The incoming Trump Administration could be about to “impose tariffs at levels unseen since the 1930s”, potentially putting the squeeze on global supply chains.

The second inauguration of President Donald Trump will take place on January 20th. The incoming president and convicted felon has made a series of promises on the campaign trail regarding his plans for the start of his administration. 

Among other claims, Trump has said that, during the first 24 hours of his presidency, he will close the US’ southern border and reinstate travel bans, carry out mass deportations, pardon insurrectionists who took place in the attempted coup on January 6th 2021, roll back federal regulations on fossil fuels, and scupper the meagre steps the country took towards environmental legislation during the past four years. 

While it may trail Trump’s other promises in terms of potential to inflict human misery and economic disruption, organisations in the US have spent the past month scrambling to prepare for another of his threats: tariffs and a new trade war with China.

The president-elect promised back in November that planned to implement 25% tariffs on Mexico and Canada, as well as an additional 10% tariff on goods made in China, on his first day in office. Reports from December found that such measures would likely create sweeping supply chain disruptions, resulting in higher costs for customers and potentially destroying US businesses. 

Whatever happens, there’s no doubt the impact on procurement and supply chain sectors will be profound. 

How do tariffs work? (Spoiler Alert: Not the way Trump says they do)

Despite his claims that tariffs will help grow the US economy, raise tax revenues, and protect jobs, almost all economists have agreed that this rhetoric (including Trump’s statements that his tariffs were “not going to be a cost to you, it’s a cost to another country”) is misleading. 

In reality, a tariff is a domestic tax levied on your own country when businesses and individuals purchase goods from overseas. Government then leverages a percentage of the total value of the goods when they arrive on US soil. Then, the importer pays the tariff. Not the foreign entity. 

Essentially, if a US company wants to purchase $1,000,000 worth of consumer goods from China at a 30% tariff rate, the Chinese company still gets paid $1,000,000. When those goods arrive in the US, however, the US company taking receipt of the goods will be forced to pay the US government an additional $300,000. 

Over the course of 2023, the US imported approximately $3 trillion worth of goods, equivalent to roughly 11% of the country’s GDP. 

“During his first term, Trump often used the threat of tariffs as leverage in trade negotiations, but didn’t always follow through,” notes Rob Carlisle, Associate Partner at operations transformation consultancy Argon & Co

The higher price of protectionism

Carlisle argues that, “if we take Trump’s campaign rhetoric at face value, the United States may impose tariffs at levels unseen since the 1930s, having a seismic impact on trade relations as we know them today.” 

He adds that, with Trump potentially considering tariffs of 10-20% on all imports and a staggering 60% on goods from China, these measures “would likely hit electronics, apparel, and toys hardest – sectors heavily reliant on Chinese manufacturing.” 

Often, companies add the cost of any tariffs they pay to the price of the final product. This effectively turns them into a tax on consumers. However, Carlisle notes that, not only could tariffs cost American consumers and businesses money at a time when the cost of living is higher than ever, but cutting the US off from its neighbours and their supply chains could have even more disastrous long-term consequences. 

“From a sustainability perspective, Trump’s proposed tariffs could be shortsighted,” he says, noting that, during the previous Trump previous administration, tariffs imposed in an attempt to curb China’s dominance actually backfired. Trump inadvertently enabled China to take a leadership position in technologies critical for the green transition, according to Carlisle. Six years later, the International Energy Agency’s data shows that China currently controls more than 80% of the global solar value chain. “If these tariffs go ahead, they could further cement China’s position in green technology while increasing costs for U.S. manufacturers and consumers,” Carlisle warns. 

How likely is World (trade) War II? 

A prickly (and expensive) trade war with China was — among other things — one of the defining characteristics of the first Trump administration. 

Now, with Trump going into a second term on an even more right-wing platform than in 2016, Carlisle notes that a trade war is “certainly possible.”

If that were the case, the “policy and response from other countries could take many forms. During Trump’s first term, we saw ‘tit-for-tat’ responses from China and the EU, and this pattern will likely escalate further if he follows through on his campaign promises,” says Carlisle. “The scope of a trade war largely depends on how other nations respond. While superpowers like China may engage directly, it looks unlikely that smaller countries would enter into a tariff war with the US and are more likely to mitigate exposure to the impacts. For example, countries reliant on U.S. energy exports might shift to alternative sources, as China has done in its long-term pursuit of energy independence. Can the U.S. really afford the consequences of sustained trade conflicts? The answer may not just reshape its economy but redefine its role on the global stage.”

What can we do about tariffs and the trade war?

The threat of increased tariffs and a looming trade war has sprung up in just a few months. Donald Trump announces policy via his social media platform du jour as quickly as he can think them up (or, more accurately, copy them from Tucker Carlson). Given the speed of the emerging threat, the majority of procurement teams are still evaluating their options. Carlisle notes that organisations have a wide array of potential responses, including moving operations to avoid tariff barriers, likely accelerating the nearshoring trend that has come to establish itself since the pandemic. 

Product flows, Carlisle explains, are increasingly being “broken up into three ‘global zones’ – the Americas, Europe, and APAC – to mitigate risks associated with tariffs. The new tariffs will likely speed up this trend with companies managing their supply strategies in a regional network,” and bringing their suppliers closer to home. He adds that, “we may see Chinese firms potentially acquiring Mexican businesses to sidestep tariffs in the States.” 

In the short term, manufacturers may try to mitigate their risks by increasing inventory buffers, firmly putting the era of “just in time” supply chains to rest. “Some firms might also stockpile resources with high anticipated tariffs, while others may explore ways to automate and cut costs in their manufacturing base. While much is still to be firmed up surrounding Trump’s tariffs, firms should look to tread a careful balancing act of cost, efficiency, and resilience,” Carlisle reflects. 

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