Tariffs and the Impact on Manufacturing
Surveys of product distributors show that nearly all of them are impacted or concerned about tariffs. Those that have already shifted their production to the US have some insulation but are impacted by reciprocal tariffs or quotas that have become a common tool for foreign trade partners. They feel optimistic about the years ahead but are also wary of the impact of tariffs on the broader market.
Those with exposure to foreign trade have differing approaches, and much of this could impact their decision on where they produce products. Those that have exposure in China are convinced that tariffs and trade pressures are here to stay, and most are exploring alternatives including building capacity in the US.
But for those that source in Europe, Mexico, or Canada (and some of the southeast Asian nations for that matter), they may be slower to act. Nearly all of these manufacturers have said that they will take a “wait and see” attitude toward production. They fear that negotiations on USMCA and the three partners in the agreement may alleviate the tariff pressure and risk. If they spend millions of dollars building manufacturing capacity in the US, they fear that a reversal of tariff policy could eliminate that competitive advantage against firms that did not shift production. They believe that it might not come in the next three years, but if there is a change in administration direction in the 2028 election, it could remove that advantage. The same goes for those with operations in countries that have traditionally been good allies of the US (India, Vietnam and other southeastern Asian nations, parts of Europe, and some South American countries), in which tariff pressure could also ease.
Lastly, those industries that have products with more national security implications are likely more insulated from tariff reversal risk. Or positive incentives (tax, regulatory, or labor incentives that reduce operating costs) have made many of those manufacturers more certain about the ability and stability of shifting manufacturing to the US.
Additional Reading: American Supply Association
New Distribution and Sourcing Strategy: China +X
In the wake of trade wars between 2016-2020 and the impact of the global supply chain crisis that followed after the pandemic hit, companies were engaged in what was popularly coined a “China +1” strategy. Companies focused on diversifying their exposure to trade risk by working on increasing their sourcing partners (by country) to include at least one additional partner to China. Many of these +1 partners would include Vietnam, the Philippines, Malaysia, Singapore and many others throughout Southeast Asia.
But a new approach is emerging, and it is being coined the “China +X” sourcing strategy. This would involve not only having a single alternative to China, but now a multi-dimensional approach that might include sources from a diverse group of countries. These countries could include many if not all of the following categories of countries: low-cost leader labor markets, friend-shoring (sourcing with strong US allies), near-shoring (USMCA markets), and reshoring (getting a percentage in the domestic US market).
The challenge with this strategy is twofold. First, sourcing managers must keep “enough” of their total percentage of merchandise sourcing with all trading partners to keep those partners financially solvent. Secondly, advanced Total Landed Cost (TLC) calculations using AI will be utilized to maximize savings and determine how to optimize sourcing. The advantages are that purchasing managers can monitor changes in transportation costs, currency exchange rates, tariffs, supply chain bottlenecks and weather-related distribution challenges, and geopolitical pressures and adjust sourcing percentages by country to adjust and 1) ensure supply chain continuity and 2) optimize and minimize total landed cost. The more dynamic the process is, the quicker the adjustment (which is why AI and high-tech are enabling this to take place now while being far more difficult just a few years ago).
Additional reading: DHL
