Navigating Tariffs: A Guide for Procurement Managers
For the past few administrations, U.S. trade policy has focused on tariffs to influence buying patterns for companies and consumers.
The looming November presidential election adds layers of uncertainty, making it crucial for procurement managers to understand the current tariff environment and its potential impacts on the price of imported goods.
How will tariffs influence your procurement practices? Let’s dive in.
The Tariff Landscape
Both the Trump and Biden administrations have enacted various tariffs, mainly targeting China. These tariffs were intended to bolster domestic industries by making foreign goods more expensive. However, the results have been mixed. While certain sectors enjoyed temporary relief, the broader impact has often been higher costs for imported goods, resulting in increased prices for U.S. consumers and businesses alike.
The Biden administration’s recent imposition of $18 billion in tariffs highlights the U.S. preference for this economic policy as a tool for diplomacy. Despite initial concerns, these tariffs are not expected to significantly impact the overall U.S. economy in the long term.
However, weakened global trade flows due to geopolitical conflicts, particularly with China, are expected to persist, leading to ongoing challenges for procurement managers.
Impact on Imported Goods
Politicians see tariffs as a way to “Carry a big stick,” reminiscent of President Theodore Roosevelt’s maxim “Speak softly and carry a big stick.” The big stick is there to force opponents to accept your policies.
However, the big stick of tariffs doesn’t always work the way politicians think they do.
Tariffs directly increase the cost of imported goods, as the additional duties are typically passed on to buyers by the importing company. Contrary to popular opinion, the country of origin does not pay the tariff. It’s paid by the importer of the goods and usually passed on to buyers through higher prices.
For procurement managers, this means higher prices for materials and products sourced from countries tagged with tariffs. For example, Chinese imports, which have been heavily targeted, are now more expensive, leading to a ripple effect across various industries, from electronics to manufacturing.
Moreover, retaliatory tariffs from other countries can further exacerbate these challenges. Industries that rely heavily on exports, such as agriculture, have already felt the sting of reciprocal measures from China. This dynamic can create supply chain disruptions, as well as volatility in pricing and availability of goods.
Given the artificial interruption of the usual capital demand and supply cycle, companies may be creative in circumventing the regulations. It’s critical to have visibility into multiple supplier tiers to avoid violations that could lead to fines and sanctions.
Tariff policies could lead to a weaker environment due to slowing economic activity. Industries targeted with retaliatory tariffs experience declines in output and employment, which cascade through support industries as well.
Strategic Steps for Procurement Managers
Given the current environment, procurement managers must adopt proactive strategies to mitigate the impact of tariffs:
- Diversify Suppliers: Consider sourcing from alternative regions or countries to reduce dependency on countries subject to high tariffs. This can help stabilise costs and ensure a more resilient supply chain. However, keep watch for suppliers that open new locations in non-tariff countries or route goods through those countries to avoid the tariff. A Chinese company may perform minor manufacturing steps in Mexico or Vietnam to disguise the true country of origin.
- Negotiate Long-Term Contracts: Locking in prices through long-term contracts with suppliers can help shield your organisation from sudden price increases due to new tariffs or trade policies.
- Increase Inventory: Building up inventory of critical materials and products can provide a buffer against price spikes and supply chain disruptions.
- Leverage Tariff Exemptions: Stay informed about potential tariff exemptions or reductions that may apply to your imports. Applying for these can provide significant cost savings.
- Collaborate with Suppliers: Work closely with your suppliers to explore cost-saving opportunities, such as modifying product specifications or finding efficiencies in the supply chain.
Looking Ahead
Historically, election years bring about changes in trade policy, depending on the political landscape. Regardless of the outcome, procurement managers should be prepared for potential shifts in tariff strategies that could impact their sourcing and pricing structures.
