While a further 25% tariff has been placed on automotive parts alongside steel and aluminium goods, some sectors, such as copper, pharmaceuticals, semiconductors, lumber articles, certain critical minerals, and energy products are currently excluded. However, the broader implications for New Zealand and Australian multinational businesses exporting to the US are significant. This environment is incredibly dynamic as more tariffs and retaliatory measures are released almost daily.
Impact on trade and business operations
Historically, New Zealand has maintained a strong trade relationship with the US. Although services provided to US-based customers are not included, businesses involved in the movement of goods into the US will feel the impact, directly or indirectly.
Prime Minister Christopher Luxon has indicated New Zealand will not impose retaliatory tariffs on US imports which means businesses sourcing from the US should not experience a direct impact. However, it is crucial for businesses to understand the changes and their potential effects on supply chains, customs obligations, and pricing mechanisms.
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Theoretical demonstration of cost of goods sold implications
According to Grant Thornton’s International Business Report, at the end of 2024, 54.6% of global midmarket businesses were planning to increase their exports and approximately 50.3% were expecting revenue growth. Instead, we saw the first notable dip in 2 years, down 2.9%. The global tariff and trade landscape is constantly changing, with tariffs coming out of the US almost daily, coupled with retaliatory tariffs from impacted countries. With the shift in traditional global export markets, organisations need to maximise their value in domestic markets and look at doing business in a more regional capacity until things settle.
In addition to tariffs, the US administration has decided to remove the $800 'de minimis' loophole. As a result, imported parcels below this threshold entering the US will be subject to a 120% tariff or a flat fee of $100, which will increase to $200 in June. This is in addition to the 145% tariff already imposed on Chinese imports.
Short-term strategies for mitigation
This is the first instance of volatile trade conditions in years where midmarket firms haven’t been able to focus on their portfolio of non-domestic business to grow despite market turbulence. Their ability to respond swiftly to new challenges and pivot as required is crucial. Strategic shifts are already being observed, with many companies electing to concentrate on a select few markets with the most promising prospects. The number of companies that businesses are looking to sell to has already decreased.
In the short term, businesses should focus on gaining clarity over their supply chains. This involves ensuring robust data about what is declared to customs authorities based on Harmonised System (HS) codes and valuation methods is recorded. This data can then be used to model impacts and determine cost implications. Additionally, examining contractual pricing with suppliers and customers will help ascertain whether tariff costs can be absorbed or passed on.
Evaluating current and alternative customs value pricing strategies can provide simple solutions to mitigate or defer duty liabilities. Ensuring country of origin claims are supportable is also critical to tariff management. Optimisation of all available duty and tax incentives throughout the supply chain can help effectively manage costs.
Long-term considerations and transfer pricing implications
The imposition of these tariffs introduces several technical and practical challenges, particularly for multinationals with US operations. In the longer term, businesses may need to explore alternative export markets to reduce dependency on the US, shift supply chains, and consider alternative transfer pricing policies.
For many Australian and New Zealand businesses, these tariffs will affect more than just the immediate costs of doing business. They will likely influence profit allocations, tax liabilities, compliance exposure, and potentially trigger double taxation disputes. Multinationals exporting goods to the US via related-party structures must carefully manage the transfer pricing implications of these new tariffs.
It may not be sustainable to try competing in tariff-heavy markets. Businesses may need to make the call to scale down or halt trade in markets where tariffs are going to continue.
Key transfer pricing considerations
The new tariffs may prompt multinationals to rethink their country of production and broaden supply chain strategies. Existing intercompany agreements may not clearly allocate responsibility for unanticipated tariff costs, necessitating review and possible amendments to clarify responsibility, consistent with arm’s length principles.
The 10% tariff will directly impact the cost of goods sold by US distribution subsidiaries. This may erode target profit margins, potentially driving the US entity into a loss-making position and triggering transfer pricing adjustments. Businesses must consider whether existing transfer pricing policies and Advanced Pricing Agreements remain appropriate or if price adjustments are required.
