Retail Under Fire: How to survive incoming tariffs

For decades, U.S. retailers have been no stranger to trade volatility. However, the latest round of tariffs — targeting China, Mexico, Canada, and Section 321 loopholes — may be the most disruptive in recent memory.

Every link in the supply chain, from sourcing and manufacturing to distribution and vendor relationships, faces upheaval. Companies that have not built resilience into their operations are now stuck playing catch-up.

Intentional redundancy — the ability to manufacture identical products in multiple geographies — has been a successful de-risking strategy since the first wave of tariffs in 2018. But despite years of warning signs, many companies haven’t embraced it fully and remain overly reliant on a few key markets.

However, the new tariffs have been a wake-up call: 60% of companies are now fundamentally changing their supply chains, including diversifying suppliers, investing in automation, and near-shoring. Industries that will require dramatic overhauls include automotive and consumer electronics, where Chinese suppliers have long dominated due to scale and pricing advantages.

But some companies in these sectors, such as Tesla and Apple, are ahead of the curve and have already begun shifting parts of their production to Mexico, Vietnam and India.

Mexico: Risk and Reward

Mexico's infrastructure and expertise have made it an attractive manufacturing hub and a near-shoring alternative to China. Its proximity to the U.S. allows for fast turnaround times and, until now, duty-free advantages under previous trade agreements.

Many companies aren’t deterred by the proposed tariffs, betting that an agreement will be reached between the Sheinbaum and Trump administrations as evidenced by the recent tariff delay until April. As a result, Mexico looks poised to gain even more prominence in global supply chains. The Mexican apparel market, in particular, is expected to grow at a compound annual growth rate (CAGR) of more than 6% through 2028.

However, companies relying on Mexico’s duty-free status that don’t see the possibility of 25% tariffs as an empty threat are drafting strong Plan Bs. Apparel brands such as Levi’s and Nike, which had integrated Mexico into their sourcing networks, are now exploring cost-sharing arrangements with suppliers or pivoting toward alternative locations in Central America.

Those without the means or time to establish near-shoring operations can still offset short-term cost spikes by expediting shipments before tariffs take effect or leveraging alternative logistics models like air freight.

Looming Distribution Crisis

The Section 321 de minimis exemption, which previously allowed goods valued under $800 to enter the U.S. duty-free, will now be moot, throwing a wrench into many brands’ e-commerce fulfillment models. Many brands have established their own fulfillment centers or relied on third-party logistics (3PL) hubs in Canada and Mexico to bypass U.S. duties through these 321 allowances.

With this loophole likely closing, retailers now face a distribution crisis. Companies must renegotiate contracts with 3PL providers, reassess minimum handling costs, and determine whether existing agreements contain exit clauses in case of policy changes.

Companies with extensive e-commerce operations, such as Amazon and Shein, are now reconfiguring their fulfillment networks to comply with new regulations while maintaining cost efficiency — an especially difficult task, if even industry leaders are struggling to do so.

A Delicate Balancing Act

Reacting to the incoming tariffs is a delicate balancing act. Moving too quickly could lead to overcommitment to a sourcing model that may shift again, while moving too slowly is not an option and will mean withstanding unsustainable cost hikes.

Maneuvering in the tariff era will require successfully juggling short-term cost mitigation with long-term strategic positioning. Many companies are asking: Is absorbing tariff costs in the short run preferable to a disruptive supply chain overhaul? Others are shifting their focus to vendor negotiations, seeking cost concessions and sharing cost burdens across the supply chain rather than having them falling solely on the retailer.

Some businesses are hedging their bets by investing in technology-driven forecasting models to simulate various tariff scenarios and optimize sourcing decisions in real-time. Walmart, for example, has been leveraging AI-based supply chain modeling to assess the risks of different sourcing strategies, allowing for rapid adjustments in response to policy changes. Tech investment aside, in this fast-changing environment it’s essential that companies repeatedly model all scenarios to understand their exposure and keep sourcing, supply chain, and finance in sync.

Leaving China Isn’t a Silver Bullet

Companies seemingly best positioned to weather the tariffs are those that initially shifted production from China to alternative markets. They now find themselves unexpectedly benefiting, as tariffs make that decision even more strategic, yet still in limbo, given the threat of looming reciprocal tariffs.

While China remains a one-stop shop for raw materials, textiles and finished goods, many companies — particularly in the footwear, denim, and knitwear industries — had already diversified their sourcing and are now insulated from the worst of the disruptions.

But shifting production away from China isn’t a fix-all. Smart retailers have also prioritized hemispheric balance, maintaining production in both the Far East and the Western Hemisphere to ensure lead time flexibility. Others have focused on vertical integration, choosing locations where textile production and finished goods manufacturing occur in close proximity to minimize transportation costs and logistical complexity. 

It’s not just locations that need reexamining, but structure as well. Just-in-time inventory models are particularly vulnerable to tariff disruptions. Companies such as Zara, which have long relied on fast-moving supply chains, are now investing in expanded warehousing and longer-term supplier relationships to mitigate sudden cost increases.

Retailers that thrive in this environment will be those that treat fluctuating tariffs not as isolated disruptions but as a catalyst to reexamine their entire network. By doing so, their supply chains can continue to evolve toward more resilience and agility, allowing them to weather any crisis — whether trade, geopolitical, public health-related, environmental — or something else we haven’t yet seen.