A year ago, we published a checklist naming eight procurement challenges manufacturing companies would face in 2024. We began the piece by writing, “Procurement is more dynamic than ever. It must turn on a dime to react to sudden changes and unexpected developments in the market.” How right that turned out to be! Nobody was predicting the sharp change in US economic policies that have been heralded by the election of Donald Trump as the 47th President of the United States. He says “tariff” is his favorite word. What will that mean for procurement in the manufacturing sector?
The challenges we set out in that document still apply. They focused on digital transformation, centralizing digital solutions and resources, increasing transparency across the supply chain, digitalizing source-to-pay processes, recruiting top talent, reevaluating sourcing strategies, tackling ESG challenges, and improving supplier relationships. These initiatives remain crucial, but with US tariffs and non-tariff trade barriers (such as the “Buy American” initiative) on the horizon, the priorities change. Reevaluating sourcing strategies must move to the top of the agenda, and while ESG/sustainability remains a top priority, it will likely take a back seat over the next year while companies address commercial concerns around tariffs.
Sourcing strategies must be reviewed from many different perspectives, but here we will focus on the proposed policies and their implications from a European viewpoint.
The impact on European manufacturing
Let’s begin with Europe. We say “European” for a reason. Despite Brexit, there are good reasons to believe that any tariffs will also apply to the UK, whose government appears to be tilting back toward the EU; it knows that if the UK benefits from discriminatory tariffs there will be a reaction in Brussels. That said, the UK’s trading relationship differs significantly to that of the EU. Whereas the European Union has a massive trade surplus with the USA, which is one of the key motivations for the incoming US administration to impose tariffs, the UK’s trade is relatively balanced. Germany exports to the United States stood at US$171.65 billion during 2023, while US exports to Germany amounted to just US$76.47 billion, according to the United Nations COMTRADE database on international trade. Other European countries such as France and the Netherlands also have a healthy positive balance. By contrast, United Kingdom exports to United States in the same period stood at US$71.91 billion, while United States Exports to United Kingdom were US$74.05 billion.
We must also take account of the economic situation. Europe is experiencing low growth, currently forecasted at 0.9% in the EU and 0.8% in the eurozone area. UK economic growth is predicted to be 1%. But the really bad news from a manufacturing sector perspective comes from Germany, where growth is predicted to be zero or plus or minus 0.1% for 2024. Leading automotive manufacturers such as Volkswagen and Mercedes Benz are planning to lay off tens of thousands of employees in 2025 in response to falling demand worldwide and Chinese competition. Further layoffs in the supply chain are inevitable, not only in Germany but across the continent. US tariffs could hardly come at a worse time for Europe’s manufacturing powerhouse! Germany has already borne the brunt of the fallout from the Ukraine war, especially with disruptions to its energy supplies.
Tariffs: the broader picture
Before getting into the specific impact on European business, let’s consider the broader picture. If the Trump administration goes ahead with its plans, this will put the entire global trading regime in jeopardy. Under the current World Trade Organization (WTO) system, countries negotiate tariff reductions between themselves and then apply those reduced tariffs equally to all other WTO members: the system known as “Most Favored Nation” (MFN). Experts believe that the Trump administration’s most likely approach towards European countries will be “Reciprocal Tariffs,” whereby the US Congress (which ultimately controls foreign trade) empowers the US President to increase or decrease tariffs on third countries in exchange for, or to extract, tariff and trade concessions. Such an approach is the opposite of MFN in that it would allow the USA to impose different tariffs on different countries, in violation of WTO principles. Undoubtedly the EU, as well as other countries (notably China) will lodge complaints with the WTO if they are subjected to discriminatory tariffs and non-tariff barriers. But what if the USA ignores these complaints? The EU will likely respond with its own tariffs (the WTO has a system allowing proportionate retaliation for unremedied breaches of its rules); then, either the USA backs down, or else a full-scale trade war could mean the WTO unravels and we return to the trade anarchy and “survival of the fittest” mentality of the first half of the last century. A third possibility, one that optimists will be keen to grasp, is that trade tensions lead to a constructive reform of the world trade order. But that would take time. A lot of time.
We will not know for sure what the prospects are even for the short term until well into the first quarter of 2025. All we can say for now is that EU manufacturers exporting to the USA face an uncertain future.
The EU has leverage – but its suppliers don’t
Reciprocity means a return to bilateral trade negotiations. The good news is that the EU, as one of the world’s largest trading blocs, has negotiating leverage in any bilateral disputes and is thus in a position to defend manufacturers in member countries. Things do not look so good, however, for developing countries, many of whom are suppliers of raw materials and intermediate goods to EU manufacturers. They have minimal leverage. Moreover, if the USA’s most aggressive stance is directed towards China, that’s also bad news, as European manufacturers have in many cases become highly dependent on Chinese suppliers for a vast variety of components.
Possible impacts on US supply chain and procurement
If tariffs are indeed imposed, this means higher costs for US manufacturers, which will incentivize them to look for domestic suppliers of raw materials, components, and investment goods such as machine tools. Those domestic suppliers, previously unable to compete on price with suppliers from low-cost countries, will then be able to demand higher prices if these latter face future tariffs. A policy to encourage companies to “buy American” could therefore create a cost surge fueling inflation and/or reducing end-user demand.
