The Tariff Trade-Off: Cost Reduction vs. Quality Risk

Tariffs on imported consumer goods have surged, squeezing profit margins across apparel, footwear, furniture, and multi-category retail. In recent trade moves, U.S. duties on clothing and footwear from key sourcing countries jumped from around 15% to over 30%, doubling the tariff costs that brands must pay. This sudden spike leaves retailers facing an unpleasant choice: absorb the higher costs and erode their margins, or pass them to consumers via price hikes which could hurt sales. Seeking a middle path, many brands are considering “cost-sharing” with suppliers – essentially asking suppliers to bear a portion of the tariff burden by reducing product prices. The idea is to split the impact so that no single player – brand, supplier, or consumer – takes the full hit. But is this strategy viable in the real world?

Tariff hikes are dramatically increasing import costs. For example, one analysis shows U.S. apparel import duties more than doubling (to about $26 billion) under new tariffs, and footwear duties nearly tripling. Such increases put intense cost pressure on brands, prompting them to seek relief through measures like supplier cost-sharing.

The Logic of Cost-Sharing with Suppliers

At first glance, sharing costs with suppliers seems like a sensible way to cushion the blow. The basic logic is that if both the retailer and the manufacturer accept a portion of the tariff cost, the increase can be partially neutralized without massively raising consumer prices. For instance, rather than a retailer paying a 10–12% higher cost, which is the estimated increase needed to fully offset new Vietnam tariffs, and then potentially marking up retail prices, the retailer might negotiate so the supplier absorbs a few percentage points by discounting their price. The goal is to distribute the “pain” across the value chain. As one industry analyst noted, companies are indeed trying to “share the pain up and down the value chain” by renegotiating vendor contracts. In practice, this means brands ask manufacturers for price concessions or rebates to offset some of the duty impact, hoping to protect their own cost of goods and keep retail prices in check.

From a brand’s perspective, this approach offers short-term relief. It can buy time while longer-term solutions, like finding new suppliers or adjusting product prices gradually, are explored. It also signals to consumers that the company is not immediately passing on the full tariff in higher prices. In industries with razor-thin consumer price sensitivity, spreading out the cost increase is preferable to a sudden price jump that might drive shoppers away. Indeed, early in the U.S.–China trade war, many retailers pursued exactly this tactic: splitting tariff expenses with overseas factories to soften the blow. Cost-sharing can be seen as an extension of traditional supply chain negotiations – much like sharing currency fluctuation risks or material cost changes, sharing tariff costs is another way to maintain stability in a volatile trade environment.

The Supplier’s Perspective: Thin Margins and Limitations

While the logic of cost-sharing is straightforward for retailers, the reality for suppliers is far more constrained. Many suppliers in apparel, footwear, and furniture manufacturing already operate on extremely thin profit margins. Their business models are built on high volume and low costs, often with net margins in the low single digits. This means they have very little financial cushion to absorb additional costs. Even a small, requested discount can wipe out a supplier’s profit.

For example, garment factories in Bangladesh reported that global buyers demanding just a 5% price cut put extraordinary pressure on them – in some cases forcing them to accept orders at or below their production cost. According to the Bangladesh Knitwear Manufacturers and Exporters Association, with typical gross margins around 10–15%, such price cuts drive net profit down to nearly 2%, or even into losses. In other words, a few percentage points given back to the customer can mean the difference between breaking even and operating at a loss.

This problem is not unique to South Asia. Across emerging-market suppliers of hardgoods and ready-to-assemble furniture, similar dynamics apply. Manufacturers often face rising input costs – materials, labor, energy – and intense competition, leaving slim margins. If a U.S. retailer asks a supplier to reduce prices to offset a new 15% tariff, the supplier might simply have no room to do so without cutting corners or risking bankruptcy.

There’s also a longer-term risk that some brands and retailers will attempt to reduce tariff exposure by pushing for a lower FOB (Free-on-board) price—which in turn lowers the tariff burden since tariffs are calculated on FOB. To achieve this, B&Rs might encourage suppliers to:

• Use cheaper materials
• Redesign products to reduce labor or production complexity
• Shift manufacturing to lower-cost facilities
• Cut overhead through layoffs or reduced investment
• Accept lower profit margins

On the surface, this approach reduces costs and thus minimizes tariff impact. But in practice, it’s a functional redesign of the product. The new version may appear the same to consumers but is built under different conditions with new materials and methods. This introduces quality control risks and a learning curve for suppliers. It also requires material testing and validation, often leading to production delays, increased defect rates, and higher inspection needs.

