A Beautiful Blanket. With Holes.

The coming battle over exceptions to Trump's tariffs.

"To me, the most beautiful word in the dictionary is tariff." -- Donald Trump

Businesses worldwide are struggling to understand what may happen to supply chains and prices in 2025. The prospect of new and disruptive tariffs is confounding financial executives and logistics professionals alike.

It's not hard to see why. We heard a blizzard of tariff threats during the presidential campaign and more since the election. The Trump campaign promised "blanket tariffs" on all products from all countries, in the range of 10-20%, with higher rates applied to imports from China. In just the last few weeks, President-elect Trump has made new threats: "a 25% Tariff on ALL products" from Canada and Mexico, "an additional 10% tariff, above any additional tariffs" on China, and even a threat of 100% tariffs on imports from Brazil, Russia, India, China, and South Africa for allegedly trying to undermine the U.S. dollar. Europe, Japan, Korea, and Vietnam have so far escaped the president-elect's attention but probably will be close behind.

If your head is spinning, get used to it, because casual threats to trash economic relationships and send corporate supply chains into chaos will be a feature of the next four years, not a bug. Businesses trying to plan may be tempted to despair. However, in the chaos surrounding Trump's tariff policy lies opportunity. For economic and political reasons, there will be differences in the tariff rates applied to different trading partners and—crucially—in the categories of products affected. Understanding these differentials in tariff rates will help companies adjust their global supply chains and mitigate the increased costs of tariffs.

Casual threats to trash economic relationships and send corporate supply chains into chaos will be a feature of the next four years, not a bug.

As we've seen in recent weeks, there is no international problem for which Mr. Trump does not think tariffs are the answer. Wall Street has casually chalked up the tariff threats to "negotiating tactics." Yet businesses with global supply chains cannot be so dismissive. Instead, they should look at two key differentials in tariffs: the differences in rates applied to countries and different rates applied to various products.

Not All Countries Are the Same

Even if a "blanket tariff" of 10 or 20% is applied to every item imported to the United States, higher tariffs will still be imposed on certain countries. It's been made clear that imports from China will take a bigger hit, no matter what. The existing Trump-Biden tariffs on a wide range of Chinese imports will not be removed and will likely increase. Other nations may run afoul of the Trump administration for reasons having nothing to do with trade; it is not difficult to imagine a tariff threat against Europe for failure to increase defense spending or against Korea and Taiwan for not "paying more" for the U.S. defense shield. But the tariffs applied to different countries will likely vary, and companies can exploit that variation to mitigate cost increases.

Tariffs applied to different countries will likely vary, and companies can exploit that variation to mitigate cost increases.

There is ample precedent for this strategy. During Trump's first term, and continuing in the Biden years, many companies diversified their supply chains by moving production out of China, with Vietnam and Mexico the biggest beneficiaries. Given that the bilateral trade deficit with Vietnam has increased so dramatically (to America's fourth-highest) and that Mexico is already in Trump's cross-hairs, businesses may consider other Southeast Asian production destinations, such as Malaysia, Thailand, Indonesia, and the Philippines. India, too, stands to benefit from production shifts and will leverage its strategic importance as a counterweight to China to avoid the worst of Trump's tariffs.

Supply chain shifts are expensive and take time to implement, but the smart bet is that China will be hit harder than any other country. Savvy business planners will have already bought ahead (stockpiling is driving a surge in imports at the moment) and are looking for alternative production sites.

The early threats against Mexico and Canada are more worrisome for U.S. companies, particularly in the automotive, technology, and electronics sectors. The North American supply chain is one of the most tightly integrated in the world; replacing it would be far more difficult than finding geographic alternatives to production in China. There is hope that the leaders of Canada and Mexico will find ways to address Trump's concerns on the border and fentanyl. And given that the US-Mexico-Canada Agreement (USMCA) was a Trump-negotiated trade deal that passed Congress with a large bipartisan majority, it would be surprising if the new president were to tear it up on his first day in office.

Products In the Target Zone

Just as new tariffs probably won't hit all countries equally hard, there will be significant differences in how specific product categories are impacted, and perhaps also an "exception process" that will allow companies to petition for relief. This was the case with the first-term China tariffs, which were applied selectively on import categories in which the U.S. was not too dependent on China, where small businesses convinced USTR they would be unduly harmed, or where the hit to consumer prices would have been quick and obvious.

For example, iPhones were exempted from the first-term Trump tariffs because Tim Cook made a compelling argument to Donald Trump during a meeting. Laptops, tablets, and some toys avoided getting hit because of concern that price increases on these items would be very evident to consumers near the holidays. Certain medical devices were exempted because of worries over visible increases in healthcare costs. USTR also ran a formal exception process to consider thousands of other items, with relief granted mostly in categories where small businesses could demonstrate harm.

The bulk of the first-term China tariff burden fell on "intermediate goods"--parts, components, raw materials, and sub-assemblies--imported from China to U.S. factories for further production. This will probably continue to be the hardest-hit category of imports, not for economic reasons but political ones; while it hurts U.S. manufacturers to make their inputs more expensive, tariffs on intermediate goods are much less visible to consumers and may be partially absorbed by manufacturers.

Intermediate goods, especially from China, will likely be walloped by new tariffs.

A "blanket" tariff would be highly inflationary because it would indiscriminately hit price-sensitive consumer goods as well as critical manufacturing inputs for which there is no domestic substitute. But even a blanket tariff is likely to have exceptions. For example, will Trump's threat to impose a 25% tariff on "all" Canadian imports apply to crude oil, our top import from Canada that provides critical energy supply across the Midwest? It's hard to imagine the Trump administration wanting to impose such an obvious, identifiable hit to consumers at the gas pump.

Predicting exactly what the next president will do is impossible. But the experience of the first-term China tariffs, together with a review of the economics of imports, leads to some general conclusions:

• Intermediate goods, especially from China, will likely be walloped by new tariffs; businesses should consider buying ahead, alternative country sources of supply, or petitioning for relief along with small-business partners as possible mitigation strategies. Steel, aluminum, wood products, semiconductors, auto parts, chemicals, textiles, and electrical parts may be high on the Trump administration's target list.

• Finished consumer products without ready domestic substitutes can lobby to avoid a hit. Importers must demonstrate an immediate and visible consumer price effect... and do so vocally. Think mobile phones, laptops, and other consumer electronics; footwear; some apparel; medical devices; and out-of-season fruits and vegetables.

• Certain high-profile finished goods that have domestic competitors or that the Trump administration hopes to "re-shore" could be attractive tariff targets. Examples include appliances, autos, aircraft, furniture, and pharmaceuticals. High-profile luxury goods make attractive targets when signal-sending is the goal, such as French wine, Italian handbags, or Scotch whisky.

In Chaos, An Opportunity to Mitigate Harm

We've heard much about blanket tariffs, and we may get one. However, President-elect Trump likes tariffs too much to have just one unitary global tariff rate. That would take away his favorite tool of policy leverage, clumsy and ineffective though it may be. Trump's love of tariffs and his haphazard style of policymaking means there will be differences in tariffs among countries and product categories. In that differentiation lies the opportunity to mitigate risk and cost. Companies cannot prevent the coming tariff chaos, but they can and should plan for it.