How can manufacturers prepare for tariffs?
Throughout his campaign, Donald Trump made clear his plan to raise tariffs on imports, particularly those from China. Now, as he's set to reenter the White House, companies are pushing to strategize how to deal with the promised tariff hikes.
Should the tariff hikes happen, they would have wide-ranging ramifications on manufacturers, making it more expensive to produce goods that use foreign components. And if other countries hit back with retaliatory tariffs, it could also make it more expensive for manufacturers to export goods to foreign markets.
All of this potential sets up manufacturers and the wider economy for a "messy" situation, said Willy Shih, an economist at Harvard Business School.
"People generally don't understand how dependent the global economy is for those kinds of intermediate goods, raw materials, that we sort of take for granted," Shih said.
As companies await the start of Trump's administration and potential tariff increases, now is the time for them to dissect their supply chains and evaluate where their vulnerabilities to tariffs lie, Shih said.
"They need to understand where their exposures are," he said. "A lot of times, it'll be in surprising areas, because your exposure may be at your supplier level. Your tier two supplier may have exposure to tariffs and you may not know, but the first thing you got to do is understand all that."
A short-term strategy: Frontloading
In the short term, manufacturers may opt to frontload commodity and component imports as a way to bring in goods before tariffs are enacted, said Canan Gunes Corlu, an associate professor of supply chain management at Boston University.
The move, while effective in avoiding higher import costs, may also drive up freight rates amid demand spikes, she added.
"Because there's a lot of volume there now for freight companies, they're likely to drive up prices," Corlu said.
Expediting and increasing imports ahead of Trump’s term is risky for some more time-bound sectors, however, Shih said. Apparel retailers, for instance, may not be able to push forward imports for items that could date quickly.
"I would expect a lot of basic commodities that don't change that often, we'll probably see a rush to import a lot of it," he said.
Diversification is the way forward
Looking further afield, manufacturers will likely need to start diversifying their supply chains outside of China, Shih said.
"People who haven't diversified out of China, and some companies don't have much choice, you got a lot of work ahead of you," the economist said.
And while Trump has often said tariffs are meant to spur domestic manufacturing, Shih said this scenario is largely unrealistic for factories that have high labor needs, given the higher cost of wages in the U.S. compared to places like China.
"What you will be able to do in the U.S. is manufacture products that have high differentiation or high intellectual content, where label labor cost is a small part of your overall bill of materials," Shih said. "Those things, a lot of those never left the U.S., you can keep them here."
Many companies have already been moving to diversify their supply chains in recent years. Some, like Google, have pushed into Vietnam, while others aim to bring production closer to home with facilities and suppliers in Mexico.
Dual sourcing from China and another location could be a more manageable approach for some companies seeking tariff relief, Corlu said. Having a playbook of options depending on the severity of the tariffs will be key, she added.
"When it comes to tariffs, there is no best option you can take. It does really depend on your supply chain and your dependence on foreign countries," Corlu said. "It is hard to say a best strategy across the board. I think the key is to map out the supply chain and try to understand your dependency.”
This article was written by Kate Magill from Manufacturing Dive and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.
