How The New Tariffs Could Affect the Supply Chain

With three rounds of attempted trade negotiations come and gone, a trade war between the United States and China, representing the two largest economies in the world has begun. China’s Ministry of Commerce has made a declaration that they will fight back against the Trump administrations imposed retaliatory tariffs on imports to China. China is now joining the ranks of other major players in the global economy, Canada, Mexico, and the EU, who are fighting back against these tariffs.

The $200 billion in import products that are being considered span a wide array of household and consumer goods

The $200 billion in import products that are being considered span a wide array of household and consumer goods including, but not limited to, bicycles, sound systems, refrigerators, pocketbooks, vacuum cleaners, cosmetics, tools, and seafood. With a 10 percent duty markup, the tariff would highlight just how dependent the U.S. consumer economy has become on imports.

“In recent days, Vice Premier Hu Chunhua, who oversees foreign investment, has instructed local governments to gauge how the biggest round of U.S. tariffs to date—25% duties on $34 billion of Chinese goods imposed on Friday—is affecting American businesses operating in China, the officials said. In particular, authorities are looking for signs of U.S. companies potentially moving facilities out of China. That would be a blow to Beijing’s effort to attract foreign capital and keep people employed at a time of gathering economic gloom,” according to the Wall Street Journal.

“The idea behind the imposition of tariffs is to increase the cost of imported goods to the point where American manufacturers can compete more effectively, and punish other countries for unfair trade practices. But the reality is that the global economy is so intertwined that most U.S. manufacturers rely heavily on imported parts to support their own U.S. production,” according to Supply Chain Management Review.

Seeing as how many U.S. based manufacturers rely on parts that come from outside the country, we could see a stymie point in production that could create a heavy impact on manufacturers and shippers in the near future.

So how will this growing trade war affect global supply chains? Seeing as how many U.S. based manufacturers rely on parts that come from outside the country, we could see a stymie point in production that could create a heavy impact on manufacturers and shippers in the near future.

The Backlash from the Automotive Sector 

While the new jobs are a boon to the U.S. economy, it is not without consequence. “BMW said Monday that it would move production for some of its SUVs out of the U.S. as a result of new tariffs placed on the vehicles,”  according to The Post and Courier in South Carolina. “The German-based automobile manufacturer signed an agreement with its Chinese partner, Brilliance Automotive Group Holdings, to increase the number of vehicles produced in the country, according to the Charleston newspaper, with the total reaching 520,000 by 2019.” 

 Volvo might also be pulling jobs out of the United States as a means of offsetting these tariffs.  A necessary step as many of the vehicles the company produces in the U.S. and exports to other countries such as Europe and China. Volvo has recently put its plans to expand production in the United States, which would increase staffing from 1,200 to 4,000 on hold.  

A Slow Build for the U.S. Economy

There will undoubtedly be a good deal of fluctuation as U.S. and Chinese companies alike learn how to negotiate these new tariffs. Partner companies between the two countries are already negotiating terms for splitting the difference to help offset some of the lower point tariffs such as the 10 percent increase on Chinese seafood. However, the more substantial duties, such as the 25 percent markup on exported automobiles have some manufacturers looking to pull away.  

“Over time, tariffs reshape the economy. Newly protected industries draw workers and investment away from exporting industries whose inputs are now more expensive. That effect is compounded when exports are also targeted by foreign retaliatory tariffs. Heavily protected industries, like U.S. sugar farmers, don’t export much because prices abroad are much lower than at home. Protectionist countries like India and Brazil have lower imports and lower exports relative to GDP than open economies like South Korea and Chile,” Douglas A. Irwin, an economist, and trade historian at Dartmouth College notes. 

Exporters are going to have a hard time finding ways to mitigate the additional costs of the tariffs while still making a profit.  

Ultimately, the U.S. economy could see some potential benefit from these changes as it might level the playing field for U.S. manufacturers. In the end, however, those that will suffer the most boil down to the consumers buying the products affected by the tariffs, and the exporters. Exporters are going to have a hard time finding ways to mitigate the additional costs of the tariffs while still making a profit.  

How the Supply Chain Will React 

As the cost of raw materials goes up, many companies will have to reevaluate their opinions and suppliers to determine what the best course of action is.

