Procurement’s Role in Managing the Tariff War

The news is in – in the form of more Tweets, of course.

In a series of tweets on Thursday, Trump announced another round of tariffs on the roughly $300 billion of Chinese goods that had not already been targeted by American levies. The U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country.  This does not include the 250 Billion Dollars already Tariffed at 25%…

The move breaks a truce in the long-running trade war between Washington and Beijing, with investors fearful it could further disrupt global supply chains. The tariff threat also came as a surprise to financial markets, in large part because negotiators for the two sides had just met earlier this week in China.

Although Trump continues to remain optimistic:, (“We look forward to continuing our positive dialogue with China on a comprehensive Trade Deal…”), the reality is that these tariffs will continue for some time to come.  There is nothing about the current environment that lends any degree of predictability to the scenario.  Some Chinese companies went through some gyrations to re-jigger supply chains to export out of Vietnam, it is unlikely this short-term measure will work.

Forward looking procurement organizations need to begin to take the time to think through how they are going to deal with these issues.  A good first step is to segment your spend and understand how much of it is coming from China.  Then think about domestic sources within the NAFTA region of Canada and Mexico, and whether you will be able to shift supply to these locations, even though at face value product prices may be higher.  Mitigation actions may also include looking for substitute products, looking for other low cost suppliers, and other actions to move supply out of China.

In some cases, this will not be easy.  Particularly in the electronics sector, a huge amount of contract manufacturing takes place in China.  But it is also important to consider the side effects of tariffs, and what they can do to domestic markets.  For instance, Chinese purchases of US’soybeans, pork and corn is down significantly, which is resulting in lower commodity prices.  This may be a “net benefit” to purchasing organizations, although it is not an approach you typically desire to get price reductions.  But also paying attention to supply issues domestically, and the weather can be interesting.  For example, it was incredible “wet” in the spring, that farmers planted very late – but then the 3-5 weeks of drought is now impacting yields.    And although the media announced that Trump had put togetheran $8.4B  aid package for farmers, it has the requirement that farmers must have a crop to be eligible.  A lot of farmers put in soybeans this spring, knowing that Chinese tariffs would not result in sales, but to simply be able to collect on the package!  Most are a few week behind, but are growing.

All of these factors are inter-mixed, creating a very complex set of scenarios.  Purchasing must be on top of understanding supply market conditions, tariff implications, net benefits and challenges to different parties, and weigh these off in creating their category strategies.