Managing Uncertainty Around Tariffs

Tariffs are not new. Over the past eight years, tariffs, especially those on Chinese-made goods, have become a normal part of business for some industries, companies and supply chains.

In his second term, President Donald Trump has promised additional tariffs on imports from other countries. Whether designed as a push to bring more manufacturing back to America or as a negotiation tactic, such tariffs, if enacted, could cause more widespread impacts on such areas as consumer goods and the automobile industry, and could result in retaliation or greater disruption from the targeted countries, experts say.

Claiming national security violations, Trump recently threatened Colombia with a 25-percent tariff for refusing to accept military flights carrying deportees. After a resolution was reached with the South American country, Washington backed down on imposing tariffs.

Last week, Trump announced plans to impose a 25 percent tariff on products from Canada and Mexico starting in February. That could be as early as Saturday.

Will it happen? “The potential for such sizable economic impacts ought to act as enough of a deterrent that Trump will not end up implementing these higher tariffs,” Matthew Martin, senior U.S. economist at the consultancy Oxford Economics, told The Associated Press.

Vinny Licata, head of logistics and import compliance at Fictiv, a custom global manufacturing company, says that, as with Colombia, Trump’s tariff threats could be leverage for negotiation. “I don’t think it’s necessarily trade concessions he’s looking for from Mexico and Canada,” he says. “It’s more about border security.”

The Short, Mid and Long of Tariffs

If tariffs are designed to bring manufacturing back to America, that may happen to some extent. But switching locations can’t be done overnight, or even in a few months.

Thus, in the short term, it’s unlikely that manufacturing will come back to the U.S. due to tariffs, says Cheryl Druehl, Ph.D., senior associate dean for faculty affairs and research and a professor in the Costello College of Business at George Mason University in Fairfax, Virginia. Instead, supply chains are likely to adjust to the tariffs, searching for suppliers in locations not impacted by them.

As a short-term countermeasure, some companies are stockpiling goods from countries threatened by tariffs, Licata says. But stockpiling as well as the uncertainty over tariffs could delay a company’s investment in other more pressing areas, he says. “All of a sudden, their capital is invested in things they didn’t necessarily need to invest in,” he says.

Stockpiling will end if tariffs are put in place, or as companies realize they have too much inventory, Druehl says. This could exact a bullwhip effect, which could have further economic and supply chain impacts, she says.

“In the longer term, continued tariffs could reconfigure supply chains to bring suppliers and manufacturing to the U.S., but the U.S. will need to provide support,” she says. Such support could be in the form of programs and incentives for companies and labor, like training programs at community colleges. The loss of manufacturing jobs has resulted in less skilled labor available throughout the country, Druehl says.

“We’ve seen companies bringing some manufacturing back to the U.S. over the years, but it’s been typically much more automated with fewer workers,” she says. “Where companies need workers, it’s been harder to find them. Welding programs and machining training programs haven’t really been a priority for most regions.”

Additional Considerations

U.S.-made goods are attractive to consumers, but only if they are competitively priced, Druehl says: “That is the challenging part.” U.S.-made household needs, groceries and even toys that are more expensive than imports might not be as desirable to consumers.

Some industries are likely to be more impacted if tariffs were imposed on Canada and Mexico. One is the automotive industry. “Automotive (parts and components) travel across the border numerous times before an automobile is created,” Licata says.

Tariffs also could impact nearshoring measures undertaken by some companies after the coronavirus pandemic. Nearshoring to Mexico has been seen as favorable as labor costs are less than in the U.S., Licata says.

Strategies

Organizations should take a proactive approach to managing the uncertainty surrounding tariffs, Druehl and Licata say.

Goal setting. While cost is always first and foremost for any company and supply chain, Druehl says, equally important is having a company goal. First, determine the goal, then factor in uncertainties such as tariffs and other disruption and how they might impact your supply chain, she says.

Among the questions to ask when goal setting:  

• Is the goal to produce goods close to customers, which translates to quicker delivery? Or is it to manufacture as cheaply as possible, therefore, potentially risking long lead times?
• Who are the customers? Are they U.S. consumers?
• How will the goal impact decision-making and the supply chain?
• Scenario plan: What might happen in the short term? The medium term? The long term?
• Where do we want the company to be in four or five years?

“Ask a lot of questions,” Druehl says, adding, “These are big, big questions.”

Diversify. Over the past few years, in the aftermath of the pandemic, companies began to diversify production from China. Many have looked to manufacture closer to customers or in other Asian countries like Vietnam. Some have chosen to nearshore or even reshore. But moving production takes time.

“It’s challenging, because where do you go?” Licata says. “Tariffs have a big implication on that.”

Companies also need partners that are diversified, and having customers or partners that already have a network is going to be key, he says.

Rethink products, planning and investment. According to Gartner, the Stamford, Connecticut-based research consultancy and advisory, managing tariff volatility enables companies to retire or revamp products that will be too costly to produce or need to be updated, and take advantage of new opportunities.

“The long-term winners will reinvent or reinvigorate their business strategies, developing new capabilities that drive competitive advantage,” Brian Whitlock, senior research director in Gartner’s supply chain practice, said in a press release. “In almost all cases, this will require material business investment and should be a focal point of current scenario planning.”

(Photo credit: Getty Images/Meinzahn)