Impact of Tariffs on Global Supply Chains

Impact of Tariffs on Global Supply Chains

In July 2018, after the initial tariffs were implemented on China by the US, I was in Shanghai, teaching a scheduling class at a multi-national specialty chemical company. As CNN International blared in the background at lunchtime, one of my students asked what the impact of tariffs on Global Supply Chains would be. At the time, I was hoping that we wouldn’t find out the actual answer to the question, so I said it depended on which products were ultimately tariffed and how long the Tariff War continues. My students shared stories of ships speeding into Chinese ports to beat the deadline before the tariffs were imposed. Some companies had pre-bought products that were targeted for tariffs, so if the trade war were short, as the US President predicted, then the impact would have been minimal. The longer the trade war goes on, and the more products that get tariffs imposed, the more of an impact they will have.

There are a lot of people that didn’t know or even understand how Global Supply Chains work, and I think these tariffs have provided a crash course for every consumer. It’s a tough way for people to learn, but it’s been instructive.

One of the benefits of Global Supply Chains is that it allows companies to change the sourcing of raw materials and/or assembly location of their products as labor conditions, taxes, tariffs, government regulations change favorably or unfavorably. Some changes are easier to make than others. Changing the sourcing of raw materials might be easy to do if you have multiple countries that produce the same quality product at similar prices. Changing manufacturing locations could be more complex because infrastructure is needed, and labor rates and skill levels are different in every country. If back-up manufacturing locations already exist, then that change could also be easy to execute. If not, then this might be the push that companies need to build manufacturing locations in another country. Companies could also decide to absorb the tariffs and/or pass it along to consumers. Evaluations regarding the best place to source raw materials and/or manufacture products are done regularly by companies during normal times. Since the trade wars started in 2018, I am certain that every company that leverages a Global Supply Chain has evaluated their options and are now making changes. Here are some of the impacts so far:

• Farmers in the US have yet to find alternative outlets for the products that China is no longer buying (i.e. soybeans and corn). They have been promised subsidies from the US Government (aka US tax payers) to temporarily bridge the gap. This will ease some of the losses from last year’s crop, but farmers will make decisions on what and how much to plant for 2019 knowing that there is no plan to continue the subsidies.  

• Some companies are moving the manufacturing portion of their supply chain out of China as it becomes more expensive to manufacture there. 

• 86 percent of Chinese companies have been affected by the trade tensions according to a UBS Group AG survey. “68 percent reported cutting prices on products subject to levies, while 27 percent have slashed capital expenditures. Adding to that, 23 percent said that they have had to lay off staff and 18 percent reported cutting wages.” 

• Apple issued a letter to investors that it would miss revenue estimates for its fiscal-first-quarter, something that Apple hasn’t done in a generation. Apple CEO, Tim Cook, blamed the slowing Chinese economy and trade tensions between the US and China. 

• US Automakers are being hurt by the steel and aluminum tariffs and will not benefit by China reducing US Auto tariffs because most US Auto makers manufacture cars in the country that they sell them in. Tesla, on the other hand, is speeding up plans to build a manufacturing facility in Shanghai. Tesla is currently single sourced out of Fremont, CA. 

• The U.S. tariffs on steel and aluminum products coming from Canada and Mexico, still remains open under the United States-Mexico-Canada Agreement (USMCA) that is intended to replace NAFTA. Oxford Economics has had an opportunity to work with companies considering how the worsening tariff environment will impact their bottom line and, in this article, they share a few of the insights that they have learned.

• The EU is proposing tariffs on $20B of US imports in response to a WTO ruling that the US illegally subsidized Boeing.

• Goldman Sachs reports Chinese exporters of tariffed goods have not lowered their prices to share the impact of the tariffs and US producers have hiked their prices, so the cost of the tariffs have fallen on the US Consumer and Business that buy these products. 

As the crash course in how tariffs impact Global Supply Chains continues on many fronts, the question now is: How much longer will they last?

About Karen Bird

Karen is a Supply Planning Management Professional with over 30 years of experience in manufacturing in the Specialty Chemicals industry and in Global Supply Chain Implementation management in Specialty Chemicals, Consumer Packaged Goods and the Wine Industries.

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