This tariff is not necessarily detrimental to Australia and New Zealand exporters. For certain products there is the opportunity for relative cost of goods sold (COGS) to be lesser than those of competing exporters. For example, if the tariffs placed on French wine exceed that of the 10% rate placed on New Zealand - assuming both exporters elect not to absorb tariff costs - the New Zealand wine is now comparatively cheaper than the French product, which means the quantity demanded for our wine will exceed that of the French; New Zealand products are now more competitive relative to competing exporters, and are relatively cheaper.
Engagement with government and industry bodies
Sharing information on the commercial and financial impacts of the tariffs with government agencies such as Austrade, the Ministry of Foreign Affairs and Trade (MFAT), the Department of Foreign Affairs and Trade (DFAT), and NZTE is crucial. Coordinated industry engagement will support bilateral discussions and dispute resolution efforts.
More tips for navigating tariffs
There are several ways businesses can reduce the impact of increased costs and supply chain disruptions, while also identifying competitive opportunities and synergies for optimisation and compliance requirements.
Data analysis within your customs team
- Drawback analysis: Duties paid on imported goods that are subsequently exported can be identified and reclaimed
- FTA analysis: Assess the benefits of various Free Trade Agreements (FTAs) to ensure the business is leveraging all available duty reductions.
- Tariff re-engineering: Optimise tariff classifications and explore duty exemption schemes to minimise costs. For example, reclassify certain exports so they fall into classifications that face a lower tariff rate. This may require specialised classification and subclassifications of goods.
- Origin verification: The origin of goods can be verified to maximise the benefits of FTAs and other duty programs and ensure compliance with rules of origin.
- General compliance: Ramp up customs compliance activity including the disclosure of transfer pricing adjustments.
Procurement strategies
- Direct procurement: Develop multi-sourcing relationships, negotiate volume-based price protections, and explore material substitutions to reduce dependence on tariffed inputs.
- Indirect procurement: Manage tariff-driven cost increases effectively across software, facilities management, logistics services, and other operational expenses.
Transfer pricing
- Transfer pricing policies review: Review existing transfer pricing policies, how they impact the price of related party dealings, and the impact they have on goods declared for customs duty purposes.
- Optimise supply chains: Review global supply chains, analyse sales transaction flows versus physical transaction flows, and align characterisation of group entities for transfer pricing purposes to help adapt the organisation’s operations effectively.
Wider economic impacts to the global economy and the US domestic market
The imposition of universal tariffs by the US represents a significant commercial and financial challenge for Australian and New Zealand exporters. Beyond the immediate trade, operational, and economic impacts, these tariffs have far-reaching consequences for transfer pricing policies, tax compliance, and financial reporting. With proactive review and strategic action, businesses can manage these risks and ensure their transfer pricing arrangements remain robust, defensible, and aligned with arm’s length principles.
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The graph above shows how tariffs increase the price of goods, shifting the quantity demanded for imports. The impact of tariffs varies by country. For instance, US tariffs on China have a far greater effect than those levied on New Zealand assuming the graph above is for the effect of tariffs on New Zealand (ie, the purple area - tariff revenue) would visually be far greater.
The illustration of US tariff revenue assumes perfect theoretical conditions, which means such estimated revenue from the tariffs is not guaranteed. Instead, there may be a shift away from exporting to the US towards other economies due to higher associated costs.
Looking at the COGS examples of imports into the US between New Zealand and China, a similar comparison can be drawn between China and US in relation to New Zealand, the tariff price to export goods to the US vs China is going to differ, China is going to import, sell and price goods from New Zealand at a lower cost than the US will, relative to the new tariff imposition.
Demand elasticity affects the response to tariffs, varying across various goods. Necessities like raw materials and oil are demand inelastic, while luxuries like champagne are more elastic, making tariffs more impactful on demand for goods that traditionally have been considered demand elastic. New Zealand's primary exports to the US, meat and dairy, are traditionally inelastic, potentially mitigating negative effects from US tariffs.
