies and build resilience. This clear-eyed view will be critical not just to navigating the new trade landscape, but also to understanding the impact on supply chain, regulatory compliance, tax classifications, human capital, and other risk areas.

Internal audit leaders should assess where their organizations stand in terms of knowing their supply chains, particularly the depth of knowledge and information available beyond first-tier suppliers. They also should assess knowledge of tariff implications specific to their industry.

Several insightful articles have been published that outline approaches and considerations in the new trade landscape. Internal audit leaders should become familiar with options and be prepared to share them with stakeholders. Some key areas to explore include:

• Supply Chain Diversification. Identifying suppliers located in regions with more favorable trade policies can reduce dependency on tariff-heavy imports.
• Supplier Classification. It will be critical to understand how suppliers are impacted by tariffs, particularly where tariff-related costs may be passed along.
• Risk Monitoring. I have long advocated the value of continuously monitoring risks. Understanding the current state of tariffs and how they may change supports trade strategies that are flexible and resilient.
• Product Classification and Valuation. Product classification reviews can ensure tariff classifications and import valuations are accurate, thus preventing overpayment and reducing compliance risks.
• Existing Trade Programs and Agreements. Several options are available to mitigate or defer tariff costs including free trade agreements and bonded warehousing. Operating within Foreign-Trade Zones can provide cost savings, as well.
• Contract Negotiations. Cost-sharing agreements can be negotiated or renegotiated with suppliers or customers that consider new tariffs.
• Supply Network Strategies. Changes to long-term supply network strategies should also be on the table. This can include discussions about relocating to previously mentioned Free Trade Zones or more tariff-friendly regions. Adjusting operating models to reroute transactions or assessing the benefits of onshoring can be considered.
• Human Capital and Tax Considerations. Any changes to supply chains or supply network strategies must include a clear-eyed assessment of labor and tax considerations. For example, the lack of sufficient qualified human capital in tariff-friendly regions could outweigh the benefits of moving operations to a new location or expanding in existing locations. Similarly, a keen understanding of tariff classifications for products is vital in assessing customs, excise, value-added tax (VAT), or other duties. Tariff classifications also can impact import licensing, quotas and whether operations qualify under existing tariff agreements.

The complexities of global trade are significant and any changes to strategies must be carefully weighed in terms of long-term impacts. This was made quite clear by the COVID 19 pandemic earlier this decade. Organizations had to pivot quickly to find new ways to operate while supply lines and access to labor were cut off early in the pandemic. As vaccines were developed and restrictions eased, organizations looked at diversifying supply lines as production ramped back up.

A recently published study, Restructuring Global Supply Chains: Navigating Challenges of the COVID-19 Pandemic and Beyond, explores how organizations across industries restructured their supply chains during the pandemic. The authors identified four implications for organizations considering supply chain restructuring and resilience strategies.

1. The pandemic heightened awareness of disruption risks from concentrated supply sources. It is essential for organizations to proactively diversify their supplier geography.
2.  Organizations should look beyond company-level supply risks to country-level supply risks. This is particularly relevant to discussions on tariffs.
3. Organizations should reconsider lean-inventory or just-in-time strategies and opt for larger, less-frequent supply shipments.
4. Organizations should recognize that disruption/response strategies must be tailored to specific needs and dynamics of their industry.

The study included discussions with supply chain executives from various multinational companies. It found supply chain restructuring introduces new objectives to supply chain decision making.

From the study’s conclusion: “Granular data, machine learning techniques, and scenario planning tools hold significant potential to support decision-making. Alongside managing supply chain pressures through operational adjustments and direct linkages, overseeing a comprehensive supply chain ecosystem that extends beyond tier-one suppliers remains an emerging area.”

The evolving trade landscape provides internal audit leaders with a significant opportunity. By understanding available options to mitigate tariff impacts, related risk management implications, and delving into the benefits of scenario planning, internal audit functions can add value to their organizations.

I welcome your thoughts on the looming trade wars, and how you’re preparing to help your organization to endure the inevitable tsunami of risks.