Recent developments in global trade have highlighted the disruptive impact of tariffs on businesses and economies. While commonly used to protect domestic industry, the imposition of tariffs on another country often leads to higher costs and prices, disrupts supply chains, destabilizes businesses and harms supplier relationships. Tariffs can also provoke retaliatory actions including countertariffs, government investigations into companies, export restrictions and sanctions. As South Korean businesses grapple with these changes and a potential trade war, how can they adapt swiftly to mitigate risks and navigate a new complex landscape?
As an export-driven economy, South Korea is vulnerable to trade disruptions. It relies heavily on international trade, with key industries such as automotive and, to a smaller degree, electronics facing immediate headwinds from increased US tariffs. Importers in the US — a major market for South Korean automakers — now face a significant squeeze of profit margins because of tariffs, while US plants of South Korean brands are likely to affected by import taxes through supply chain disruptions, rising input costs and reduced competitiveness. South Korean electronics giants are also looking at tariff-driven higher costs and potential supply chain disruptions.
The consequences can be severe. Tariff-related higher costs are usually split between suppliers, buyers, distributors and consumers, leading to increased retail prices, shrinking demand and reduced profit margins. These potential financial difficulties from tariffs could materialize for businesses that are already fragile. Financial instability can cascade across a company's operations, resulting in declining employee morale, reduced product quality, production delays and a further escalation of costs. Financial strain also affects compliance as shrinking budgets and aggressive sales pursuits can expose suppliers to fines, penalties or reputational damage. The risk of retaliatory tariffs and other repercussions, such as government investigations into another country’s companies and consumer boycotts, can exacerbate these issues and negatively impact global sales.
The South Korean government has responded swiftly to mitigate the impact of these tariffs, including strengthening market monitoring in response to heightened financial market volatility. Nevertheless, the economic outlook remains challenging and Moody’s Analytics has revised its GDP growth forecast for the country to 1.2 percent for 2025.
Companies are reacting swiftly to the recent tariffs by considering changes in their sourcing strategies — although this does bring trade-offs including new-source startup risk, higher operating expenses and capacity constraints.
To navigate these complexities, businesses can adopt strategies such as proactive supplier monitoring. With tariffs creating uncertainty, it is essential for companies to know their supplier risk baseline, including their financial health, operational risks and regulatory compliance. Tools such as financial health checks and compliance reviews can provide early warnings of potential risks.
Pricing and contract adjustments are also necessary. Companies will need to renegotiate supplier contracts to account for tariff-related cost increases. Adjusting pricing models to reflect new cost structures can help preserve margins while maintaining transparency with customers.
Collaboration across the supply chain is another strategy. Strengthening partnerships with suppliers and engaging in collaborative planning can help address mutual challenges caused by tariffs. Open communication and shared risk mitigation strategies can foster stronger relationships and improve overall supply chain resilience.
Scenario planning and contingency measures are also important. Conducting scenario analyses to anticipate the impact of future tariff changes can help organizations prepare for worst-case scenarios. Establishing contingency plans, such as alternative supply routes or production adjustments, helps prepare for unexpected shifts in trade policies.
Supplier diversification can reduce reliance on a single supplier or region, helping mitigate risks associated with tariffs and geopolitical tensions. However, options may be limited by costs and risks of developing new sources, and the closing of previously available avenues. For instance, Mexico’s appeal as a nearshoring destination is likely fading amid the threat of US tariffs.
While tariffs pose significant challenges, they also present opportunities for innovation and strategic transformation. Businesses can take proactive steps to lessen the adverse effects of tariffs and strengthen their supply chains and long-term competitive positioning. These steps include evaluating supply chain risk exposure, which allows companies to assess the vulnerability of its supply chain to tariffs and other disruptions, and help them to be better positioned to make informed decisions. Implementing robust risk management practices is another step. Developing comprehensive risk management strategies can help anticipate and mitigate the impacts of tariffs. Additionally, exploring innovative, data-led solutions is important. Leveraging data-driven insights can help anticipate disruptions and inform supply chain mitigation strategies.
To effectively navigate the disruptive impact of tariffs, businesses need more than quick reactions — they need clear and structured plans and defined processes for how to respond when changes occur.
Businesses need to ask: What is the overall risk assessment process? Who analyzes the financial impact? Is there an understanding of how much tariff burden a supplier can bear without a negative impact on their performance? Contracts should be reviewed for flexibility and negotiations on how to split extra costs will need to start. The most tariffs-sensitive components and materials should be closely monitored.
The businesses that manage these risks effectively today will be the ones that remain stable tomorrow.
Andrei Quinn-Barabanov, Vitaliano Tobruk
Andrei Quinn-Barabanov, supply chain industry practice lead at Moody’s, has worked, among other roles, as the head of supply chain risk management at Raytheon. Vitaliano Tobruk, industry practice lead at Moody’s, has helped organizations enhance their risk assessment processes to improve operational resilience and mitigate risks. The views expressed here are the writers’ own. — Ed.
edwin@heraldcorp.com
