Tariffs On the Horizon: Expect Supply Chain Implications
If implemented, President-elect Donald Trump’s campaign tariff plan — 60 percent on goods imported from China and a blanket tariff on other imports — will have global supply chain consequences, to say the least.
Supply managers have been warned for years that it’s difficult to manage supply chain risk when buying products from (1) manufacturers a long distance away and (2) potential adversaries, says Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee. “Supply managers should be prepared for this,” he says. “In actuality, we likely are not.”
Tariff Implications
Tariffs and trade barriers are nothing new, especially to a Trump presidency. During his first term in office, Trump levied tariffs against China “to curb the flow of Chinese imports into the United States and protect domestic producers against dumping and subsidized production,” Robert B. Handfield, Ph.D., and Clark Banach, Ph.D., MBA, wrote in a blog article.
President Joe Biden continued the tariffs for broader political objectives, wrote Handfield and Clark, who noted that the effectiveness of the tariffs has been hard to classify: According to The Economist, China claims its exports to America rose by US$30 billion between 2020 and 2023, whereas the U.S. claims Chinese imports fell by $100 billion.
Trump doesn’t look at tariffs in isolation, former Trump official Kelly Ann Shaw, partner at Hogan Lovells law firm, told CNN. “They are a fundamental and core part of his broader economic strategy, which also includes tax cuts, deregulation, energy diversity,” she said.
According to the Committee for a Responsible Federal Budget, Trump’s campaign pledges would add an estimated US$7.75 trillion to the projected debt through FY 2035, part of which is expected to be offset by revenue estimated at $2.7 trillion to $4.5 trillion generated by increased custom duties.
The potential increase in tariffs could impact components, products and materials across the global supply chain. And the resulting increase in prices of goods likely would be passed down to customers and consumers.
Tariffs could cost U.S. consumers as much as $78 billion a year in annual spending power, according to the National Retail Federation. “Retailers rely heavily on imported products and manufacturing components so that they can offer their customers a variety of products at affordable prices,” Jonathan Gold, NRF’s vice president of supply chain and customs policy, said in a recent statement. “A tariff is a tax paid by the U.S. importer, not a foreign country or the exporter. This tax ultimately comes out of consumers’ pockets through higher prices.”
The Vietnam and Mexico Connection
“While China is an export-powered economy, only about 15 percent of Chinese exports currently go directly to the U.S.,” says ISM CEO Thomas W. Derry. “It was as high as 22 percent during the first Trump administration.”
An increasing share of Chinese exports is going to Southeast Asian countries, he says. While some of that shift might reflect increased demand in those countries, some of that trade flow could be a diversion to an intermediate destination before eventual export to the U.S. to avoid tariffs, he says.
The October Manufacturing ISM® Report on Business® indicated that companies were advancing deliveries of products coming from overseas that will likely see delta tariffs, Fiore says. Chinese imports to Mexico and shipments to Vietnam are accelerating — as are shipments from Vietnam to the U.S., he says.
“All three areas indicate that the statement of origin may change but there may still be large Chinese content from products coming from Vietnam and Mexico,” Fiore says. “For the last six months, comments (from Report on Business® survey respondents) have suggested that companies that use Chinese suppliers are encouraging their Chinese suppliers to open businesses in Mexico.”
However, such strategies and efforts to maintain current costs do not support supply chain resilience as the Chinese government can still affect companies’ access to product if there is a conflict, he says.
And Mexico could face challenges as a nearshoring partner given that Trump has pledged closing the border to immigrants, deportations and tariffs on Mexican imports. And that’s not all: The United States-Mexico-Canada Agreement (USMCA) is due for review in 2026 and could be subject to change.
“In some sensitive business areas such as aero and automotive, teams have been established to actively manage, with high internal visibility, the resourcing of products and parts from lower risk areas,” Fiore says. In the next three months, companies with significant exposure likely will be stockpiling inventory to avoid future tariffs and have a safety stock of parts, he says.
Other Considerations
Imposing high tariffs could cause potential unintended consequences. “Are we really going to impose 60-percent tariffs on active pharmaceutical ingredients from China for critical medicines?” Derry says. “We get 80 percent of our APIs (application program interfaces) from China today.”
The better approach, he says, “would be to make America the unquestioned destination of choice for future manufacturing and supply chain investment. That happens through such factors as reliability and cost of energy, availability of a skilled workforce, cost of labor, and competitive tax structures.”
Derry continues: “The Trump administration needs to be very clear about its policy objective,” Derry says. “What’s the goal? Is it to weaken the Chinese economy? Tariffs will do that, but with significant geopolitical risk attached. Is the goal to bring manufacturing jobs back to the U.S.? That’s not going to happen, although it could compel private Chinese companies to open locations in third countries, like Vietnam and Mexico.”
Fiore notes that the potential tariffs will be inflationary. However, it will take six to nine months for their impact to start showing up in higher prices, considering how weak demand is, he says: “This will then get mixed in with higher inflation due to the scale that Republicans are talking about.”
He continues: “We saw the effects of the Trump tariffs in 2019. We saw the Manufacturing PMI® move into contraction territory in August 2019, in large part due to the 2018 tariffs. These were much smaller than what we are talking about today.”
Another consideration is the Federal Reserve’s course of action on interest rates. The business community believes the Fed “will get knocked off its rate reduction path due to tariff-caused inflation, especially since there will not be split governance” with Republicans holding the majority in both houses of Congress, Fiore says.
It’s a two-year wait until the midterm elections, he concludes.
(Photo credit: Getty Images/Adrian Hancu)