Tariffs. We are all talking about them, but will they really affect you, and how? Let’s take the example of a product that is all around us. In fact, it’s in nearly everything that we buy: Packaging.

Putting your favorite brand to one side, let’s take an example of your favorite soft drink. That probably most often comes in an aluminum can or a plastic bottle. So, how do those two stack up against each other?

Now imagine a tariff coming in on aluminum and plastic, of say 25% as these are purchased in a third country and shipped in for bottling and sale.

Assuming a total cost of $1 and taking a mid-point materials cost, the 25% on the aluminum can takes the packaging cost up from $0.50 to $0.63 and the overall product cost to $1.13. Assuming the same total cost for the plastic bottle, the effect is less as packaging costs now run from $0.20 to $0.25, leading to a new overall product cost of $1.05

Clearly, in the case of the can, the cost effect of the change is much more marked due to the higher cost of packaging in the product.

In the case of a TV, the size of the TV is going to be the key deciding factor if all things quality are equal. The corrugated box and foam inserts make up 80% to 90% of the packaging cost, with the remainder split across protective bags and labels. Whilst the packaging cost of $30-$60 appears small on a large TV it soon eats into a net profit margin of 5%-10%.

Make sense on a TV? Maybe not, as most TVs are shipped into the US as packaged finished products, some from China, some from other nations, some of which will have Chinese origins. Different tariffs would apply. Not simple, not overly complex, but needing investigation and planning.

But we probably buy a lot more cans than we do large TVs, so are we more likely to see and feel that pain? Is a $0.13 increase on a can enough to change our habits? What if the whole drink is bottled abroad with a flat 25% increase? Is that enough?

Confused? Complex? This is what businesses are dealing with, a potential, unavoidable % cost increase on the whole or parts of their products. The only financial solutions to which are:

• Pass on some or all of the cost to the consumer
• Take a margin hit on some or all of the cost
• Mitigate some or all of the cost by reducing other costs
• All of the above (likely)

Packaging is interesting because it is all around us, and most imported goods (from countries with trade tariffs levied) will be subject to the types of cost increases and calculations mentioned above. Or perhaps a business is importing materials like aluminum, steel, and paper, as many do—complementing a large domestic market in the US for wider packaging materials.

The table below shows the predominant source country for key packaging materials and the proposed tariff at the time of writing and impact. The Proposed tariff is likely to flex in terms of the date implemented and the figure itself.

Packaging companies, in particular, rely heavily on these materials, and they are facing increased input costs and increasing regulation. This, in turn, affects the pricing of packaged goods, leading to higher costs for consumers.

Mooted tariffs are also causing disruption. Why? Because many/ most packaging companies source materials from multiple countries to optimize costs and efficiency, and talk of tariffs starts companies thinking about making changes, and or building more flexibility into supply arrangements. Disruption here can lead to delays and increased logistical challenges, further driving up costs.

To date, and over the last few months, we have seen packaging companies importing materials before the impending tariffs. Although this does avoid product costs in the short term, additional costs can be seen in the form of capital tied up in the materials, additional warehousing, and increased logistic costs to compete with others doing the same. And it’s a short-term fix.

We are seeing shifts in manufacturing and sourcing strategies

As a long-term response to the tariffs, packaging companies are reconsidering their manufacturing and sourcing strategies. There is a growing trend towards reshoring, where companies bring material purchasing back to the United States to avoid tariffs. While this move can mitigate some tariff-related costs, it could involve cost increases from the limited supply within the US. The Trump administration is clearly looking to boost US production across a number of sectors, but this takes time and investment.

Consumer implications are inevitable

Ultimately, the effects of the tariffs on the packaging industry trickle down to consumers. Higher production costs lead to increased prices for packaged goods, affecting everything from food and beverages to electronics and household items, from 50%-60% of a soda can to around 2%-4% of a large TV. The cost effect is not uniform, although any resulting disruption may be.

Long-term outlook

Long-term cost increases, coupled with strong demand forecasts, tend to lead to cost reduction (often through specification), innovation (product or production), or justification for higher-quality or more sustainable product lines. This is how the packaging industry will respond and adapt. Those who do respond and adapt will come out stronger.

However, there will be pain in transition and other hurdles such as tightening sustainability regulations in other parts of the world which may impact the cost of imports from the US (as higher standards of packaging must be met or compensated for). Further pains will extend far beyond packaging as a category such as facing into cost and logistics challenges while maintaining quality and monitoring consumer demands. Collaboration within the industry and with policymakers could help mitigate some of the negative impacts and foster a more stable and sustainable future—or at least assure a level playing field.

strategies to prepare

• To buy time, import as much as you can before any tariffs start or change. Even if it seems too late, this gives you the time and ability to look at alternative supply chains and qualify alternative suppliers
• Secure and contract with US-based businesses and make sure the supplier has a commitment of a certain amount of materials so they cannot award capacity to another company.
• If you have to import, look at non-tariff countries.  If that is unavoidable, look at importing raw materials and converting them in the US (a great example would be spray triggers: the parts are imported into the US from Canada or China and assembled in the US).

in conclusion

Like many other industries, the packaging industry will need to balance short-term challenges with long-term opportunities to thrive in this evolving economic landscape. The key to this is absolute clarity on product mix, cost, origin, and specification—in a word: transparency. It’s only from here that we can make informed decisions.
 
Anyone for a soda?