Rather than solving the problem, this tactic may shift cost from tariffs to quality failures and delays. For brands, this trade-off can erode consumer trust and operational efficiency—particularly if product issues make their way to market or if delays impact seasonal retail calendars.

Ultimately, cost-sharing pressures combined with product cost engineering could backfire without careful planning, robust supplier collaboration, and enhanced quality oversight mechanisms.

Sustainability of Cost-Sharing: Expert Views

Is cost-sharing with suppliers a sustainable solution or just a short-term fix? Industry experts tend to view it as a stopgap measure rather than a long-term cure for tariff woes. Financial analysts observing the recent tariff spike note that most retailers simply cannot shoulder the entire increase themselves – but nor can their suppliers. “Ultimately, someone will have to pay the price” of these tariffs, pointed out the CEO of the American Apparel & Footwear Association, explaining that costs will eventually filter down to consumers if they can’t be absorbed elsewhere. In other words, if neither the brand nor the supplier can sustainably absorb the duty, the end consumer may see higher prices. A chief economist similarly warned that with hefty import taxes, “prices may rise, consumers might balk, costs will increase. It’s not a pretty picture for profit margins” anywhere in the chain. These statements underline that tariff costs don’t disappear – sharing them only distributes the impact for a while.

Many sourcing and procurement veterans caution that while negotiating cost-sharing can ease immediate pain, it is not a viable permanent strategy if tariffs remain high. An apparel brand might get a one-time 5% discount from a supplier to help with a new 15% tariff, but if those tariffs persist year after year, the supplier will likely need to raise prices again or find other ways to cut costs, which might already be exhausted. Essentially, there is a diminishing return to squeezing suppliers – beyond a point, you risk damaging the supply chain that your business depends on. Expert opinions often emphasize collaboration and transparency: if cost-sharing is pursued, it should be part of a broader partnership approach. For example, a brand might commit to longer-term contracts or higher order volumes in exchange for the supplier helping absorb some short-term tariff costs. Such arrangements can make the practice more sustainable by giving suppliers a compensating benefit. However, these are complex negotiations, and not all retailers have the flexibility to make such commitments, especially if demand is uncertain.

It’s also worth noting industry trends: in the face of sustained tariffs, companies are exploring more structural solutions like diversifying sourcing countries, redesigning products to shift classifications, or investing in automation and local manufacturing. These longer-term strategies address the root exposure to tariffs, whereas supplier cost-sharing is a reactive measure. The very fact that brands are considering significant moves, from re-routing supply chains to lobbying against tariffs, suggests that relying on supplier concessions alone is not seen as sufficient. Cost-sharing does not address the fundamental issue of the tariff; it only changes who pays for it.

A Balancing Act for Brands and Suppliers

Cost-sharing with suppliers is a partial and temporary fix for tariff-induced cost pressures—not a silver bullet. While it can offer some immediate relief, its sustainability is limited by the economic realities suppliers face. Efforts to reduce FOB prices through cheaper materials or process changes may result in a different product with different risks, including delays and quality issues.

Key decision-makers in retail must adopt a balanced strategy—one that includes short-term collaboration with suppliers but also accounts for quality, compliance, and long-term operational resilience.

How Inspectorio Helps Navigate Tariff-Induced Risk

To ensure that efforts to manage tariff costs don’t compromise product quality or supplier performance, Inspectorio offers an integrated platform that supports:

• Quality Risk Management: Proactively identify and address risks tied to changes in materials, suppliers, or processes—before issues impact consumers.
• Lab Testing: Validate new materials and redesigned products efficiently, helping you maintain compliance and safety standards amid product changes.
• Production Management: Monitor manufacturing progress and lead times in real time, helping reduce delays caused by product redesign or unfamiliar processes.

With Inspectorio, brands and retailers can mitigate risks associated with rapid cost adjustments while sustaining quality, compliance, and visibility across their supply chain.