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Trump’s Tariff Plan Has Strategic Implications: Here’s What They Are
Vicki M. Young
6 min read
President-elect Donald J. Trump takes the oath of office on Jan. 20, and tariffs are expected to be front and center on his agenda.
But the tariff threats leave little clarity as to how high and when. Last week, there was speculation that Trump was considering a national economic emergency that would give him broad power over tariff implementation in imports. But Trump advisors could have him walking back on threats to impose an immediate 25 percent tariff on certain goods on his first day in office. On Tuesday, word surfaced that a gradual rise in tariff increases was also a possibility. Under either option, Trump is expected to rely on the International Economic Emergency Powers Act (IEEPA) to fight global trade imbalances based on unfair trade practices.
Regardless of which course the incoming administration elects to pursue, the one thing that’s certain is that tariffs are on the rise. Campaign talk had possibilities that include a 10 percent to 20 percent levy on all imported goods to incentivize domestic manufacturing, up to a 60 percent increase on certain goods from China, and an immediate 25 percent tariff for Mexico and Canada and an additional 10 percent on top of existing tariffs for China when Trump takes office.
Some believe that the tough-on-tariff talk could be a “positioning” tactic to help advance foreign policy goals. That may be so, but some tariff increase should still be expected. To that end, LogicSource, which has visibility to $100-plus billion of indirect spend data across companies that include Lululemon, GSK, PetSmart, Michael’s, DSW and Gap, conducted an analysis on the tariff impacts across different categories, notably logistics, packaging and apparel.
The sourcing and procurement technology firm has a number of recommended strategies to enhance supply chain resilience.
Prioritizing critical needs to focus resources and mitigate risks in the most critical categories is a top recommendation. Exploring alternative sourcing to ensure continuity of supply is another. As is the need to expand one’s supplier base, which will decrease reliance on single-source suppliers, increase supply chain robustness, and reduce geopolitical risks. The tech firm noted that partnering with suppliers that have off-shore and on-shore capabilities provide increased flexibility to “take immediate advantage” of changes in tariff strategy when they occur.
LogicSource said the companies can optimize supplier agreements by sharing costs, negotiating bulk or long-term contracts, and streamlining supply chain processes to offset tariff-induced expenses. It also raised the possibility of volume-based discounts or alternative payment structures such as supply chain financing programs and/or longer payment terms to retain working capital within the business. Moreover, the use of advanced tools such as AI and predictive analysis can help improve supply chain visibility, as well as identify inefficiencies. And it noted that companies can re-engineer their manufacturing processes through split production by importing semi-finished goods and completing final assembly domestically. “That’s because tariffs will only apply to the cost of semi-finished goods,” the report said.
Below are some details on how some categories will be impacted by higher tariffs.
Logistics
The main subcategory to feel the impact from higher tariffs in distribution and logistics is expected to be ocean freight at 100 percent of spend. And unlike other categories and sub-categories, ocean freight has no other alternate source viable for cutting costs.
The LogicSource study said that tariffs would probably shift sourcing to countries with lower tariff rates, reducing the demand for long-haul shipping from Asia. But that would likely increase logistics needs in Mexico and Canada, pending potential tariff announcements for these countries.
For comparison purposes, the 2018 tariffs resulted in a temporary 70 percent spike in ocean freight rates. Those spikes settled back to pre-tariff rates by late 2019 to early 2020. The report sees ocean carriers facing delays in building capacity at new supply points, with ports in these regions struggling to handle increased demand.
Any new tariffs could see changes in shipping lanes, which could disrupt current pricing models. And altered transit times may impact inventory levels and speed-to-market strategies.
For North American ground transportation, an increase in nearshoring is expected to require expanded capacity along the U.S.-Mexico trade routes, although efficiencies are needed at border crossing points. The LogicSource report predicts that a shift toward nearshoring or domestic production will result in shorter transit times.
For small parcels, proposed adjustments to de minimis threshholds could increase the cost of small parcel shipments from international sellers. That is expected to impact cross-border e-commerce. In addition, small businesses are likely to face higher costs for imported goods and raw inputs. That could result in a reduction in small parcel shipping volumes, impacting logistics providers such as UPS, FedEx and the U.S. Postal Service. Should companies move sourcing closer to home or use consolidated freight options, that would redistribute demand across logistics categories and impact parcel volumes.
And for warehousing and distribution, retailers could increase their storage demand as they “overstock” goods before tariffs are enacted. Over time, reliance on large warehouse spaces could get reduced as inventory strategies shift more toward nearshoring or domestic production.
Packaging
For fashion firms and retailers, packaging is a sector that involves several sub-categories.
For shopping bags, 85 percent of spend is forecasted to be impacted by tariffs. The primary sources of impacted material are from China, India, and Vietnam for both paper and non-woven fabric bags. Alternate sources that are viable options to mitigate cost increases include Malaysia, Bangladesh, Turkey and Indonesia. For plastic bags, which use petroleum-based resins such as PVC and polyethylene, the primary import sources are China and South Korea.
Corrugate materials—pulp, recycled fiber, and adhesives—are projected to see an 80 percent impact on spend. The primary sources are from China and Canada. Alternate sources for mitigation include India, Poland and Mexico. Corrugate, specifically cardboard boxes, are in high demand in e-commerce, and tariffs on pulp and other inputs are expected to create supply constraints and cost volatility.
Retail packaging materials could see an 80 percent impact on spend. Primary source materials for custom-printed boxes, gift bags, and brand packaging involving paper, plastic and printing materials are from China, India, and Vietnam. Alternate options for sourcing include Malaysia, Turkey, and Indonesia.
And plastic packaging for containers and flexible packaging made from polyethylene and polypropylene, where the expectation is a 90 percent impact on spend, is primarily sourced from China and Thailand. Alternate sources can be found in Vietnam, Malaysia, and Indonesia.
Apparel/Textiles
Eight-five percent of the apparel and textiles sector is expected to be impacted by the new tariffs. Tariffs are “poised to significantly disrupt the industry,” particularly for imports from major sourcing countries that include China, India, and Vietnam. Alternate sourcing options include Bangladesh, Indonesia, and Malaysia.
The LogicSource analysis found that tariffs on raw materials such as cotton and synthetic fibers, as well as finished goods for apparel and home textiles, could result in price hikes of between 10 percent to 35 percent. “These cost increases are likely to ripple through supply chains, affecting manufacturers, retailers, and ultimately, consumers,” the report concluded.
