Image courtesy of NOAA.gov.
President Donald Trump’s tariffs are having a ripple effect on the global supply chain.
Trump initially imposed tariffs on most of the United States’ trading partners in March, adding Canada, Mexico and the European Union at the end of May. In the midst of those tariffs was an additional focus on China, which started in April and escalated in the following months.
The tariffs — 25% on steel and 10% on aluminum — are impacting companies whose supply chains are built around the global-friendly policies of recent years. What started with 18 products has ballooned to 10,000 and counting, according to an interactive graphic by The New York Times.
The interconnectedness of the global supply chain is at stake, as Ralf Thomas, finance chief of Siemens, told Reuters:
“…threats to free trade by tariffs are an area of concern. The global supply chains are deeply interconnected, and it’s of utmost importance to have reliable framing conditions to foster confidence and economic growth.”
By understanding the effects, organizations can minimize the damage.
Rising Costs and Growing Uncertainty in the Global Supply Chain
Companies big and small are feeling the impact of the tariffs, according to Reuters and The New York Times. Much of the disruption is due to the rising costs the tariffs are causing as well as the overall uncertainty of the situation.
While the tariffs are intended to not have a visible impact on consumer goods, they are forcing some manufacturers to rethink their supply chains, according to Financial Times. Electronics and machinery comprise more than half of Chinese exports to the U.S, and the tariffs could cause equipment and component makers to “reshore” their supply chains.
Take HiberSense, a small startup that sells connected climate control systems, that decided to end its dependence on Chinese imports and plans to move to manufacture devices in Pennsylvania, according to Reuters. This plan will take nearly three years to unfold. In the meantime, HiberSense has to increase their retail price due to the tariff on shipments from China.
European companies are also starting to feel the impact. BMW and Volkswagen have noted that the trade tensions could affect their production and profit, reported The New York Times.
All of the tariff talk from American and European businesses has created a cloud of uncertainty with real consequences. A July 2018 survey by the Institute for Supply Chain Management found that respondents were “overwhelmingly concerned” about how tariffs will continue to affect their businesses. From contingency plans to moving materials to negotiations to customer kickback due to higher prices, respondents across industries expressed the toll the tariffs are taking on their businesses.
How Businesses Can Shield Supply Chains From the Impact
Companies can take steps to protect their investments and ensure the least disruption in their supply chains during these tumultuous economic times. One strategy is to “have multiple suppliers in multiple locations using multiple transportations channels,” writes Bill Conerly for Forbes. While this practice is expensive, it’s a good policy for companies that can afford it. After all, tariffs are just one of many mishaps — including natural disasters, wars, strikes and factory accidents — that can disrupt a company’s supply chain.
In an article on Manufacturing.net, Eric Wang, Geoff Pollack and Matt Stanfield of Alvarez & Marsal outline five additional tactics for minimizing tariff disruption that organizations large or small can implement:
- Review the timing, trade terms and country of origin provisions in their contracts. For companies making finished products, raw material suppliers must not be overlooked.
- Evaluate demand forecasts and communicate this to suppliers early in the process to ensure consideration when markets tighten.
- Shift production of finished goods to low-cost countries or import higher value finished goods to cushion against the full brunt of tariffs.
- Communicate with suppliers. Leverage previous engagement to ensure consideration in times of shortages as well as to expand opportunities. It’s also wise to develop relationships with suppliers in other nations as a hedge against disruptions.
- Know the risks of dealing with current and potential trade partners. Be aware of the laws and policies of countries that are home to businesses with whom the company deals. Collaborate with teams throughout the company to ensure that there are “Plan Bs” for disruption scenarios.
The key is for a company to know its supply chain risks and options because, as Trump’s tariffs and other policies have shown, the economic landscape can change quickly.
Interested in reading more about how current events have impacted the global supply chain? Read our STEEP series here.