Tariffs and a New Trade War: From Uncertainty to Harsh Reality

Editors’ note: In the two days after this story was published, President Donald Trump walked back many of the tariffs announced, fueling more uncertainty. He exempted three U.S. automakers from duties on Canadian and Mexican products, then delayed tariffs on some Mexican imports. Both reprieves are for one month.

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The trade war is on. President Donald Trump has imposed a 25-percent tariff on goods from Mexico and Canada. Goods coming from China have been hit with an additional 10 percent in duties.

Supply chain organizations are left to deal with volatility, uncertainty and disruptions. “The prevailing thesis from the business community I’ve spoken to is that this is a negotiation tactic, and hopefully this will eventually go away,” says Michael Starr, vice president of growth and expansion at Zencargo, a digital first freight forwarder and logistics provider. “My personal opinion is there will be at least some very harsh short-term pain. Now, the question is: Does this last three months? Six months? Years?”

He continues, “You have to expect the unexpected and roll with the punches.” Agility is key, and developing a response strategy is paramount.

Tariffs Tit-for-Tat

The Trump administration indicated the Canadian and Mexican tariffs were prompted by the flow of fentanyl and other drugs into the U.S. According to a White House fact sheet, “While President Trump gave both Canada and Mexico ample opportunity to curb the dangerous cartel activity and influx of lethal drugs flowing into our country, they have failed to adequately address the situation.”

Canada responded to the tariffs by announcing it will impose a 25-percent duty on US$155 billion of American goods, beginning with duties on $30 billion worth of goods. Prime minister Justin Trudeau condemned the tariffs, saying they were an attack on Canada. In a social media post today, Trump stated that when Canada issues a retaliatory tariff on the U.S., he will respond with a reciprocal tariff of “a like amount.”

Mexican President Claudia Sheinbaum remarked that her country was taking no immediate countermeasures, but if the duties remained on Thursday, after a scheduled call between Mexican officials and Trump, such measures, including tariffs, would be forthcoming.

China responded with tariffs on $21 billion of U.S. agricultural and food imports, with more to come.

This morning, stock markets opened lower ­— the S&P 500 dropped 0.7 percent at the start of trading — with investor concerns about the global economy driving activity, The New York Times reported.

Trump is scheduled to address Congress shortly after 9 p.m. ET this evening.

The tariffs imposed today by the U.S. aren’t the only ones on the horizon. Duties of 25 percent on copper and aluminum are slated to take effect on March 12; tariffs on imported agricultural products and foreign cars are set for April 2.

Assessments and Reshoring

Stamford, Connecticut-based research and consultancy Gartner, in its Use Tariff Volatility to Drive Competitive Advantage report, recommends a three-part strategy that consists of:

• Assessing “strategic demand and supply-side risks”
• Analyzing market risks
• Determining and prioritizing actions to take (if necessary).

Calling these tariffs different than past ones because of their “blanket nature,” the Gartner report says to “balance tariff uncertainty versus potential impacts versus response implementation lead time to determine the optimal timing for change initiatives to commence.”

Alex Bowles, director of global client services at supplier management software provider Transparency-One, an ISN company, says that although tariffs can be disruptive for established supply chains by making certain imported components less accessible or increasing their cost, they can also provide an opportunity to improve resilience and diversification.

Supply chains need to become more proactive and adaptable to disruptions, including those from tariffs, he says. “Diversification creates opportunities for companies to explore new partnerships in regions where tariffs are not being imposed, increasing competitiveness and lessening supplier dependency,” he says.

Reshoring is another option.

The tariff discussion is prompting some companies to rethink their stance on reshoring — moving sourcing and production to the U.S.

“You’re starting to see some changes,” Vinny Licata, Fictiv’s head of logistics and import compliance, says, noting that Eli Lilly is investing in production in the U.S. and Apple has said it’s going to invest $500 billion into artificial intelligence server production. Also, India is changing its tariff strategy on U.S. imported goods.

Licata adds, “There is starting to be movement in the way the Trump administration is looking for. The more you see that, the more the administration may continue to use the tactic.”

Still, investment aside, reshoring is not an immediate response. “Companies can’t come up with factories in a matter of months,” Starr says. For example, he says, “if every car manufacturer in the in the world wanted to have a factory in the U.S. to produce all the lines of vehicles sold in the U.S., that will take billions of dollars. It takes six to seven years to open a factory. Plus, companies have to find and train people to run these factories.

“A shift to American production is a marathon; it’s not a sprint. But the policies are dictating a sprint.”

Short-Term Strategies

Starr says that most executives he has spoken with are setting up a dual strategy — short-term and long-term strategies running in tandem. The short-term, plug-the-gap plan pertains to taking out as much cost and creating as many efficiencies as possible, he says. Such actions can include improving efficiency in operations and order placement, or considering head-count reductions.

“There are other things you can do related to tariffs, many of which are already in existence,” Starr says. One is using the first sale strategy, where importers use an earlier sales price in tariff calculations. “You can use the sale principle to import at the cost at the factory sold to the intermediary,” he says. “That might lower your like overall net exposure to duty, but it’s not going to change the duty rate you’re receiving.”

Another strategy is eliminating the intermediary — and associated costs — and sourcing directly from the supplier. A third, Starr says, is rethinking inputs and components, including where they are sourced and how they can be purchased differently. Would buying in bulk be more effective? If I have a standard SKU, can I find it produced locally or regionally?

“Consider having supplier density per SKU,” Starr says. “Instead of having one or two suppliers that can produce what you want, have five or six.”

Other strategies, Licato says, are:

• Build in geographical diversity. “It’s important to have a diverse network, to make sure you’re in many different regions” because of tariff volatility, he says.
• Consider using free trade zones and bonded warehouses.
• Alter or change a product or component to reduce the tariff impact. “Understand the classification codes and determine if you can change the material or the form to bring it from a higher duty classification to lower duty classification,” he says.

Tariffs are likely here to stay, at least for a while. No matter the duration, assessing supply chains, products and components; diversifying sourcing and production; and looking for ways to cut costs and improve efficiencies can help organizations weather the trade-war storm.

(Image credit: Getty Images/MicroStockHub)