US Tariffs Take Their Toll

One of the critical issues in the November 2024 US presidential elections is tariffs. It’s one of the few things the Democrats and Republicans seem to agree on.

The emphasis on tariffs will impact procurement before and after the election. The full fallout may not be apparent until after January 2025, when the new president takes office. During his first term, President Trump imposed more tariffs than any recent president. Since then, President Biden has left the previous levies in place while increasing the amounts in many categories.

In May 2024, the Biden administration announced a wave of tariff increases impacting imports from China on a range of goods from electric vehicles (tariff raised from 25% to 100%) to lithium-ion EV batteries (up from 7.5% to 25%), steel and aluminium products (also up from 7.5% to 25%), and semiconductors (jumping from 25% to 50%), among others. Other products impacted include ship-to-shore cranes and medical devices.

These tariffs, brought under Section 301 of the Trade Act of 1974, cover $18 billion of imports from China. Some of the announced tariff increases will take effect immediately, while others will come into play in 2025 or 2026.

In 2018-2019, the Trump administration initially imposed tariffs worth $300 billion. The U.S.-China Business Council claimed the arrangement cost the US economy 245,000 jobs. In fact, the trade deficit with China actually rose in 2020 compared to 2018.

In response, China initiated more than $106 billion worth of US goods for an estimated tax of nearly $11.6 billion.

One nuance that seems to be overlooked in the tariff discussion is that the exporting country doesn’t pay the tariff. The company that buys and imports pays the tariff, and the cost is usually passed on to customers through higher prices. In the US, tariffs are collected by Customs and Border Protection.

Incentivising Behaviour

The administration’s stated goal for the tariffs is to stop China’s harmful technology transfer-related acts, policies, and practices, including cyber intrusions and cyber theft. Reading between the lines, it would seem the tariffs are not yet generating the desired behaviour from China.

Tariffs are a type of trade barrier designed to raise the price of imported products compared to domestic options. Tariffs are usually applied as taxes or duties levied on importers that are eventually passed on to end consumers. They are considered a protectionist measure designed to give domestic producers an advantage and raise revenue.

The US is attempting to change purchasing behaviour by artificially inflating the costs of imported goods and encouraging and protecting domestic production. The idea is to drive US companies to buy from domestic sources and punish nations that are out of favour.

The Biden administration encourages domestic companies to onshore supply chains to reduce dependence on sources in China. These moves could interfere with the administration’s net zero carbon consumption goals by making Chinese sources of clean energy technology and EVs more expensive.

Tariffs increase the cost of essential components, raising production costs and squeezing margins. With the implementation of this new set of US tariffs, companies are seeking alternative sources or reconfiguring their supply chains, ideally before the tariffs go into effect.

However, the imposition of tariffs may have unintended consequences, and the effects may not be entirely predictable. The country could experience a short-term positive impact. Other countries could activate their own tariffs, leading to a decline in global trade.

Intended Consequences

Whenever tariffs are imposed, the impact ripples beyond cost increases to companies and consumers. The new tariffs are another obstacle to managing ongoing risks and building resiliency. Companies may adjust their inventory positions by building up buffer stocks to account for delays or disruptions and seek concession when renegotiating contracts.

However, tariffs sometimes have the intended effect. To protect Harley-Davidson, the last US-based motorcycle manufacturer, the US increased tariffs on imported motorcycles to 45%. During the tariff term, Harley made improvements that allowed the company to thrive to this day, gaining about half the market share for motorcycles. Harley petitioned the government to lift all the tariffs as it became more competitive.

By 2021, the tables turned in the motorcycle market. The European Union proposed an increase of 50% (56% up from 6%) on imported Harley-Davidsons. The EU settled on a 31% tariff. From 1986, when the company was on the brink of extinction, to 2022 Harley increased production more than five-fold.

One distinction in the 2018 round of tariffs compared to previous measures was the emphasis on intermediate goods, e.g., materials and components, as opposed to finished goods like Harley-Davidson motorcycles.

Unintended Consequences

Tariffs can protect domestic companies, especially those that are not competitive in terms of efficiency or quality until they can upgrade to be competitive on the world stage. Buyers may have to choose between cheaper but lower-quality domestic parts or pay more for higher-quality components.

Tariffs can protect sub-tier suppliers that may be smaller companies with fewer resources than their enterprise customers.

Tariffs are often seen as a punishment against competitors or adversaries. However, China, North Korea, Iran, and Russia found ways to bypass the tariffs. For example, Chinese EV manufacturers are shifting capacity to Mexico to offer competitive pricing for the US market.

When tariffs on Chinese-made solar panels were laid in 2023, production quickly moved to Southeast Asia nations. CPOs are looking for other sources as well, such as Apple’s recent expansion in India.

The global supply chain is so complex that tariffs may have a negative effect on the country that imposes them. Tariffs on EVs made in China and components used in domestic production have led to higher prices for EVs at a time when EV adoption has slowed.

With supply chains caught in the crossfire, procurement pros must be ready to reshape supply chains on short notice, upending perhaps decades of relationships and processes.

Note: This article was written prior to President Biden exiting the Presidential race and being replaced as the Democratic Nominee.

Are you a Procurement or Supply Chain Professional based in the USA? What is your organisation doing to prepare for any changes in tariffs and how is this impacting your day-to-day operations?