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How Are New Tariffs Going to Influence the Global Supply Chain?

Michael Wilson | Mar 13, 2018

To say that tariffs and trade agreements can have an impact on the way the global supply chain operates is a massive understatement. NAFTA, the largest free trade agreement ever ...

To say that tariffs and trade agreements can have an impact on the way the global supply chain operates is a massive understatement. NAFTA, the largest free trade agreement ever conceived, significantly helped to expand trade throughout North America when it was finally enacted in 1994.

So when politicians begin to talk about significantly disrupting things like NAFTA and lobbing new tariffs, you'd better believe that global supply chain executives are paying close attention. But what, if any, impact will these new tariffs have on the global supply chain?

New Tariffs: What's Happening?

To understand what is currently going on with proposed tariffs, you need to understand more about Donald Trump's relationship with international trade in the first place. He has long protested what he calls "unfair trade agreements" and even withdrew the United States from the Trans-Pacific Partnership last year. He has threatened to do the same with NAFTA at some point in the future.

All of this segues into the recently announced tariffs on items like washing machines and solar panels. Earlier in 2018, for example, the administration announced a new 30% tariff on imported solar panel technology in an attempt to protect domestic manufacturers from overseas competitors.

In an interview with The Associated Press, the European Union budget commissioner made the most immediate affect of these tariffs abundantly clear: we need to be prepared for the exact same thing to happen to us. He said that if exporters in Europe have to pay tariffs then US exporters would have too.

From the supply chain side of the equation, this means that it's going to be difficult to get everything from parts to equipment that aren't sourced in the United States - thus making items like solar panels more costly to manufacture and more expensive for consumers as well.

The Impact of New Tariffs and Beyond

All of this is to say that the new tariffs proposed by the Trump administration are understandably controversial to say the least. The experts at the Economist recently conducted an analysis, for example, that pointed to the fact that higher tariffs (or even a new border tax) for Mexican trade would negatively impact states like Texas and Michigan in particular, as exports with Mexico account for such a large share of their economy. It also stands to reason that many states would be affected disproportionately, meaning that any negative impact would not necessarily be a universal one.

Equally controversial are new tariffs on solar panels, washing machines, and other types of items coming into the United States from abroad. Experts warn that while the actual impact isn't necessarily clear, this could lead to certain foreign governments placing retaliatory duties or tariffs on US exports - thus requiring manufacturers based in the United States to find new ways to protect themselves against competitors around the world.

Take washing machines, for example. Upcoming proposed changes include 20% tariffs on the first 1.2 million units imported each year, then a 50% tariff on everything afterwards. That 50% tariff would also extend to the parts used to make the washing machines themselves. One analysis predicts that a company like Whirlpool, will actually see their competition with foreign companies decrease. The same is true for Haier - a company based in China - which could easily have a negative impact on washing machine exports from the United States and thus the global supply chain.

Even certain manufacturers are opposed to these changes. Samsung (which is based in South Korea) says that this particular tariff will lead to consumers paying more money for fewer choices, which could ultimately lead to lower employment in certain key locations. Samsung also says that these tariffs would likely prevent its own supply chain from establishing the flexibility it needs to set up new production lines within the United States, thus affecting employment as well.

The absolute best-case scenario is a situation where because international competition goes down, demand for items like washing machines increases from within the United States. To continue to use Whirlpool as an example, they are clearly betting big on this being true - they've already added 200 new full-time employees to meet a projected increase in demand.

Just how long that demand sustains itself, however, remains to be seen.

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