A look at the ripple effect of tariffs on trade and tax policy, with two experts from EY: Jeroen Scholten, global trade leader, and Jay Camillo, global operating model effectiveness leader.

Historically, tariffs were low enough to be considered “a part of doing business,” Scholten says. Now, as they climb into the double and even triple digits, they’re threatening to hit the bottom line. Companies need to assess whether they’re facing a short-, medium- or long-term problem, and how that translates into whether to manage the customs duty bill, pass on higher costs to customers, or absorb at least some of the increases. “That all a financial play, essentially,” he says.

Companies also need to distinguish between trade with related parties, which accounts for at least half of all global trade, and that with third parties, Camillo says. Each has its own set of rules and options for modification. But it starts with acquiring “a great catalog of all your importations.”

Whether companies decide to respond to tariffs by diversifying or shifting sourcing depends on their evaluation of how long the current situation will persist. If they view it as a long-term play, they’ll need to take a deep look at their sourcing of raw materials, work in progress, and finished goods — all of which are subject to various tariffs, and together promise to have “a dramatic impact” on financial results, Camillo says. “I anticipate a lot more diversity in sourcing strategy,” he adds, “and [supply] redundancies that will be re-emphasized.”

Modern analytical tools, especially artificial intelligence and machine learning, can help in making those ultimate determinations. But it starts with having the right data, including the proper tariff code classifications for each product, which can then be used to model multiple scenarios.