Tariff Risks Part I – An evolving uncertainty
Even the most streamlined manufacturing supply chains face risks that have the potential to disrupt the business. At the top of that list, according to a survey of 10-K filings of the largest 100 publicly traded U.S. manufacturers, is the threat of foreign supplier distribution disruptions. The potential for tariffs, between the US and some of its biggest trade partners, loom constantly. While trade deals and tariffs can protect domestic firms, they also have the potential to increase the cost of imported raw materials and force retaliatory tariffs, which can in turn can impact the overall competitiveness of manufacturing companies.
Examples in 2018-19 included proposed tariffs on Chinese goods, ‘restoring’ steel (25%) and aluminum (10%) tariffs on Brazil and Argentina, and other proposed tariffs with Europe, Mexico and Canada. This trend is expected to continue to be among the top global challenges in 2020. The current trade war with China kicked off January 2018,, where upto 25% tariffs were imposed on ~$250 Billion worth of Chinese goods. Retaliatory tariffs were levied in response by upset trading partners, including China, with whom deescalation negotiations continue to evolve, including a Phase 1 agreement.
The manufacturing sector is also heavily reliant on the mining industries in Latin America. Brazil is the largest importer of steel to the US and the restoring tariff of 25% could have resulted (not pursued as of Dec 2019) in price changes for steel as well as steel-based inputs. On a further note, countering a steel tariff on Latin America will be the surplus steel production/availability from China.
Additionally, the manufacturing sector also relies on parts or intermediate goods/materials from Europe and Canada, and transfers from existing plants in Mexico, the latter ringing true for automotive and household appliance sectors. Industry sectors such as automotive, heaved a sigh of relief when the proposed 5% tariff on all Mexican goods were suspended in 2019.
According to a recent estimate from The Federal Reserve, the most impacted segments by 2018-2019 tariffs for the US manufacturing sector are Aluminum Sheet/Plate/Foil & Rolling/Drawing/Extruding, and Steel Product Mfg from Purchased Steel, with new tariff import share of costs at 17.6% and 8.4% respectively. The analysis concluded that positive effects from import protection is offset by larger negative effects from rising input costs and retaliatory tariffs.
The good news is that manufacturing and retail sectors can counter this via various mitigation strategies. Check out our next blog, Tariff Risks – Part II, on mitigation strategies and how to prepare for (and implement) them!
Author: Rekha Menon-Varma, Co-Founder & Managing Partner, Vertaeon LLC
Research Input: Brandon McKay Crooks