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More than a year into Trump’s trade war, many businesses remain unprepared for the change in US policy.

A brief summary of the recent tariffs

It began in January 2018 with tariffs on solar panels and washing machines, then escalated to steel and aluminum duties. A few months after that, tariffs went into effect on $50 billion worth of Chinese goods, and then another $200 billion worth of Chinese goods. And it’s still going.

In May 2019, the tariff rate for $200 billion in Chinese imports was increased from 10.0% to 25.0%. And in the first week of June 2019, in a dramatic reversal of a tariff threat, the White House announced it was suspending scheduled tariffs on Mexico meant to deter migrants. While the announcement ended the immediate threat of a trade fight with Mexico, it doesn’t end the possibility of tariffs in the future should immigration talks between the two countries break down. And a new NAFTA deal remains elusive.

What’s next in international trade?

Up next, the G20 summit in Osaka, Japan, later this month (June 2019), where experts hope that President Trump and President Xi will be able to diffuse tensions and avoid the idea of imposing tariffs on all Chinese exports to the United States. If the past is any indication, procurement professionals would be wise not to assume a positive outcome.

Trade wars are here to stay

Despite all the uncertainty, one thing is certain: the trade war is here to stay. Trade reform was a central campaign promise for President Trump, and China shows no signs of backing down, releasing a white paper earlier this month outlining its resolve to fight the trade war. What’s more, a remapping of supply chains is already underway, with new economical alliances and business relationships being forged – moves that are not easily or quickly undone. For example, US companies are increasingly using China’s Southeast Asia neighbors, moving manufacturing operations to places like Vietnam, Malaysia, India and South Korea.

In fact, according to recent Census Bureau data, imports from neighboring countries like Taiwan, Vietnam and South Korea have risen by double-digit figures in 2019, compared with a year-over-year decline from China.

Procurement professionals need to start factoring in trade war headwinds to their operations. ProcurementIQ has identified several actionable takeaways that supply chain managers should consider.

1. Build more business relationships outside of China

Utilize suppliers in countries where trade tensions are not as high. While China may be more cost-effective in the short-term, this is gradually changing as the trade war become more protracted and supply and capacity is built up in other countries.

2. Leverage substitutes

Companies may be able to make engineering changes to their manufactured products that allow them to avoid using certain inputs subject to tariffs. While this may involve reworking a product’s design, it may ultimately save money in the long run.

3. Buy ahead of time

When new tariffs are announced, buyers have time to make purchases before the duties go into effect. While this can create accounting headaches, purchasing in bulk upfront can buy the company time to adjust their sourcing going forward.

4. Share the tariff burden

If a company’s operations are large enough, it can leverage the size of its purchasing power to share the cost of the tariff with suppliers. Though, the effectiveness of this strategy is highly dependent on the specific buyer-supplier relationship, as well as the level of competition among vendors in the market.

5. Insourcing

In some instances, companies may be able to insource operations that were previously outsourced. Depending on the size and scope of the company, and the level of vertical integration, the insourcing of input materials may be possible. For smaller companies, insourcing inputs might not be an option; however, insourcing functions like product assembly and/or inspection might be.

Looking ahead

Stay tuned to ProcurementIQ over the next several weeks as we take a look at how we got to this point of international trade tensions, review some case studies of how companies are dealing with these tariffs and delve into product snapshots that go more in-depth on how tariffs are affecting certain sectors.

You can also read our previously published pieces that further discuss tariff impacts.

 

By: Sean Windle, Lead Research Analyst

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