Tariffs in Plastics Manufacturing: Quantifying and Mitigating Risks

By Michael Benson , Steven Simone

Tariffs on imported plastics, resins, machinery, or even downstream components can disrupt a plastics manufacturer’s cost structure, profitability, and growth trajectory. As global trade tensions persist, effectively modeling and mitigating tariff exposure has become a competitive imperative.

Beyond operational measures, the ability to accurately value and protect against tariff-related risks influences transaction prices in M&A deals, capital raises, and strategic partnerships.

This piece details a structured approach to quantifying tariff exposure, outlines key mitigation strategies, and underscores why partnering with an investment banking advisor with sector-specific expertise is critical for success.

The Tariff Context in Plastics Manufacturing

If enacted, recently proposed tariffs will add extra duties to many plastic-related goods entering the U.S., spanning raw materials, components and subassemblies, finished parts, as well as machinery and equipment. These tariffs were introduced under various trade measures (e.g., Sections 301 and 232) targeting specific countries or product categories. Plastics manufacturers must stay vigilant in tracking exemptions, adjustments, and expirations that can significantly impact supply chains and bottom-line profitability.

How Tariffs Affect the Sector

Raw Materials: Resin imports (polyethylene, polypropylene, PET), additives, and certain chemicals often face elevated duties that can instantly raise cost of goods sold (COGS). While a substantial portion of resin consumed domestically is produced in the U.S., many specialty or high-performance resins are more likely to be imported, as domestic capacity for niche or advanced grades is more limited. For most plastics processors, raw material is by far the largest input expense, emphasizing the importance of passing through tariff-related price increases as soon as feasible.

Equipment and Machinery: Tariffs on specialized injection molding or extrusion equipment can derail capital expenditure plans. Quantifying these tariffs can be more complicated as well, making pass through ability more challenging.

Cross-Border Supply Chains: Even if a company does not import materials directly (i.e., the company purchases from a domestic supplier rather than sourcing from overseas), second- or third-tier suppliers could be importing components or raw materials subject to tariffs, and as a result, may pass on their own tariff-related price increases.

Potential Consequences

• Margin Compression: Increased input costs can narrow profit margins if manufacturers cannot swiftly pass these costs on to customers.
• Supply Chain Disruptions: Uncertainty around tariff rates can prompt supplier shifts, shipping delays, and volatile lead times.
• Competitive Pressures: Firms in tariff-exposed regions may lose ground to global competitors operating in tariff-free jurisdictions, pressuring both market share and profitability. However, even with tariffs, some plastics-related imports can still land at a lower total cost than domestically produced equivalents, especially in cases where a country’s labor and production costs are significantly lower.

Tariff Impact on Company Valuations

When evaluating mergers, acquisitions, or capital raises, investors and lenders scrutinize tariff exposure for its potential to impair cash flows and revalue assets. The key mechanisms include:

• EBITDA Adjustments: Unexpected tariff expenses can reduce earnings before interest, taxes, depreciation, and amortization (EBITDA), leading to downward revisions in enterprise value if multiples remain unchanged. Quantifying tariff exposure should be front of mind for a quality-of-earnings analysis to justify treating those costs as one-time or non-recurring, particularly if the tariffs are politically driven, temporary measures
• Working Capital Strains: Tariffs can inflate inventory costs, tying up cash for longer durations. Investors factor this into their valuations, often discounting the value of companies with high inventory requirements in tariff-exposed categories.
• Risk Perception and Discount Rates: Heightened trade risks can increase a buyer’s required rate of return, effectively reducing the present value of future cash flows. This results in lower valuations, stricter covenants, or demands for indemnifications.
• Deal Structuring Complexity: Tariffs introduce another layer of diligence and negotiation. Buyers may insist on contingent pricing (e.g., earnouts) or representations and warranties specifically addressing potential tariff escalations.

Bottom Line: A company’s ability to quantify and mitigate tariff exposure directly influences buyer confidence and, by extension, the transaction price.

A Practical Framework for Modeling Tariff Exposure

To accurately gauge the financial impact of existing or potential tariffs, plastics manufacturers should adopt a systematic modeling approach. By identifying and tracking the impact of tariffs, businesses can present a more accurate view of underlying profitability to boards, lenders, buyers, and investors.

