The Future of Supply Chain
To help set the agenda for supply chain leaders beyond 2025, this guide examines the industry priorities and outlines five strategic areas of focus for supply chain transformation....
Supply chain
Back to the future: How tariffs are forcing global industries to resurrect 1990s survival tactics
With the US Administration poised to introduce its steepest tariffs in over a century if negotiations to end a tariff war fail, companies across the Medtech and Luxury sectors could revisit protectionist strategies from the 1990s.
On 2 April 2025, the US administration announced a new set of tariff increases, including a blanket 10% tariff on all goods entering the United States and a list of new duties on goods from 185 countries which President Donald Trump perceives as the ‘worst offenders’ in terms of unfairness in trade. A week later, on 9 April, Trump announced a 90-day pause on higher-band tariffs with the exception of China to allow countries to come to the negotiating table. Analysts, however, remain unconvinced whether the US administration will be able to strike bilateral deals in such a short period.
The resurgence of US tariffs signals a broader shift in global trade, a retreat from decades of unfettered globalization toward a fragmented, protectionist landscape. This shift is forcing multinational corporations across sectors to revisit strategies last seen in the 1990s when businesses navigated high tariffs by decoupling physical production from intangible value. While industries from automotive to tech face similar pressures, two sectors – medical technology (medtech) and luxury goods – exemplify the challenges and solutions emerging in this new era. Their stories reveal a universal truth: in a world of rising tariffs, companies must separate what they make from what they create to survive.
The transfer pricing trap: A universal problem
At the core of this shift is transfer pricing, the practice of setting internal prices for cross-border transactions. Historically, companies bundled costs like R&D, branding, and regulatory compliance into the transfer price of physical goods. But tariffs apply to the total value of imported goods, including these intangible costs, effectively taxing companies twice: once through corporate taxes on local activities, and again through tariffs on the same embedded expenses.
A $5,000 luxury handbag might cost just $500 to manufacture. The remaining $4,500 represents intangible value: Italian design, French craftsmanship, global marketing.
Case 1: Luxury goods – taxing ‘fairy dust’
A $5,000 luxury handbag might cost just $500 to manufacture. The remaining $4,500 represents intangible value: Italian design, French craftsmanship, global marketing. When tariffs are applied to the full transfer price, companies pay duties not just on the leather and stitching, but on the brand equity cultivated over decades – a cost already incurred (and taxed) in Europe.
Case 2: Medtech – the FDA premium
For medtech firms, the FDA approval process represents a massive US-centric investment, often $75m-$100m per device and covering clinical trials, legal compliance, and American labor. By embedding these costs into the transfer price of diagnostic cartridges or machines, tariffs tax regulatory compliance again, despite these expenses being rooted in US operations.
The 1990s playbook: Decoupling tangible and intangible value
The solution, pioneered decades ago, is to isolate physical production from intangible services. This strategy, now resurgent, applies universally.
Step 1: Minimize the tariff base
- Luxury: Invoice handbags at factory cost ($500) instead of the full $5,000 retail price.
- Medtech: Sell diagnostic cartridges at production cost ($5/unit) rather than bundling FDA expenses.
Step 2: Bill intangibles separately
- Luxury: Charge subsidiaries separately for design (via an Italian entity), brand licensing (via a Swiss IP arm), and marketing (via local contracts).
- Medtech: Recover FDA costs, R&D, and regulatory support as standalone services billed by the parent company.
Result: Tariffs apply only to the physical product’s base cost, while intangibles escape duties.
The risks: Customs authorities are watching
While this strategy seems straightforward, modern customs authorities are far savvier than their 1990s counterparts. US Customs and Border Protection (CBP) evaluates the “dutiable value” of imported goods, which includes:
- Royalties and license fees tied to the product (e.g., brand IP for watches).
- Assists: Contributions by the US subsidiary to development, tooling, or marketing.
- Related-party services deemed integral to the product’s value (e.g., advertising that boosts brand equity).
If services are seen as a condition of sale or directly tied to the imported good’s value, CBP may reclassify them as part of the dutiable value, nullifying the tariff savings.
How to make it work: Legal and operational guardrails
To avoid CBP recharacterization, companies must:
- Create clear separation: Draft intercompany agreements defining services as independent of product sales (e.g., “global brand strategy” vs. “watch-specific marketing”). Avoid conditional language.
- Prove arm’s length pricing: Use transfer pricing reports to justify service fees with third-party benchmarks (e.g., $6,000 for marketing aligns with US agency rates).
- Document economic substance: Show actual delivery of services (e.g., invoices for ad campaigns, employee time logs).
- Isolate high-risk intangibles: License trademarks via a separate entity in a low-tariff jurisdiction. For medtech, house FDA teams in a US subsidiary billing for “regulatory advisory services.”
Why this trend matters beyond luxury and medtech
While luxury and medtech illustrate the extremes of intangible value, the principle applies broadly. Industries reliant on intangibles such as brands, IP, and regulatory compliance are most vulnerable to “tariff on tariff” scenarios. Other examples could include:
- Automotive: Electric vehicle makers could separate battery production (high tariff risk) from software/IP licensing.
- Tech: Hardware manufacturers might decouple devices from cloud services or patents.
- Pharma: Drugmakers face similar issues with clinical trial costs embedded into pill prices.
Challenges: Regulatory risks and operational complexity
While decoupling tangible and intangible value would resolve the transfer pricing headache, the strategy is not without its challenges.
The policy may invite greater scrutiny from tax authorities, with governments challenging artificially low transfer prices. Companies must prove factory costs align with market rates (e.g., $500 handbags vs. $5,000 retail).
Second, it requires legal entities across multiple jurisdictions to host IP, design, or regulatory services, adding another layer of complexity.
Lastly, the ongoing policy volatility means that a strategy that works today, such as leveraging tariff exemptions or favorable tax rulings, may be obsolete tomorrow.
In a deglobalizing world, the past is prologue and the survival playbook of the 1990s is back in vogue.
Conclusion: A new era demands old solutions
The return of tariffs is not just a medtech or luxury problem, it’s a structural shift in global trade. Companies across industries must recognize that the efficiencies of globalization rely on fragile assumptions about open borders. To adapt, they must relearn the 1990s lesson: what you make and what you create are not the same. By decoupling production from intangibles, businesses can prevent innovation, brand equity, and regulatory investments from becoming collateral damage in trade wars.
For medtech, this means treating FDA compliance as a service, not a cost to bury. For luxury, it means monetizing heritage separately from handbags. For all industries, it means acknowledging that the future of global trade will be written not in boardrooms, but in the fine print of transfer pricing agreements.
In a deglobalizing world, the past is prologue and the survival playbook of the 1990s is back in vogue.
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