With any major jostling of exports and imports, there will be a rather substantial effect on the supply chain. As the cost of raw materials goes up, many companies will have to reevaluate their opinions and suppliers to determine what the best course of action is.   As tariffs were introduced on imported washing machines Marc Bitzer, the chief executive of Whirlpool Corp., celebrated his win over South Korean competitors LG Electronics and Samsung Electronics Co. “This is, without any doubt, a positive catalyst for Whirlpool,” he said on an investor conference call. 

Nearly six months later, the company’s share price is down 15%. One factor is a separate set of tariffs on steel and aluminum, imposed by the U.S. in March and later expanded, that helped drive up Whirlpool’s raw-materials costs. In the best case scenario, existing suppliers can negotiate with clients to help offset costs. Worst case means disruption and possible standstill for production should components and materials become cost prohibitive for manufacturers. Part of what has helped control the price of consumer goods is the low cost of Chinese labor. Without that, we could see a considerable rise in inflation on U.S. consumer goods at least until the market is able to rebalance itself.   

What Supply Chain Managers Need to Keep in Mind  

Purchasing and Sourcing managers will have their work cut out for them with the new tariffs in place, leaving them to scramble to find new sources where the tariffs don’t apply in order to help keep costs low. However, finding a new supplier is only the first step. There will still be the need for qualifying and completing a risk assessment before a new supplier can be brought on board. Additionally, the supplier must be vetted for product quality, capacity, delivery schedules, and other vital categories to make sure that they will be a reliable partner. Unfortunately, this can be a time-consuming process, but many companies already began sourcing new suppliers when the new tariffs were first announced.

Logistics channels will need to evaluate and contract with foreign trucking companies, freight forwarders, and identify export requirements from other countries before the supply chain can flow smoothly.

Negotiating transportation will be another matter altogether. Logistics channels will need to evaluate and contract with foreign trucking companies, freight forwarders, and identify export requirements from other countries before the supply chain can flow smoothly. This could mean completely altering ocean freight sailings and ports of call, as well as new air freight routes which could cause some delays in the production schedule during the early stages of these changes.  

Supply bases will also be profoundly affected as they take a considerable period of time, approximately 12-18 months, to be reestablished, especially when it involves complex parts such as circuitry. Unfortunately, some of these parts will be unable to be sourced from other countries which means that the base price of components will increase. With manufacturing costs on the rise, many companies will have to make the decision as to how far they can push their customers on the price point before they have to swallow the increase and take a hit to the bottom line.  

Many manufacturers will have to become more flexible in their approach to the supply chain to help offset eventual overages in inventory which will often occur as an attempt to prevent shortages.

Sales and Operations planning will need to make some considerable adjustments in the way they view their supply chain. Supplier schedules will inevitably change which will also change logistics needs. Inventory levels will also have to change as a result which could incur more shipping costs as production runs short on necessary components. This means that many manufacturers will have to become more flexible in their approach to the supply chain to help offset eventual overages in inventory which will often occur as an attempt to prevent shortages.  Of course, there’s also the consideration of what forms the “retaliation” will take as any number of them could result in higher costs and longer shipping times. China has already proposed closer inspections on U.S. imports as well as long delays through customs for more rigorous checks, which can significantly reduce the speed and efficiency of the supply chain.

Your focus should be on developing alternative and flexible supply chains that can be adjusted with speed. It’s time for all hands on deck to fight for your company’s survival.

“Supply chain professionals should take immediate action, if you haven’t already, to secure new suppliers and to do strategic planning using multiple “what-if” supply and cost scenarios.  Your focus should be on developing alternative and flexible supply chains that can be adjusted with speed. It’s time for all hands on deck to fight for your company’s survival,” Supply Chain management suggests.  

In short, this new trade war is going to force changes on many companies, and the supply chain will suffer. Those companies who have the agility to respond quickly will be the best off, but as relations between these global powers remain in limbo, the final result is yet to be determined.  

All Hands on Deck

BlueGrace helps our customers navigate through the constant changes the industry brings. No matter the situation, we are here to simplify your freight needs. If you have any questions about how a 3PL like BlueGrace can assist, contact us at 800.MYSHIPPING or fill out the form below to speak with a representative today!

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