Impacts of New Tariffs on the Supply Chain

Impacts of New Tariffs

President Donald Trump made worldwide waves when he announced new tariffs on steel and aluminum in March. The tariffs — 25 percent on steel and 10 percent on aluminum — were widely considered a snub against China, which retaliated with its own tariffs on some agricultural products.

Economists generally agreed that the tariffs would protect a few thousand jobs in the steel and aluminum industries. But these materials are used throughout supply chains in the production of millions of products.

Tori Whiting, a trade economist at the Heritage Foundation, told PBS NewsHour in March:
“These taxes will make it more expensive for U.S. manufacturers to produce anything made from steel or aluminum, forcing them to increase prices. These price differences may be small for things like soup or soda cans, but price increases for larger products like a car will be noticeable. Even a one percent increase in the price of a car is $350.”

While it is much too early to fully understand the effects of these tariffs as they only took effect in mid-March, the manufacturing industry is already noticing changes. These policies are affecting how goods move through supply chains to end consumers, and how much they cost.

The Fluid Movement of Products

While some steel and aluminum are produced domestically, these industries are relatively small in the U.S. It’s more common for manufacturers to import these raw materials than to purchase them domestically.

Tariffs make foreign goods more expensive. That increases domestic demand. If domestic supply can’t keep up, production can be strained at the very beginning of the supply chain.
One anonymous manufacturer of machinery told the Institute for Supply Management shortly after the tariffs were announced that they had seen “panic buying” or manufacturers snatching up raw materials, causing higher prices.

This may have happened no matter what products the administration decided to tax. But steel and aluminum are common across supply chains. These materials are part of automobiles, aircraft, machinery, appliances, construction materials and thousands of other products produced in the U.S.

And manufacturers will pass on these costs. As raw materials become more expensive, finished goods follow. But ancillary businesses like logistics may see impacts as well.

If manufacturers have to spend more money on raw materials, they may begin to squeeze their shipping budgets.

In terms of their ripple effects within the shipping industry, tariffs may be most analogous to the truck driver shortage. Transportation costs are already rising because fuel and trucks themselves get more expensive over time. But a lack of truck drivers is forcing carriers to pay higher wages as they compete for labor. And if there aren’t enough drivers, delivery times slow.

Tariffs may seem like they only affect one component of the supply chain. But their price impacts will touch every company that helps move goods from raw materials to doorsteps.

Keeping Up with Changing Industry Demands

How other nations will retaliate or whether additional U.S. tariffs will follow these, remains an open question. In the short term, companies must focus on controlling what they can.

In the case of policies that can have ripple effects throughout supply chains, the more agile the supply chain, the better. Many companies achieve greater agility with the support of software. These technologies can help companies compare competing suppliers, shipping carriers and manufacturers.

Beyond that, such software can help companies develop contingency plans or what adjustments they need to make in sourcing, pricing and operations if a certain policy changes or a certain company pulls out of the market.

Changes in trade policies are challenging to plan for because the ramifications are so numerous. As economist Whiting pointed out in her interview with PBS NewsHour, in the production of a car in North America, “each of the three countries specializes in the part of the production process where it is most efficient and effective, sometimes resulting in products crossing the border half a dozen times before the final car is made.”

In order to prepare for such sweeping changes in supply chains, companies need to understand their production process intimately from end to end. They need to choose the right metrics to watch most closely, based on those that most effectively optimize their networks.

This is what Reveel offers to companies as they plan their shipping budgets: our consultants can help executives figure out which shipping metrics to track, identify inefficiencies and negotiate contracts that eliminate those inefficiencies. While we can’t see into the future, we can help our clients build agile, efficient supply chains, and figure out what to do when sudden surprises arise. Reach out today to get started.

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