Since November’s presidential election (and even before then), tariffs have been a popular topic for companies and consumers.
The United States is no stranger to tariffs and has used them to drive economic and foreign change for years. For many companies, preparing for and navigating tariffs means understanding individual supply chains. Every item, part, and material has its own supply chain – and throwing even one off can have far-reaching impacts.
But for all the news on both sides of the political aisle, there is still mystery surrounding tariffs. What are they, how are they imposed, and how do they affect industries?
At base level, tariffs are one of many levers countries can pull to add a tax to anything imported into their country. In effect, imported products become more expensive, forcing importers to pay more.
Tariffs can apply to any product or industry, impacting everything from electronics and metals to foods, consumer goods, and medicines. However, countries often enter trade agreements like NAFTA, CAFTA, and USMCA, to avoid potential trade issues. These agreements encourage trade between participating nations, lowering prices.
There are plenty of reasons why countries may apply tariffs, but it usually boils down to one of several causes.
Increase the Price of Imported Goods – When overseas products are more expensive, domestically produced goods look more attractive. Tariffs imposed for this reason can spur domestic manufacturing, encouraging people to buy more goods produced by American businesses. It can also help relieve trade imbalances between nations.
Generate Additional Tax Revenue – Higher tariffs mean importers pay more to bring materials and finished products into the country. As imports increase, the federal government raises more revenue for programs and other initiatives.
Trade Wars – Isaac Newton’s Third Law of Motion states, “Every action has an equal and opposite reaction.” The same logic applies to international trade disputes.
The United States can apply tariffs to anything and any country it wants, but the road goes both ways. During his first term, President Donald Trump focused his efforts on several countries by making products like steel, aluminum, solar panels, and electronics more expensive to import.
Some countries, including China, India, and Canada, retaliated. They introduced tariffs on agricultural products like soybeans, sorghum, and pork. According to the USDA, U.S. agriculture lost more than $27 billion from 2018 through 2019, with China causing about 95% of the loss.
No matter what, the objective is always the same: protect your nation’s security.
The United States has promoted domestic manufacturing, encouraging companies to bring their development and production processes home. Tariffs are one way to encourage companies to either nearshore production processes or reshore them in the United States.
When imported products cost more, consumers may lose interest in them.
Those higher prices may also lead customers to buy similarly priced, high-quality products made here.
As you can expect, even the copper wire supply chain deals with tariff effects.
Importing companies within the copper industry sometimes deal with the impacts of small tariffs on copper products. According to the United States Geological Survey, nearly half of the country’s consumed copper comes from imports.
Luckily, many countries doing business with the United States have duty-free or reduced rates, meaning there are no import, value-added, or sales taxes, or reduced tariffs. These countries include Australia, Chile, Columbia, Korea, Peru, and those under trade agreements like Mexico and Canada. As of the end of 2023, the rate for copper rod coming into the U.S. was 1% or 3% ad valorem.
Additionally, because copper is critical to many industries and applications, the U.S. works constantly to shore up imports. This means collaborating with friendly nations to secure supplies and develop strong trade partnerships.
Another issue for the U.S. could come from plastics and polymers, but not in the way you might expect.
The U.S. is an exporter of polyethylene (PE) thanks to its massive natural gas production. Natural gas has many uses, from heating and cooking to power generation and chemical production, including PE.
How critical is a material like PE to our daily lives? The highly adaptable plastic is in everything from water pipes and bottles to consumer goods, toys, and many other products. As a result, PE is a popular material around the world, including China.
When the U.S. implemented tariffs in 2018, China responded with its own tariffs. Although Chinese officials planned to target low-density polyethylene (LDPE), they eventually switched to LLDPE and HDPE. The switch shifted the tariffs from a small percentage of U.S. production to a much bigger market.
In one quarter (Q4 2018), Chinese imports of U.S. PE resin tanked more than half, despite China importing more PE overall. The United States, facing headwinds from a valuable trading partner, had to shift its focus quickly to find buyers. This meant doing business with buyers in other Asian countries and finding partners in Europe and South America.
Tariffs are tricky because they can come and go in a heartbeat. When they kick in, importers and exporters must find solutions to address immediate concerns.
Budgeting Concerns – When tariffs come into play, importers must pay more for goods and materials from other countries. In turn, they must also decide whether they will eat the loss or pass it through the supply chain to distributors, retailers, and consumers.
Nearshoring and Reshoring Options – Sometimes tariffs aren’t a short-term arm twist and can last for years. When that happens, companies may need to diversify their long-term supply chains.
Some may scramble to find new partners, leading to delayed orders and long lead times. However, it also means searching for suppliers in countries with more favorable conditions, like Canada and Mexico, or finding domestic suppliers.
Occasionally, importers can find nearby partners and benefit from a shorter supply chain. Buying from domestic producers also may lead to higher-quality products, though buyers will pay a premium for American manufacturing.
Altered Project Timelines – Though tariffs sometimes spur domestic economic growth, companies may not always move quickly.
Short-term threats of higher prices may not drive long-term investments in reshoring. Long-term tariffs could spur new facilities and partnerships, but large-scale investments and ramp-ups are expensive. The high development cost is eventually offset by a shorter, leaner supply chain with less threat of outside influence.
Supply Chain Disruption – Anytime changes occur, the supply chain must readjust. As tariffs kick in, companies may look for new partners. If other countries do the same thing, it could lead to competition for limited resources.
Lost Export Revenue – Buyers may look for other opportunities if goods and services become more expensive. When this happens, producers and exporters lose crucial revenue until they find new buyers.
When China opted to assign tariffs to PE products from the U.S., some Chinese companies looked elsewhere for their supplies. And as they say, one person’s loss is another’s gain. Several countries, including Singapore, Saudi Arabia, and Taiwan grew in the Chinese market while U.S. exports sunk.
Altered Supply Chains – When tariffs impact the usual global supply chain, it can quickly wreak havoc. Exporters may need to find new markets, but they also need to find routes, shippers, etc.
This could take months, leading to bottlenecks, overstocking, longer backlogs, higher prices to ship, and more expensive warehousing. At the same time, product prices could slip because of product backups. Worse yet, the longer products sit on warehouse shelves, the longer it’s a sunk cost.
Previous Partners Move On – Import tariffs force companies to sometimes look elsewhere for products. In China’s PE market, Chinese companies formed and grew relationships with other partners while reducing the use of U.S. materials.
As tariffs wear on and rivalries grow, it could lead to U.S. companies forever losing market share. Of course, new partners may also mean new opportunities to expand. Exporters can expand their reach and gain market share if tariffs end, giving them a stronger foothold.
Many countries have tariffs or taxes to protect their interests, but they’re often a two-way street.
Tariffs can strengthen domestic companies, leveling the playing field against lower-cost rivals. They can also give countries a leg up on their rivals to secure or negotiate better trade deals and spur growth.
We’ve also seen how tariffs can hurt exporters, opening the door for more competition. The rush to find new partners to buy stock may lead to bottlenecks, production delays, overstocking, and higher shipping costs.
Depending on how you look at them, tariffs may lead to new partnerships, better trade agreements, and lower prices. They also have the power to spur domestic manufacturing processes and growth, bringing jobs back to the U.S.
Regardless, keep every option open. Tariffs are complex economic instruments but can potentially protect and improve trade and manufacturing for every partner.