Tariffs, Tax Reforms Are Causing Businesses To Reevaluate Global Footprints

The rise of tariffs in recent months, combined with the tax reform overhaul passed last December, has resulted in a uniquely complex business landscape. And it’s thrown US companies into unprecedented territory. Businesses are looking to seize the opportunities provided by tax reform, including large-scale investments, while simultaneously trying to navigate these economic and political shocks to the system.

One critical area of focus for many executives is global footprint. Sweeping changes to US tax policy and government regulation have left companies questioning how and when to move forward when it comes to optimizing or refining their footprint in other countries. Most companies do not make these kinds of dramatic, expensive changes often, but today’s landscape may provide the right opportunity to do so given the recent shocks to the system.

Though today’s business landscape presents a myriad of challenges, it also provides a wealth of opportunities for strategic growth. For business leaders, the key is knowing how and when to take advantage.

Today’s Unprecedented Business Landscape

There are few moments over the past 10, 20, 30 years in which American businesses have faced as much uncertainty as they do today. The unique combination of a tax reform overhaul, the first large-scale reform since 1986, the rise of tariffs, and escalating global trade war has created a business landscape that is both unprecedented and difficult to navigate.

Over the past couple of months, the tariffs landscape has been quite fluid and changing quickly. The first round of tariffs on Chinese goods (totaling $34B) went into effect on July 5th while the second round (totaling$16B) went into effect on August 23rd and impacts products from antennas to motorcycles. Further, tenuous trade discussions in North America continue. On August 31st, as part of the North American Free Trade Agreement (NAFTA) negotiations, the Trump administration announced its intent to enter a bilateral trade deal with Mexico, which Canada could join down the road. This action immediately spurred further negotiations between the US and Canada which are still ongoing.

These recent developments have companies realizing the rise of tariffs is real and likely isn’t going away anytime soon. Moving forward, the idea around scrutinizing trade with both international partners and competitors will continue to be at the forefront.

The Resulting Impact on Global Footprint

The amount of change and uncertainty around our global economy is at an all-time high, which leaves some companies questioning how and when to move forward when it comes to optimizing or refining their footprint.

The eagerness of a company to reevaluate its footprint depends on a variety of factors, including the company’s current state and the future changes they anticipate making. A recent PwC survey examining executive response to US tax reform found more than half (53 percent) of C-suite executives plan to invest in expanding their company’s geographic footprint over the next year.

Yet many leaders still lack full clarity on the new tax rules and are uncertain about where these will net out, resulting in a wait-and-see approach. Alternatively, others are unable to wait due to other internal factors and need to make the call on footprint right away.

Options for Companies to Take When Reevaluating Footprint

Regardless of where an organization is in the footprint reevaluation process, the analysis around the physical footprint needs to start now. Companies should be modeling to take a deep dive into the potential impact of tax reform and tariffs alike. They must also critically examine the factors at play so leadership can make an informed, educated decision when the time comes to make something happen.

We aren’t seeing as many businesses take a “lift and shift” approach, as the tenor around tariffs and trade is likely to change but also impossible to predict. As a result of tax reform and trade chaos, if a company has to make a change today there are a few options – including moving production back to the US, building an intermediary in a foreign country and only putting the finishing production/assembly in the US, or shifting capacity in multiple locations by using existing resources in a new way.

There are numerous options but determining the right one is the tricky part. That’s where the importance of modeling and constant, dynamic strategic thinking comes into play.

Potential Pitfalls for Companies to Avoid

The consideration of large-scale investments such as footprint involves many decision makers. Modeling is a way to help all parties involved understand the complexity of such decisions, but it is in no way a fool-proof strategy. Neglecting just one area of importance can have far-reaching implications.

Although overall tax strategy is a critical consideration when it comes to footprint, all too often the decisions made don’t place enough emphasis on income taxes. Many evaluations are done on pre-tax ROI calculations, which ignore a myriad of after-tax financial implications. Tax reform, the first major shock to the system, pinpointed why tax needs to be a strong element of consideration around any footprint-related decision.

Another pitfall leaders encounter when reevaluating footprint is failing to look at the issue comprehensively; specifically, not thinking about large macro trends as thoughtfully as they should. With so many factors to consider, companies run the risk of falling in love with one lever (e.g. lowest labor cost) and chasing that lever at the expense of a balanced solution. Companies that don’t look at macro trends early enough run the risk of missing out on an opportunity in the marketplace, particularly if their competitors are able to swiftly and strategically shift their footprint to capitalize on that opportunity.

A confluence of tax reform and an escalating global trade war has placed companies in a challenging position. Seemingly these once-in-a-generation changes would cause businesses to pump the breaks on executing large-scale investments like global footprint, but the opposite is true. In reality, now is the optimal time for companies to assess and act on these initiatives. Those who can take advantage by thinking strategically can position themselves for success for years to come.

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John Ranke & Deniz Caglar :John Ranke is International Tax Services partner with PwC and Deniz Caglar is Fit for Growth leader with PwC.