At the start of April, US President Donald Trump made good on a campaign promise to impose tariffs on US imports in an attempt to revitalise US manufacturing and reset America’s trade agenda.
The sweeping tariffs included a 10% tariff on all US imports, along with an array of steeper rates for some of the US’ major trade partners, including the European Union, which faced higher rates of 20%, and China (an additional 34% on top of the 20% rate imposed earlier this year), as well as Japan (24%), and Vietnam (46%). These figures have, and continue to, change on an almost daily basis as the Trump administration wheels and deals with foreign powers — operating according to a new doctrine of retribution and reward. “Do not retaliate and you will be rewarded,” the President wrote on April 10th, as the White House paused tariffs for most countries but slapped a steep 125% duty on China.
There have been other reprieves for cooperative nations and industries. The US implemented a 25% tariff on all foreign-made cars and auto parts, and Trump recently announced his intentions to cushion the impact of auto tariffs by cutting other levies, such as those on steel and aluminium, for automakers. According to the Wall Street Journal, carmakers will be able to secure partial refunds for tariffs on imported auto parts, based on the value of their US car production.
Nevertheless, the abiding impression in the auto industry — as well as throughout the rest of the global value chain — is that the global economic order established in the wake of World War 2 is in tatters.
“The global economic system under which most countries have operated for the last 80 years is being reset,” wrote Pierre-Olivier Gourinchas, Economic Counsellor and Director of Research at the International Monetary Foundation (IMF), in a recent article. Pointing out that US and global tariffs were now the highest since immediately before the Great Depression, Gourinchas warns that, “If sustained, this abrupt increase in tariffs and attendant uncertainty will significantly slow global growth.”
For procurement leaders, the current state of affairs threatens to represent a more severe, long-lasting disruption to their supply chains than the COVID-19 crisis. However, the sector is already developing some innovative solutions and strategies to the new era of the Trump Tariff.
Dealing with deglobalisation: Onshoring isn’t enough
Trump’s tariffs have inevitably accelerated the deglobalisation trend that COVID-19 kicked off, as organisations race to shift their value chains away from regions affected by the President’s levies.
Onshoring — the process of relocating production operations back to a company’s home turf — is undeniably an effective way to avoid paying tariffs. However, while relocating the supply chain closer to home can decrease lead times, increase control and visibility into operations, and circumvent tariffs, the process is a slow one. The domestic labor markets in industrialised nations like the US — both in terms of available skills and labour costs — mean you can’t just uproot a supply chain from China and move it to the US or Western Europe.
The economy of the Global North is too dependent on cheap labour from poorer nations. CNN estimated last month that an iPhone manufactured exclusively in the US would likely more than triple in price to over $3500. Not only that, but many goods (especially complex electronics) depend on manufacturing capabilities and expertise that disappeared from the US decades ago.
Bringing these supply chains entirely back to the US would be a months-long process for even simple operations; doing it for complicated goods like iPhones, data centre infrastructure, and cars could take decades. And that’s before we even consider the raw materials, many of which have processing supply chains that are deeply entwined with Chinese and other tariff-hit nations.
In short, while the US and other nations caught up in the trade war will likely see a shift towards onshoring and nearshoring, applying these strategies across the board simply isn’t viable.
When the US imposes tariffs on countries that are home to specialist suppliers, manufacturers will have no choice but to pay tariffs and either absorb the cost themselves or pass those higher prices along to the consumer.
“Many manufacturers have spent decades getting their supply chains to a point where they heavily rely on a small circle of suppliers they regularly work with to minimise touchpoints, keep costs low, and drive efficiencies. The appeal of handing back office supply challenges to tiered vendors was a logical and valuable choice. Unfortunately, with today’s uncertainties, they can no longer afford a hands-off approach,” Phillip Gulley, Co-Founder and Chief Strategy Officer of Cofactr, wrote in a recent article for SupplyChain Strategy. “Manufacturers are now expanding or shifting their supplier networks to mitigate delays and shortages, attempting to ensure production continues at unit economics that still fit existing business models. But manufacturers must go beyond increasing the number of suppliers to mitigate risk—to leverage better optionality they need to diversify geographically and consider where subcomponents are sourced to eliminate single points of failure.”
Visibility and technology
Of course, reshaping supply chains in response to tariffs is a complex and potentially dangerous process. As Adrian Wood, Director of Strategic Business Development at DELMIA, recently told SupplyChain Strategy, “Tariffs don’t represent a physical constraint, but cost is a major driving factor in the optimisation of the supply chain and production plans.” Accurate data and expertise allow supply chain teams to experiment with new approaches to supply chain orchestration, but understanding things like at what tariff percentage an organisation can absorb costs to protect margin without having to pass all the costs along to the consumer and impacting demand are “extraordinarily difficult to answer without technology.”
Powered by artificial intelligence and a strong data foundation, Wood advocates for building digital twins of supply chains in order to help companies become more agile and resilient.
“Even with a precision virtual twin, the complexity of global supply chains and the number of possible business permutations are beyond human comprehension to evaluate and analyse effectively,” writes Wood. “However, traditional AI methods (such as optimization) are now adept and considering competing business priorities to balance supply and demand while considering any number of physical and logical constraints. Used along with the virtual twin model, manufacturing and supply chain leaders can use AI to experience unlimited what-if scenarios to determine tactical responses.”
How to tackle tariffs in the long-run: It’s a relationships game
While technology can give supply chain leaders an understanding of the decisions they need to make in order to weather tariff headwinds, supply chain resilience is ultimately about relationships.
“While many believe that tariff changes and their resulting challenges are largely beyond the control of CPOs and supply chain leaders, there is a great deal that can be eased by investing in stronger trade relationships; offering continuity through the chaos,” writes Fayola-Maria Jack, CEO and founder of Resolutiion.
This, she adds, is because, “in times of crisis, transactional suppliers tend to protect themselves first. The problem with relationships that are purely transactional is that there’s little incentive for suppliers to go the extra mile, and contractual rigidity leaves no room for improvisation.” This rigidity and lack of a strong relationship can result in disruptions ranging from delivery failures and financial penalties to stranded assets.
“Trust-based relationships, on the other hand, enable flexibility. Strong, strategic partners are not only more likely to renegotiate terms instead of pushing material disputes and perhaps even litigating, but they can also open the door to early intel. Knowledge sharing is a really important part of planning, becoming even more so through tougher times,” she writes, adding that “fostering an open and transparent relationship that shares early signals of disruption will be key.”
The coming months and years will undoubtedly be challenging for organisations all over the world, as economic constraints and political tensions threaten to disrupt supply chains. However, with the right combination of technology, strategy, and relationship management, supply chain leaders stand a good chance of weathering the storm. As Wood notes, this isn’t the first large-scale disruption supply chains have faced in recent years, and it won’t be the last.
“This is not really uncharted territory,” he notes. “Over the last decade, the world has faced many disruptive events: Brexit, COVID, the Suez Canal, geo-political conflicts, climate changes, and so on. Each one is unique in its nature, but they all have similar impacts on supply chains and manufacturing; causing breaks in global supply, extreme fluctuations in demand, and unknown costs and barriers to competing.” Using their experience of the past, procurement leaders can secure a future in the world Trump’s tariffs have built.