Articles · 02 · Tariffs · USA

Tariff by origin: the rate is not the risk. Pass-through is.

A $250M US equipment maker buys $150M of materials and components: 45% domestic, 30% Mexico, 15% China, 10% EU. We ranged the tariff rate by origin, the USMCA compliance share and the pass-through to customers, and ran 10,000 scenarios. The duty bill runs $9M to $17M. What decides EBITDA is not the rate. It is how much of it the customer pays.

// an anonymised composite, not a client · commodity and tariff ranges from public forward curves and bank forecasts · not investment advice

The setup

Tariffs are a cost line that changes by press release. Most budgets carry them as one number. Three things actually move the line. The rate, which depends on the country of origin. The share of Mexican volume that qualifies under USMCA, which is paperwork and always less than 100%. And the share of the duty the customer ends up paying.

Our company: $250M revenue, $150M of purchases. Domestic 45%. Mexico 30%, of which about 80% is USMCA-compliant and duty-free. China 15%, at an effective 30% including the Section 301 layer. EU 10% at 15%. Duties are paid at the border, roughly 75 days before the customer pays for the finished product.

The budget

Duty bill $11.25M. Half passed through to customers. EBITDA $30M, 12% of revenue, after the $5.6M the company keeps. One number for each, no range.

Our model

Duty = China spend × China rate + Mexico spend × non-compliant share × Mexico rate + EU spend × EU rate. EBITDA hit = duty × the share the company keeps. Cash tied up = duty × 75 days. Our ranges:

DriverPlanRangeShapeWhy
China rate, effective30%20% … 55%uniformcourt rulings and reciprocal rounds; ρ +0.3 with the EU rate
Mexico, non-compliant share20%10% … 35%uniformrules of origin, certificates, supplier changes
Mexico rate, non-USMCA25%0% … 35%uniformthe review outcome
EU rate15%10% … 25%uniformtrade deal terms
Share the company keeps50%20% … 80%uniformbig jumps are harder to pass on; ρ +0.3 with the China rate

Note the last row. Pass-through is the one driver the company controls, and it has the widest range in the table because most contracts are silent on it.

There is no hedge for a tariff. No exchange trades it and no bank writes it. The instruments that exist are the ones in the model: the share of Mexican volume that qualifies under USMCA, the sourcing mix by origin, and the pass-through clause in the customer contract. That is why this article treats them as drivers with ranges rather than as footnotes.

What 10,000 scenarios say

Budget versus the simulated range, duty bill

Duty paid, $M. Blue bar: P10 to P90. Dot: P50. Dashed line: the $11.25M budget.

Budget $11.25MBudget $11.25M$8.0M$10.0M$12.0M$14.0M$16.0M$18.0MP10 $9.1M · P50 $12.8M · P90 $16.5MP10 $9.1MP90 $16.5MP50 $12.8MP50 $12.8M

The budget sits below the median. The bill is more likely to be $13M than $11M.

43%chance EBITDA holds $30M
$29.5MP50 EBITDA
$24.9MP10 EBITDA
$3.4MP90 cash tied up in duties before the customer pays

One year in four EBITDA lands below $27M. The cash is the quieter problem: duties are paid at entry, so in the P90 case $3.4M sits in working capital before any of it reaches the P&L or the customer.

What moves the year

Share of the total EBITDA swing, one driver at a time between its P10 and P90.

Share the company keepsShare the company keeps: 46% of the swing46%China rateChina rate: 27% of the swing27%Mexico rate, non-USMCAMexico rate, non-USMCA: 11% of the swing11%Mexico non-compliant shareMexico non-compliant share: 10% of the swing10%EU rateEU rate: 8% of the swing8%

The rate everyone reads about is the second bar. The contract clause nobody reads is the first.

What management controls, and what it does not

Who sets the driver

The same swing as above, grouped by who sets the driver. Bars: share of the total swing.

Set in WashingtonSet in Washington: 45% of the swing45%China rate · Mexico rate · EU rateManagement leversManagement levers: 55% of the swing55%pass-through · USMCA compliance share

For tariffs, management controls more than half of the swing. That is unusual, and it is the point.

Unlike steel or gas, more than half of the tariff swing is in two things the company runs: the paperwork that makes Mexican volume duty-free, and the sentence in the customer contract that says who pays a new duty. The rate is the part you cannot control, and it is the smaller part.

Three scenarios

Bear (P10, about $25M): the China rate lands near 50%, Mexico compliance slips, customers accept only 30% of the increase. $3.4M of cash goes out at the border first.

Base (P50, about $29.5M): a normal year that still misses the budget by half a million, because the rate ranges are skewed up and pass-through is skewed down.

Bull (P90): a rate cut on China, 90% compliance in Mexico, 70% passed through. The budget is beaten by about $3M.

Two what-ifs: paperwork, and moving the supply

First, USMCA paperwork: get the non-compliant share of Mexican volume down to 5% … 15%. Second, move 40% of China spend to a compliant Mexican supplier at 8% higher unit cost. Everything else unchanged, same seed.

Chance EBITDA holds $30M

Same model, same seed. One change per row.

Budget rangesBudget ranges: 43%43%USMCA paperwork doneUSMCA paperwork done: 49%49%40% of China moved to Mexico40% of China moved to Mexico: 52%52%0%25%50%75%100%

The P90 duty bill falls from $16.5M to $15.4M with the paperwork and to $12.8M with the move.

The paperwork is worth six points of probability and costs a customs adviser. The supplier move is worth nine and costs 8% on the moved spend. Neither is as large as the pass-through bar in the chart above, which is a sentence in the customer contract.

Questions a CFO can answer

What share of Mexican volume is USMCA-certified today, and who signs the certificates? Which contracts have a tariff surcharge clause? How many days sit between paying the duty and collecting from the customer? At what China rate does EBITDA fall below the covenant?

The takeaway

Tariffs are three drivers, not one. The rate by origin makes the headlines. The compliance share and the pass-through decide the year, and the cash. Range all three and the tariff line stops being a surprise.

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// method: simplified driver model, plan values set to a typical cost structure for the size, ranges from public forward curves and bank forecasts; 10,000 Monte Carlo scenarios per run through the ScenarioCast engine, correlations and hedges as stated in the model section; sensitivities one-driver-at-a-time at marginal P10/P90; what-ifs re-run on the same seed. Figures rounded. Our estimates, not the company's. Not investment advice.