How does it feel to be caught in the middle of a brewing trade war?
While we’ll address the predicament technology manufacturers face later, look no further than American soybean farmers to see what a dramatic impact tariffs can have on profitability. They bet big on the crop this year, planting a record 89 million acres and hoping that the World Bank’s forecast of a 2% increase in agricultural prices was on target. In July, however, soybean prices hit a 9-year low — making farmers the country’s most visible trade casualties (to date).
In 2014, total trade (imports + exports) for the United States accounted for 30% of Gross Domestic Product, so global trade tensions are an increasing risk for virtually every American industry. Trade and tariff uncertainty expose critical supply chains to added costs.
It’s not known how much trading partners are willing to escalate the situation. U.S. companies must actively use risk assessments based on their individual business model to identify possible areas of concern and create contingency plans accordingly.
Both Importers & Exporters Face Financial Risks
Companies can still export soybeans to China and import Canadian steel, but export tariffs affect sales projections. Import duties affect production costs and sales prices.
So far, the list of targeted items from China doesn’t include many items consumers use daily, but that may be temporary. Bloomberg reported in June, additional duties on $50 billion worth of Chinese imports will increase U.S. supply chain costs. Toyota announced that proposed tariffs could increase the cost to build a Camry by $1,800. Consumers will certainly notice that increase the next time they go car shopping.
Higher import costs affect many industries, including aerospace, information and communications technology, robotics, industrial machinery, and automotive. It’s a double whammy for durable goods manufacturers, facing import duties on raw materials and export tariffs when products are sold abroad.
Mitigating Risks Imposed by Tariffs
How do you mitigate known or unknown tariff increases? While it’s unknown how long or how much larger tariffs will get, you can take the steps below to reduce the impact of tariffs.
Step 1: Calculate the Impact of Tariffs on Cost & Sales Price
Companies should already be developing cost models with current and projected data to determine the impact of a tariff on the total cost of the product. This data should be injected into the “Landed Cost Model” when shipping goods internationally.
- Identify and calculate all costs — from transportation to brokerage fees, and determine how they affect margins. Perhaps it’s feasible to modify transportation agreements to lower costs.
- Include duties and tariffs in the new cost model and consider alternate sources.
Also, consider the overall effects of trade disputes on markets, consumers, and expansion plans. There is so much uncertainty now, that some companies are putting expansion plans on hold or delaying new decisions until the situation stabilizes.
Step 2: Look for Opportunities in Your Global Supply Chain
Conduct a thorough supply chain review and look for opportunities to source from additional product suppliers or e-source the entire product line. This is a good time to do a resourcing optimization review to determine the source percentages from various regions.
Here’s how to get started:
- Consider multiple sourcing origins. For example, have 15% from China, 20% from Indonesia, etc. It’s like investing in a stock mutual fund instead of sinking all your investment into a single stock.
- Look at the impact on forward stocking locations (FSLs). Tariffs may increase service and repair costs for companies that maintain FSLs. It depends on the country of origin of the repair parts. A company that’s shipping repair parts of Chinese origin won’t face extra costs if it’s shipped to a country in the European Union, but components made in the USA might. Control some of these costs with multiple sourcing and develop an allocation strategy based on country of origin.
How Bad Can It Get? Nobody Knows
The EU and United States recently took a step back from an all-out trade war — at least temporarily. Both sides agreed to further negotiations and a delay in imposing threatened tariffs.
There’s been no such cease-fire in the U.S.-China trade situation or disputes with Canada, Mexico, and other countries. On July 16, the U.S. complained to the World Trade Organization about “retaliatory tariffs” placed on U.S. goods in response to U.S. tariffs.
Remember that your company doesn’t operate in a vacuum. Businesses with firm “Buy American” policies are at risk — even if they don’t export products. That’s because their suppliers likely use some imported parts and raw materials. Costs added at any step ripple through the rest of the supply chain like water rolling downhill.
While companies can hope for the best, it just makes sense to plan for the worst.
Get an Expert Opinion
Want an expert opinion on mitigating tariff risks? Find out how Flash Global’s network modeling can illuminate your global supply chain risk. Fill out the form below to start the conversation. We’d love to help shed light on potential risks in your service supply chain.