How Tariffs Are Affecting U.S. Supply Chains

Concept image of U.S.and Chinese flags overlaid on images on supply containers and ports

The tariffs imposed on Chinese goods by President Donald Trump have caused sharp increases in expenses for some companies, and even businesses that have yet to feel the sting of the duties on imported Chinese goods are taking a closer look at their supply chains to see how they can minimize the damage.

As businesses scramble to find solutions, investors are watching closely to see how these changes are being handled.

The Effects of Tariffs on Supply Chains

The duties being charged for Chinese goods are affecting supply chains in a big way, especially for companies without the built-in flexibility to immediately begin sourcing elsewhere. Companies are forced to find a way to get out of China or absorb the costs.

Even businesses not utilizing Chinese goods directly are seeing higher prices on raw materials from China, as well as intermediate goods and final products that contain Chinese parts. And with today’s increasingly interconnected global supply chain landscape, the cost of these tariffs will eventually be felt across all supply chains.

Coping Mechanisms for the Imposed Tariffs

Even before the trade war, some U.S. companies were aiming to create more resilient supply chains, with timelines in place to minimize supply chain disruption by mitigating risks. The trade war has spurred many companies to reassess those timelines. Below are some key strategies companies have been using to deal with the tariffs.

  • Shifting production to other countries
  • Applying for exemptions
  • Raising product prices so that consumers cover increased costs
  • Negotiating with Chinese suppliers to share the cost of tariffs
  • Finding new raw material sources
  • Reducing spend in other areas to help level off costs
  • Simply waiting to see what will happen

On December 1, China and the United States agreed to a 90-day cease-fire, but few details were provided, and China’s media was hesitant to confirm the truce. The cease-fire leaves U.S. tariffs in place on $250 billion in Chinese products but eliminates Trump’s threat to impose tariffs on all Chinese imports. It also removes his threat to increase tariffs from 10% to 25% on $200 billion of those products in January.

More than 11,000 exemption requests from American companies have been filed with the U.S. Trade Representative.

Investors Beware

There’s no doubt that investors are taking note of how various companies are reacting to the tariffs. Where the companies being affected go from here could make or break them, and investors are fully aware of that.

One Barron's analysis showed that supply chains were mentioned twice as often in third-quarter earnings calls for S&P 500 companies, implying that supply chain management techniques top of the list of concerns for many investors.

Beyond the Trade War

For many businesses, regionalization and nearshoring efforts are sounding more rewarding than ever for the long run, and even companies hardly affected are exploring the possibilities of bringing the supply chain closer to home. Lower energy costs and technological improvements that reduce labor costs can make these options even more attractive.

Thus far, many of the steps taken to offset tariffs have been short-term. However, the impacts of the trade war have caused many companies to look harder at the resiliency of their supply chains. For many businesses, these tariffs have brought to light the various issues inherent in building a supply chain with only cost cutting in mind. And with modern supply chains so interconnected in the intricate web that makes up today’s global value chains, the ripple effect of these tariffs is even greater.

 

Image credit: Akarat Phasura / Shutterstock.com

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