Global supply chains for everything from automobiles to toys have all but frozen, as manufacturers grapple with uncertainty over the Trump administration’s tariff actions.
Between April 2 and April 11, the Trump administration imposed stiff tariffs on imports from China, Mexico, and Canada, and introduced “reciprocal tariffs” while sparing Canada and Mexico in that round. It had singled out China for a total levy of 125% but later updated that to 145% to include prior tariffs. Next, it paused reciprocal tariffs for 90 days while imposing a 10% tariff on all countries, and then walked back levies on imports of phones and other electronics while keeping its options open.
Senthil Veeraraghavan, Wharton professor of operations, information and decisions, parsed out the supply chain impacts of those tariffs in an interview with Wharton Business Daily on April 7 (prior to the 90-day pause announced on April 9). Below are edited excerpts from his interview:
What’s Different Between COVID and Now
During COVID, supply chains shrunk with a reduction in economic activity, which was exacerbated by social distancing, quarantine mandates, and uncertainties over the efficacy of vaccines and the potential health care costs. The overall belief during COVID was that supply chains were under stress, but they would eventually be back to what they were before the pandemic.
Now, we are in a new territory. We are probably seeing a reset of the global economy and trade. With ever-changing actions, the outlook remains unclear. (Veeraraghavan provided a historical backdrop for tariffs in a Substack post.)
How Supply Chains Will Be Affected
Tariffs are a tax. So, the immediate effect will be akin to what an increase in tax would do to consumption and sales. The first thing we will notice is that consumption falls. As a related effect, prices will also go up, depending on how much margins companies choose to absorb from the cost shock, but surely they will pass on some costs to their consumers.
The tariffs are generally bad for global supply chains, as supply chains depend on collaboration and mutual benefit. In the short term, tariffs are particularly bad for cheap industrials and cheap apparels, which have low margins — these supply chains will suffer a lot of damage as these inventories will depreciate if consumption falls. Auto or industrial supply chains include many low-cost components that have very low margins. As costs for those go up, we will see price increases in the finished goods as well.
“[Tariffs are] are particularly bad for cheap industrials, or cheap apparels, which have low margins — these supply chains will suffer a lot of damage.”— Senthil Veeraraghavan
Companies Backing Off From the U.S.
Some companies have been moving material and products into the U.S. before the tariffs took effect, in the hope of being able to sell them at regular prices. Apple, for instance, is well-positioned to move its iPhone manufacturing to the U.S., a White House spokesperson said. But while it is possible to get to the position of diversification in consumer markets over a year, those changes need to be gradual and patient.
Other companies like Jaguar Land Rover have paused shipments to the U.S. for a month, and Nintendo has stopped taking pre-orders from the U.S. for its Switch 2 console.
There is a pricing question going on here. All companies face price pressure if consumer spending becomes discretionary. All these companies are surely examining how much they could get hit on their price margins, how much of a haircut they can take on those margins, and how much of their costs they could realistically transfer to their consumers. Companies like Jaguar Land Rover or Nintendo have a global consumer base. They could first go to markets that could become relatively attractive, where they could retain their margins.
Many companies are also backing off on their capacities and announcing layoffs. When some auto production plants went down in Mexico because of tariffs, there was an immediate reaction from the U.S. auto supply market.
Typically, in auto manufacturing, you would imagine multiple different component supply chains in the back-end integration. Parts come in from China and Mexico and move around back and forth between the U.S., Canada, and Mexico, during various stages of assembly before they come back into the U.S. as final finished products.
“To call this a tariff war is an escalation of terms. At least, I’d like to not think about it that way.”— Senthil Veeraraghavan
Impacts Across the Value Chain
The impact of the tariffs on consumers is almost immediate this time, and we are already observing that in the resale value of used cars, which have limited inventories. Inventories are depreciating assets. Often, the only way for companies to tide over that uncertainty is to buy and store a lot of safety inventory at a cheap holding cost. But with tariff uncertainties, holding inventories can become expensive. If prices go up, demand will fall, which means companies must hold those inventories on their books for longer periods, which can make things unprofitable. But companies could lose out if they choose not to hold inventories, because they could become more expensive in the future. So, either way, many companies will find themselves in a tight spot.
An Economic Policy Contradiction — Not a Tariff War
To call this a tariff war is an escalation of terms. At least, I’d like to not think about it that way. But yes, we are in a new era of geopolitical contradiction where major powers are disagreeing over economic policies, despite continued reduction in tariffs over the decades. Nevertheless, geographical localization has been growing in supply chains in recent years. That may be related to concerns about sharing the pie, which is not growing as fast as before. And tariffs are one of the tools that countries are bringing in to deal with each other over hard disagreements and tough negotiations.
