Big Changes Ahead: Understanding the Impact of Proposed Tariff Increases

Big Changes Ahead: Understanding the Impact of Proposed Tariff Increases

Potential Big Policy Changes on the Horizon

It's been a couple of months since my last post, where we explored how tariffs work and their impact on trade and pricing (click here to check it out). And now we finally have an announcement of a flat 25% tariff on imports from Canada and Mexico, as well as a 10% increase on existing tariffs for goods from China. In this post, we’ll examine our trading relationships with these three countries, explore the potential fallout of these changes, and discuss how retailers are responding.


Understanding Our Trading Relationships

When it comes to trade, Canada, Mexico, and China are our top three partners by a wide margin. Even if you consider the entire EU as one economic bloc, it would still be 4th. Together, these three nations represent over 40% of our total trade, whether measured by imports, exports, or total volume. This high percentage underscores their critical role in our economy, making any policy changes involving these countries particularly impactful for businesses and consumers alike.

Top Imports from Each Country:

  • Canada: Crude oil, vehicles, machinery, and lumber.
  • Mexico: Automotive parts, agricultural products, and electronics.
  • China: Electronics, machinery, textiles, and consumer goods.

These countries not only supply essential goods but also play a vital role in shaping global trade dynamics.


Potential Fallout from New Tariffs

Timeline for Implementation: Historically, large-scale tariffs can take time. For instance, tariffs on Chinese goods announced in 2017 came almost two years into the previous administration. However, framed as a national security issue tied to concerns over the border and crime, these tariffs are bypassing some typical procedures as a national emergency. This accelerated implementation leaves businesses with less time to adapt their supply chains or pricing strategies. The unpredictability of such a move underscores the importance of staying informed and planning proactively to mitigate potential disruptions.

Impact on Pricing: Prices will not rise immediately. Businesses often absorb costs temporarily or adjust their supply chains. However, a prolonged tariff policy would eventually lead to price increases as businesses pass costs onto consumers.

Broader Implications: These policy shifts could strain diplomatic relations and supply chains, impacting industries reliant on imported goods from these countries. And the resulting retaliatory tariffs would impact exporters as well.


How Retailers Are Responding

Since the election, many retailers have adopted a strategy known as front-loading. This involves accelerating shipments to bring goods into the country under current tariff rates, thereby avoiding potential increases. By holding deep inventory—sometimes for 12 months or more—retailers aim to maintain stable prices even after tariffs go into effect. However, this approach comes with significant risks, including higher costs for warehousing and financing, as well as challenges in adapting to shifts in consumer demand. For example, if a trend changes or a product becomes obsolete, retailers could face substantial financial losses due to unsold inventory.

While effective in the short term, this strategy carries risks. Retailers must manage higher inventory costs and may struggle to adapt to shifts in consumer demand. Data analysis becomes critical, with businesses crafting detailed strategies for each product to mitigate risks and maximize profitability. But once that inventory is depleted, some kind of price increases become inevitable.


Importers Exploring New Supply Chains

Importers have been evaluating ways to navigate these tariff changes as well. Many are exploring alternative supply chains in other countries or even reshoring production to the United States. The success of these efforts varies significantly depending on the product. Some supply chains can take years to develop and cannot be moved quickly due to complex logistics or specialized manufacturing requirements. On the other hand, certain products can be shifted to other countries for relatively small additional costs or manageable delays in lead times.

Reshoring presents its own set of challenges and opportunities. For some categories, such as raw materials, domestic alternatives can be viable. However, other products face significant barriers to reshoring due to a lack of domestic infrastructure, insufficient access to essential materials, or the high cost of labor in the U.S. As a result, businesses must conduct careful evaluations to determine where reshoring makes sense and where maintaining or diversifying overseas operations remains the better choice.


Conclusion

These policy changes underscore the complexity of international trade and its impact on businesses and consumers. When purchasing products,  you need a partner that understands the landscape.

If you are looking at making a custom product or have any other questions, feel free to reach out to me directly. Let’s navigate these challenges together.

Stay tuned for updates on how these policies evolve and their implications for trade and pricing.

 

 

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About the Author

Michael Rosecrans

Lightsource Founder. Supply chain professional with 15+ years of experience developing and delivering products for businesses of all sizes, from local companies to the biggest retailers. That includes 10 years of being based out of China and working closely with manufacturers around the globe.