This clarity helps stakeholders differentiate between structural operating costs and extraordinary, policy-dependent expenses that may not persist over the long-term. Below is a proposed framework:

1. Catalog all imported raw materials, components, and machinery subject to tariffs.
2. Identify the Harmonized System (HS) codes for each item and document corresponding tariff rates.
3. Determine the volume and value of each imported item.

Cost-of-Goods-Sold (COGS) Analysis

1. Integrate current tariff rates into your COGS breakdown to calculate the immediate impact on unit cost.
2. For purchases of imported machinery and equipment, first amortize tariff costs across the expected equipment lifespan to arrive at a monthly or annual tariff cost, and then factor those costs into overhead or machine hour rates.

Scenario Planning

1. Baseline Scenario: Reflects existing tariffs and known trade policies.
2. Moderate Escalation: Models tariffs increasing by 5–15% on certain materials.
3. Worst-Case: Evaluates significant tariff hikes or expanded coverage to key trading partners.

Sensitivity Testing

1. Vary assumptions for foreign exchange rates, shipping costs, and supplier pass-through rates to see where margins or cash flow may be most vulnerable.
2. Overlay potential volume fluctuations if higher prices suppress sales.

Risk Adjusted Discount Rate

1. Incorporate a risk premium into discount rates for net present value calculations if your supply chain or top line is heavily exposed to tariff fluctuations.

Mitigation Cost-Benefit Analysis

1. Include budgetary impact for tariff mitigation measures—like dual sourcing, contract renegotiations, and inventory hedging—to assess net financial gains versus operational complexity.

Why This Matters: This holistic modeling framework helps boards, lenders, buyers and investors understand the full financial picture — supporting informed decisions on M&A valuations, financing terms, and strategic expansions.

Mitigation Strategies to Preserve Enterprise Value

A well-defined mitigation plan can help plastics companies stabilize margins, attract favorable financing, and maintain robust valuations in spite of trade volatility.

Supply Chain Diversification

• Alternative Regions: Sourcing from countries with more favorable trade agreements to reduce tariff burdens.
• Dual/Multiple Supplier Strategy: Splitting orders among suppliers in different regions to mitigate single-country risk.

Vertical Integration & Strategic Alliances

• Upstream Partnerships: Acquiring or forging joint ventures with resin producers can lock in pricing and secure raw materials.
• Downstream Collaboration: Collaborating with key customers (e.g., large OEMs) to share in tariff-related cost adjustments.

Foreign Trade Zones (FTZs) and Duty Drawback Programs

• FTZs: Reduce, defer, or eliminate duties for goods imported and then exported.
• Duty Drawback: Reclaim a portion of tariffs paid if the product is later exported or used in a finished good that is exported.

Note, recent proposals have suggested limiting or removing drawback provisions for special tariffs; however, no sweeping policy entirely excluding these tariffs from drawback has been finalized. That said, the complexity of obtaining a successful drawback claim can be considerable, so each company must evaluate the practical feasibility of recouping those tariffs on a case-by-case basis.

Contractual Hedging

• Forward Contracts: Negotiate longer-term contracts at a fixed price to shield from immediate tariff hikes.
• Financial Instruments: Use currency and commodity derivatives to hedge some cost volatility.

Automation and Process Innovation

• Efficiency Gains: Offsetting higher input costs by lowering production overhead.
• Reduced Labor Costs: Less reliance on manual labor can mitigate cost pressures if wages rise due to inflation or trade disputes.

Conclusion

Tariffs can significantly reshape the cost landscape for plastics manufacturers, influencing everything from raw material procurement to production processes — and ultimately impacting valuations in M&A, financing, and strategic initiatives.

By implementing a rigorous modeling framework, proactively diversifying supply chains, and adopting creative mitigation tactics, companies can limit tariff-induced margin erosion and preserve shareholder value.

For business owners considering liquidity options in the near-term, selecting an investment banking partner with on-point expertise and a proven track record in mitigating trade risks ensures transactions are structured to safeguard enterprise value.

From precise tariff exposure modeling to negotiating customized deal structures, an experienced advisor can help businesses confidently pursue growth and liquidity alternatives, even when trade tensions threaten to upend the status quo.

Stout’s Investment Banking group provides mergers and acquisitions (M&A) advisory, capital market financing, and other financial advisory services to portfolio companies of private equity firms, closely held or family-owned businesses, and divisions of large corporate parents. 

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