In our previous article we considered the potential impacts on European manufacturers if the incoming Trump administration imposes tariffs. Let’s now consider the direct and indirect impacts on American manufacturers. First two caveats: while Trump declared that “tariffs” was his favorite word, it remains to be seen whether this was essentially electioneering rhetoric, or setting out a bargaining position for talks on trade and other matters, or if he meant exactly what he said. Also, it is Congress, not the President, that ultimately decides these issues. And while Trump’s party has a small majority, it only takes a few Republicans to block legislation, perhaps to protect local small businesses or to lessen the impact of inflation on their voters.
All tariffs are not equal and the motivations for imposing tariffs are different. First, we have the proposed 25 percent “punitive” tariffs against Canada and Mexico on all products unless they clamp down on the illicit supply of drugs, in particular fentanyl, and irregular immigration. Second, Trump outlined an additional 10% tariff, above any existing tariffs on imports from China. He previously pledged to end China’s most-favored-nation trading status and slap tariffs on Chinese imports in excess of 60 percent – much higher than those imposed during Trump’s first term. The motivation here seems to be as much great-power politics as economics. Third, Trump has proposed a universal tariff of 10 to 20 percent on all other imported goods. This sounds like an opening gambit for negotiations with powerful blocs like the EU.
If the Trump administration does go ahead with these plans, then putting aside for the moment the punitive tariffs against Mexico and Canada, 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). Some 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.
Undoubtedly the EU and other trading blocs and countries 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.
From an American manufacturer’s perspective, the impact of tariffs is not “all bad” but neither is it “all good.” Let’s set out the balance sheet:
Adverse impacts
- Supply chain disruptions
- Need to restructure supply chains: Many manufacturers rely on imported raw materials, components, or equipment. Tariffs on imports from Canada, Mexico, China, or the EU could force American companies to look for alternative sources of supply, locally or from low-cost countries not impacted by tariffs.
- Higher costs
- Steel and aluminum costs: During his first presidency, Trump put tariffs on imported steel and aluminum coming into the US from any country other than Mexico and Canada. Protective tariffs on steel and aluminum imports, for instance, would affect industries such as automotive and construction, which use these materials extensively.
- Price matching: Whether US manufacturers continue to buy from abroad, swallowing the tariffs, or switch to US suppliers, input costs will increase. For example, a US supplier would be incentivized to match the price of an imported component including the tariff, or slightly undercut it. The end result is still higher production costs, which may dampen demand.
- Less competitive exports: These higher input costs will inflate the price of American exports, making them less competitive. This could make the tariffs counter-productive, especially if countries like China subsidize their export-led sectors.
- Retaliatory measures
- Counter-tariffs: Canada, Mexico, China, and the EU may impose their own tariffs on US exports, further reducing the competitiveness of US manufactured goods abroad.
- Market access: Manufacturers that rely on exports, such as agricultural equipment producers, may face reduced demand if foreign markets close off or impose penalties.
- Supply chain uncertainty
- Delays and disruptions: Tariffs can create logistical challenges, delays in customs clearance, or the need to renegotiate supply contracts.
- Global supply chain reconfiguration
- Shift to other markets: US-based suppliers may lose out if international buyers switch to alternative sources to avoid retaliatory tariffs.
- Investment diversion: Foreign companies might divert investments to other regions with more stable trade policies.
- Small business closures
- Whereas large enterprises may be able to swallow the higher costs or pass them on to consumers, this is often not an option for small manufacturers, who account for most of the sector in the USA. They may be forced to lay off workers if demand falls, or in some cases, close.
Beneficial impacts
- Protection of domestic industries
- Safeguarding jobs: Tariffs could help protect domestic manufacturers from cheaper imports, giving local industries a competitive advantage. US steel and aluminum producers, for example, will undoubtedly be among the winners. They will sell more product at higher prices, bringing in more revenue and profit.
- Discouraging dumping: One of the main motivations for imposing tariffs is to prevent “dumping”, whereby a foreign competitor reduces prices below cost to force local manufacturers out of business. At least that’s the theory, but the Chinese government has deep pockets.
- Boost to local production: Higher import costs could incentivize companies to source materials and components domestically, supporting local suppliers in hard-pressed areas such as the so-called “rust belt”.
- Market opportunities
- Increased demand for American goods: Protective tariffs could make foreign-made goods less attractive, increasing demand for American alternatives. However, this is less likely to apply to luxury categories of manufactured goods.
- Investment in local capacity: Tariffs could encourage US companies to invest in domestic production capabilities, potentially spurring technological advancements and innovation.
- Support for small manufacturers
- Level playing field: Smaller manufacturers who compete with subsidized foreign competitors may benefit from reduced price competition.
Indirect effects
- Economic uncertainty
- Consumer spending: Higher tariffs could lead to increased prices for consumer goods, potentially reducing overall demand and impacting manufacturers indirectly.
- Inflationary pressures: Rising costs from tariffs may contribute to inflation, affecting business costs and purchasing power.
- Geopolitical strains
- Trade Wars: Escalating trade tensions may lead to prolonged uncertainty, making it challenging for manufacturers to plan long-term investments.
- Shifting alliances: Countries affected by US tariffs may strengthen trade relationships with other partners, diminishing the US’s influence in global markets.
- Regulatory burdens
- Compliance costs: Navigating new tariff regimes and trade regulations can increase administrative and compliance costs for manufacturers.
Sector-specific considerations
Looking at some specific sectors, it is likely that the US automotive industry will face significant cost increases due to tariffs on imported steel, aluminum, and components. The same can be said of other downstream buyers of steel such as construction and machine tooling firms. Export-reliant manufacturers of cars, trucks and motorcycles may also be hit by counter-tariffs.
In the technology sector, tariffs on electronics and components from China could disrupt supply chains and lead to higher prices for products like smartphones and computers.
In agriculture-related manufacturing, counter-tariffs on US agricultural exports could reduce demand for equipment and machinery such as tractors and combine harvesters.
In the consumer goods sector, it is likely that costs will be passed on to the consumer, at least in the short term. Estimates put the cost at $2,600 per US household per year. On the other hand, on a positive note, in 2018 the imposition of tariffs ranging from 20 to 50 percent on washing machines led Asian manufacturers such as Samsung and LG to set up factories in the United States – also prompting US manufacturers to up their game, according to some experts.
American manufacturers must weigh these potential impacts carefully. Advanced technology to support scenario analysis at a granular level (comparing bills of materials for American, European, Asian and other suppliers at a component level) can help make informed decisions. Firms will also need to consider various mitigation strategies such as diversifying supply chains, lobbying for exemptions, helping foreign suppliers to establish operations in the USA, or passing on costs to consumers. A balanced perspective will also involve assessing both the immediate and long-term consequences of the proposed tariffs.
On-Demand Webinar