ERP Manufacturing Insights

How Trade Tariffs Are Affecting American Manufacturing

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How trade tariffs are affecting american manufacturing

The world economy, despite having largely recovered from the 2008 financial crisis, is still dealing with some wrinkles that few could have predicted. Perhaps the largest of those is President Donald Trump’s imposition of new tariffs on many manufactured goods from China, Canada and Mexico, resulting in trade wars that have included retaliatory tariffs and hardball negotiations.

Tariffs — additional duties levied by the federal government on the importation of foreign goods — were once thought of as a relic of older economic systems, but they’ve come roaring back since Trump’s victory in 2016. And the trade war shows no signs of abating — another $200 billion in tariffs on Chinese goods went into effect on May 102019

With all the concern over tariffs and trade wars, it’s important to understand the nature of what’s happening to manufacturing in the United States as a result of the new tariffs. Some are finding benefit, some are finding hardship, but almost everyone is feeling the ripple effects in one way or another. 

Costs are rising and being passed on.

One thing is consistent nearly across the board: costs are going up. Ideally, a tariff should result in a negotiation for lower prices, but that has yet to happen. In the meantime, U.S. businesses are paying substantially more for everything from steel to t‑shirts.

In many cases, those rising costs end up being passed on to the American consumer. Many prominent companies, including Walmart, Coca-Cola and others, have either raised their prices or said that they will have to soon, explaining that the tariffs give them no choice except to pass the costs on to the customer. 

Many small businesses and start-ups are having trouble adjusting.

A multinational manufacturing conglomerate can soak up a lot of tariffs before it truly harms their business, but small businesses are another story. Many small businesses operate on very thin margins, and any disturbance in the supply chain can be enough to upset their delicate business models. 

As always, businesses are finding ways to cope. These include the use of sophisticated manufacturing software, particularly cloud-based ERP models, to analyze supply chains in-depth and find savings anywhere that they can. Often, that starts with looking at inventory levels and making tough choices about what’s profitable to keep on hand. It’s also important for a small business to understand its own pricing systems so that they know what price increases consumers will and won’t accept.

In some industries, supply has become seriously constricted.

The tariffs’ effects have been most keenly felt in some industries which have almost no domestic production capacity and rely on imports. The luggage industry, for example, relies on Chinese-manufactured products almost exclusively, and industry leader Samsonite has had to enact a 10 percent increase in its prices. Supply constriction makes almost every element of the supply chain more expensive and difficult to procure. 

The auto industry, one of America’s industrial backbones, has been hit hard as well. As one auto manufacturing analyst explained, It’s not easy to resource these things. The thing is, you can make it more difficult to get parts from China, and automakers and suppliers will not necessarily bring that work back to the United States.” That same analysis predicts a downturn in car sales as the new tariff goes into effect, creating the worrisome possibility of an economic downward spiral. 

Tariffs and american manufacturing
Tariffs have been explicitly designed to aid and protect some industries

Other industries have benefited from protectionist policy.

However, not everyone is unhappy with the Trump administration’s tariffs. These tariffs have been explicitly designed to aid and protect some industries, and they appear in many of those cases to be doing their jobs. 

The American steel, aluminum and solar panel industries have all reaped the benefits of the tariffs designed to make them more competitive with their foreign counterparts. Companies that make polymer products that typically compete with Chinese steel have also seen a sharp uptick in business, as their pricing has suddenly become more attractive. However, these companies face an uncertain future if and when the tariffs are lifted, deepening the general air of instability surrounding the tariff economy. 

Exports are suffering.

Export-dependent industries, on the other hand, have been experiencing serious pain. The U.S. exports large amounts of goods, particularly in the agricultural sector, to trading partners like Canada and Mexico, and those countries have imposed their own retaliatory tariffs that have crippled exports in some cases. In other instances, industrial giants like Caterpillar, with significant foreign business interests, have also seen a sharp drop in revenue. One study found that the tariffs could shave as much as a whole percentage point off the U.S. GDP. So, while some sectors are indeed booming thanks to the tariffs, America’s place in the global economy continues to shrink and become less competitive.

Many businesses are settling in for the long haul.

Although the tariffs were originally billed as a negotiating tactic, talks between the U.S. and China have so far failed to make much progress. The recent tariff hike kicked in as part of a second round of tariff raises that weren’t supposed to be necessary, as the President had bet that China would renegotiate in the face of mounting pressure. That didn’t happen, and now tariffs are again going up. 

That’s worrisome for almost everyone, and some have interpreted it as a sign that the tariffs could become a permanent feature of U.S. trade policy. That, in turn, could push the economy in unexpected directions, so the U.S. manufacturing industry — and, by extension, businesses around the world — waits with bated breath to see what the next round of negotiations will bring.

Especially in today’s uncertain political and economic climate, it’s hard to know what the final impact of tariffs will be on America’s manufacturers. Some may derive long-term benefit from their protectionism, while many others will have to contend with higher costs and slower growth. Either way, almost all businesses must prepare for the possibility that tariffs are here to stay and make the technological and process improvements that will enable them to remain competitive. 

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