US-based manufacturers may look to develop their relationships with existing US suppliers, or invest in new ones to localize production while increasing efficiency. Alternatively, they may turn to suppliers in countries not subjected to tariffs. Of course, domestic suppliers will probably not be able to compete with low-cost countries that are not subjected to tariffs. Encouraging the reshoring/onshoring/nearshoring of suppliers or directing them towards lower cost countries could therefore adversely affect EU export business.
Restructuring supply chains in this way adds to complexity. Flexibility will be key, and above all visibility and transparency into global supply chains and the ability to “turn on a dime.” Now is the time to invest in advanced technologies to conduct risk assessments, devise strategies to avoid, manage or mitigate risk, and stay on top of things. Many manufacturers may need to increase inventory to act as a buffer against disruptions to trade, whether these are caused by deliberate policies, geopolitical tensions, or extreme weather events.
This last point reminds us that while sustainability concerns may become less of a priority, the pressure to apply sustainable approaches, such as investing in green energy sources, will persist. You can expect to see some heated discussions between procurement teams and Chief Sustainability Officers in 2025.
Possible impacts on European manufacturers
We need to distinguish here between manufacturers with production facilities in the USA, and those without. Companies that do have production facilities may be delivered a competitive advantage from policies that favor domestic production. They may see an uplift in demand as US companies seek to source domestically. On the other hand, will the new administration treat European-owned companies manufacturing in the USA on a basis of equality with purely American companies? Unlikely, if the motivation is to stimulate the creation or retention of manufacturing jobs in the USA.
Of course, if European companies with US production facilities rely on imported raw materials or components, they will also be impacted by tariffs. If this prompts them to look to source domestically, they too will need to restructure supply chains, which will likely increase costs. Until the picture becomes clearer, they can and should sketch out contingency plans for various scenarios but taking any hard and fast decisions may backfire.
European manufacturers exporting to the USA and without local production facilities will obviously bear the brunt of any tariffs imposed, which will make their goods less competitive. The impact will vary enormously depending on the class of product. Luxury European goods will not lose their cachet among wealthy American consumers because of a 20% tariff, whereas such a surcharge could make other items such as food and household goods unprofitable. It remains to be seen if the “buy American” initiative has any impact, and if so, by how much. However, the combined impact of such economic nationalism and tariffs may lead European manufacturers not only to reconsider their supply chains but to give serious thought to establishing production facilities in the USA.
How to manage an uncertain future
So, how should European manufacturers plan to thrive in this new environment? Adapt, navigate through disruptions, mitigate the risks, and leverage US production.
1. Adapt to the new reality
Control what you can and adapt to what you cannot. Strategic sourcing will be crucial to European manufacturers who wish to identify and onboard new domestic suppliers in the USA, reducing exposure to import tariffs and “Buy American” initiative. Given the Trump administration’s interest in eliminating or reducing regulatory burdens, producing in the USA may further enable them to reduce costs.
We recommend that Europe manufacturers use advanced analytics to perform a clean-sheet analysis of their costs to compare total cost of ownership (TCO) in the USA and in Europe, factoring in potential tariffs and all other costs from the bottom up. The ability to source a full bill of materials and compare various scenarios across (for example) US, EU or Asian suppliers, and by individual component rather than just the overall BoM, is critically important here. This data-driven approach allows for informed decisions regarding reshoring or nearshoring production. E-sourcing events will enable procurement teams to connect with and evaluate potential US-based suppliers to this end.
It is also advisable to review contracts. They can be tailored to include clauses that address tariff-related cost adjustments, risk-sharing mechanisms, and sustainability requirements, protecting European manufacturers from potential financial risks. This task is, of course, significantly accelerated with the right software.
2. Navigate supply chain disruptions and cost volatility
As discussed, the policies of the new administration could lead to significant supply chain disruptions. European manufacturers should ensure that they are equipped to manage and/or mitigate the risks. The ability to communicate and collaborate with suppliers in real time will be essential for responding quickly to disruptions such as sudden tariff changes or unforeseen delays. Manufacturers will also need to be at their most agile in joint planning and forecasting with suppliers, allowing for optimized inventory management. This reduces the risk of overstocking or shortages amidst unpredictable market conditions.
In terms of managing cost volatility, European manufacturers with operations on either or both sides of the Atlantic should double their efforts to ensure spend visibility and budgetary control to manage potential inflationary pressures and avoid overspend resulting from tariffs and trade tensions.
3. Mitigate risk and ensure compliance
Now more than ever, geopolitical uncertainties and changing policies necessitate robust risk management. As you seek to engage new suppliers to circumvent tariffs, many of them will be new to your organisation, or build new products that they did not supply to you previously. You may face new logistical challenges. All of this requires close attention. Supplier scorecards and risk evaluation tools help mitigate exposure to disruptions stemming from political instability or tariff-related issues. At the same time, manufacturers should implement automated workflows to ensure compliance with policy mandates, such as sourcing restrictions or preferences for domestic suppliers in the US.
4. Leverage US production facilities to maintain competitiveness
European manufacturers should consider the pros and cons of ramping up production at existing US production facilities or opening new plants. Many US states already offer strong incentives for inward investment such as direct grants and tax breaks. Or you may wish to engage established American firms as manufacturing partners. Supplier intelligence and collaborative tools, together with effective quality management to ensure compliance with local regulations, can get you off to a good start.
In the next article we will look at the implications of changing trade relations for procurement and supply chain professionals based in America.
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