Will tariffs shrink global production networks?
Global supply chains arose and flourished in an era of falling tariffs – an era that may now be coming to an end amid an upsurge in protectionism. President Trump and other political leaders’ plans to boost tariffs or overhaul free-trade agreements could increase costs and pose new risks for multinational companies that have built extensive worldwide networks of subsidiaries and supplier partnerships. However, experience suggests that in most economic sectors, supply chains do not need to change substantially in the face of protectionism. Small adjustments should be enough to allow most companies to preserve operations and avoid significant increases in the cost of their goods.
Key takeaways include:
Global supply chains have multiple variable costs, and research shows that when some of those costs rise, suppliers often choose to absorb them and remain in the supply chain.
In cases where companies pass on higher costs to retail customers, the strong global economy could help consumers absorb small price increases caused by increased tariffs.
In the longer term, companies worried about protectionism may prioritize risk management over cost savings by focusing on regional rather than global supply strategies.
Resources for Further Study
Baldwin, Richard E., “The Great Convergence: Information Technology and the New Globalization,” Belknap Press of Harvard, 2016. A trade-policy expert explains how globalization gave companies opportunities to manufacture in low-cost countries, and how companies have combined this geographical freedom with information technology to facilitate the transfer of other functions, such as managerial positions, across the globe.
Bowen, Steven J., “Total Value Optimization: Transforming Your Global Supply Chain Into a Competitive Weapon,” SDJB LLC, 2017 A logistics consultant describes how companies can overhaul their transportation and storage operations to improve their supply chains and bottom-line performance.
“Herfindahl-Hirschman Index,” U.S. Department of Justice, last updated July 29, 2015, http://tinyurl.com/
Lu, Sheng, “Four key patterns in US apparel imports,” just-style, March 1, 2018, http://tinyurl.com/
Wilder, Mike, “The consumer cost of Washington’s ‘win-win’ NAFTA timeline,” Journal of Commerce, May 08, 2018, http://tinyurl.com/
Reports and Studies
“Global Economic Prospects: The Turning of the Tide?” The World Bank, January 2018, http://tinyurl.com/
Constantinescu, Cristina, Aaditya Mattoo and Michele Ruta, “Does Vertical Specialization Increase Productivity?” The World Bank, February 2017, http://tinyurl.com/
Dempsey, Linda Menghetti, “Testimony Before the International Trade, Customs and Global Competitiveness Subcommittee of the U.S. Senate Committee on Finance on Market Access Challenges in China,” National Association of Manufacturers, April 11, 2018, http://tinyurl.com/
Engel, Charles, “Equivalence Results for Optimal Pass-Through, Optimal Indexing to Exchange Rates, and Optimal Choice of Currency for Export Pricing,” Journal of the European Economic Association, December 2006, http://tinyurl.com/
Humphries, Marc, “Rare Earth Elements: The Global Supply Chain,” Congressional Research Service, Dec. 16, 2013, http://tinyurl.com/
Shay, Scott, Ted Stank and Ben Hazen, “A SAVVY Guide to the Digital Supply Chain,” Global Supply Chain Institute, April 6, 2018, http://tinyurl.com/
Walmsley, Terrie, and Peter Minor, “Reversing NAFTA: A Supply Chain Perspective,” ImpactECON, March 2017, http://tinyurl.com/
The Next Step
Cattan, Nacha, and Michael McKee, “No Nafta Better Than Bad Nafta for Mexico’s AMLO: Top Aide,” Bloomberg, June 5, 2018, https://tinyurl.com/
Domm, Patti, “US trade relations at a low, as China set for new tariffs and amid fears Trump will leave NAFTA,” CNBC, June 13, 2018, https://tinyurl.com/
Fox, Michelle, “GOP Rep. Kevin Brady: NAFTA allies ‘close enough’ on talks, should be able to reach deal,” CNBC, June 14, 2018, https://tinyurl.com/
Steel and Aluminum
Ferry, Jeff, “US steel and aluminum tariffs — the right move at the right time,” The Hill, June 2, 2018, https://tinyurl.com/
Nienaber, Michael, “EU will act against U.S. tariffs on steel, aluminum: Merkel,” Reuters, June 10, 2018, https://tinyurl.com/
Timmons, Heather, “Over 146,000 Americans will lose their jobs because of Trump’s trade tariffs,” Quartz, May 31, 2018, https://tinyurl.com/
American Chemistry Council
700 Second St., N.E., Washington, DC 20002
Trade association representing makers of plastics and other chemical products used in global supply chains.
Global Supply Chain Institute
300 Stokely Management Center, 916 Volunteer Blvd., Knoxville, TN 37996
A program at the University of Tennessee’s Haslam College of Business that publishes academic scholarship and other research focused on supply chains.
Global Trade Alert
Bodanstrasse 8, 9000 St. Gallen, Switzerland
+44 (0)20 7183 8801
Founded in 2009 by the London-based Centre for Economic Policy Research, this group tracks trade-related policies and trends.
Institute for Supply Management
309 W. Elliot Road, Suite 113, Tempe, AZ 85284
Hosts conferences, conducts training and studies supply-chain trends on behalf of member organizations.
Office of the U.S. Trade Representative
600 17th St., N.W., Washington, DC 20508
The federal office that develops trade and investment policy, advises the president on it and negotiates trade deals with other countries.
Organisation for Economic Co-operation and Development
2 Rue André Pascal, 75775 Paris Cedex 16, France
A group of 35 developed countries that studies global economic issues, publishes data and recommends reforms.
The World Bank
1818 H St., N.W., Washington, DC 20433
A global organization created to help developing countries end poverty through grants, loans and advisory services for governments.
World Trade Organization
Rue de Lausanne, 154, Case postale, 1211 Geneve 2, Switzerland
+41 (0)22 739 51 11
International organization charged with enforcing global trade rules and arbitrating disputes between member nations.