Unpacking the Supply Chain: The Trade Wars (Part 2)

Performance Improvement

By

November 6, 2018

This is the second blog in a series where we are exploring the biggest roadblocks executives are facing in today’s dynamic supply chain. After global import tariffs trended downward for half a century, the 2016 presidential election saw increased commentary against free trade agreements. If international trade wasn’t on your radar a few years ago, it is now. The state of international trade for companies in the U.S. changes daily and those changes have an important bearing on supply chain strategy and management.

International Trade Disrupted

Political rhetoric became a reality upon the arrival of the new administration. In the arena of previously negotiated agreements, the President ordered the withdrawal from the Trans-Pacific Partnership and kicked off the renegotiations for NAFTA. To gain leverage to renegotiate past and potential trade agreements, the U.S. has levied a series of import tariffs that are specific to a country of origin or to a product type (or both).

Most notably, the current state of imposed U.S. tariffs include 25% tariffs on $50 billion worth of imported heavy machines and electrical equipment from China; 10% levied on $200 billion worth of Chinese imports including apparel, food products, chemicals, and electrical consumer goods; and 25% and 10% tariffs levied against global steel and aluminum imports, respectively, totaling $46.4 billion worth of metals imports.

In addition to tariffs levied by the U.S., domestic companies must account for the retaliatory tariffs imposed on products being shipped from the U.S. to those destination countries. China has fought back with tariffs on almost all U.S. exports to their country, hitting the aviation, auto, oil and gas, and food industries the hardest. The E.U. has retaliated with tariffs on items such as kitchen ovens and cranberries.

These references to tariffs and retaliatory tariffs are by no means exhaustive. With almost 18,000 import codes and 240 countries of origin, the tariffs can have a profound impact on U.S. businesses.

The Bottom Line

The impact to companies from escalated trade wars differs depending on the relevant tariffs being imposed by the U.S. or from foreign countries. An impact to a company will also vary based on that company’s product and market-specific exposure. U.S. imposed import tariffs increase the costs of companies trying in import targeted goods. Genesco (owner of the Lids retail hat brand) will likely see diminished margins from U.S. import tariffs levied against headwear, which are one item in the $200 billion worth of diversified imports from China. Companies that face retaliatory tariffs will have to account for higher costs of products sold in tariffing countries. Harley Davidson has seen a $2,200 per bike price increase because of retaliatory tariffs levied in the E.U. Annualized, the motorcycle manufacturer that netted $521 million in 2017 anticipates a $90-100 million hit should tariffs remain.

Addressing the Issue

For a company to address, the first step is an exercise in scoping and prioritization, which is a calculus that varies between U.S. import tariffs and foreign retaliatory tariffs.

 

 

 

 

From there, U.S. companies can choose from a suite of risk mitigations that make the most sense given the companies unique bill of materials, product mix, existing distribution network, and global exposure. Mitigations include: correcting and recategorizing product import codes, accelerating shipping, and re-examining global product and ingredient sourcing strategy based on risks associated with countries of origin, among others.

By remaining aware of the ever-changing landscape of international trade and responding quickly to new barriers to trade, U.S. companies can mitigate the risks of global uncertainty and minimize the impact to their supply chains.

Stay tuned for Parts 3 and 4 of this series on Unpacking the Supply Chain or check out Part 1 here.

(Uncited figures are North Highland analysis on US International Trade Commission data)


This blog was co-authored by:

Jonathan Wetherbee

Jonathan Wetherbee is a Senior Consultant in North Highland’s Strategy capability and specializes in helping organizations accelerate growth while addressing a changing world. Specific areas of expertise include growth opportunity assessment, project management, data analytics, and regulatory risk mitigation.

© 2018 THE NORTH HIGHLAND COMPANY.