The United States and China are in contentious trade discussions, with each country disputing proposed tariffs placed on mutually traded goods. The U.S. has also levied an import duty of 25 percent on steel and 10 percent on aluminum, which will affect trade partners including the European Union, which has proposed retaliatory measures. While from a U.S. perspective tariffs could reset the balance in what Donald Trump has called unfair trading relationships, the supply chains of American businesses could be adversely affected by tariffs imposed on the goods they sell. Conversely, companies that had been losing market share might benefit from U.S.-imposed tariffs.
Effects of Tariffs
When companies source raw materials, tariffs imposed on these materials increase the "landed costs," which disrupts the companies' supply chain models. They now have to consider redesigning their network of suppliers to source materials from countries that do not impose tariffs, even if this means countries where other costs, such as labor, are higher. The fear of tariffs can force companies to make substantial contingency plans.
Logistics and supply chain software automate some of these decisions, factoring in variable and fixed costs for goods based on volume and location. Countries considering imposing tariffs have to consider the response from trading partners and how such decisions could harm the very businesses they intend to help.
As an alternative to tariffs (and companies seeking alternative supply sources), U.S. tax breaks for multinational companies that produce goods with high local content may be less risky. In other words, rather than the U.S. impose tariffs on imported steel from China, it could reward multinational automakers that have a presence in the U.S. with tax advantages for using a specified percentage of domestic steel in their vehicles.
How Companies Pivot
Businesses that face tariffs on the goods they use in production must combine sourcing restructuring with more effective supplier negotiations to minimize cost increases that would be passed on to consumers. Or they can seek alternative materials for which there would be no tariffs, such as substituting aluminum or nickel for steel. Businesses hit with tariffs on the goods they sell can cost-rationalize by improving productivity elsewhere in the supply chain, or by changing business models so that more profits can be derived from other operations (e.g., maintenance and repairs) to make up for losses in the products themselves.
Volvo recently opened a factory in Charleston, S.C., to protect itself from proposed tariffs in the EU on U.S. steel. Now the company has incentives to source more steel from the U.S., but if this results in higher tariffs on the vehicles it exports to the EU, then this could become a losing gamble. Harley-Davidson, a U.S. motorcycle manufacturer, made the same decision in reverse, moving some production from the U.S. to offset tariffs on its products. Now executives at both companies are holding their breath, wondering what comes next in the trade wars.
The supply chain is a highly complex system of variables, and it's difficult for countries, let alone individual businesses, to anticipate the negative effects of tariffs and how to counteract them. Yet at this juncture, tariff wars appear to be a fact of life. Professionals with mastery of supply chain economics will become indispensable to the companies that want to outmaneuver competitors in the coming years.
Sources:Logistics Viewpoints: Donald Trump and the "Made in America" Supply Chain
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