Posted February 12, 2024

Exclusive: Tariffs and the Supply Chain

The supply chain is no longer a chain, but a complex web.

By: Sunderesh Heragu, Regents Professor, Hendrix Chair, and Associate Dean, College of Engineering, Architecture and Technology, Oklahoma State University

Since the COVID-19 pandemic, the supply chain topic has been on the headlines constantly. First, it was due to the limited availability of groceries on store shelves. Then, it was the semiconductor chips shortage that caused automobile production to be severely restricted. Home prices went up sharply due to the shortage of materials and more people expanding their housing footprint by building offices and additions. Then, there was the Russian invasion of Ukraine.

This was followed by a backlog of container ships in Long Beach whose cargo could not be unloaded fast enough due to labor shortage. Soon after, we had the drought in the Panama Canal that forced shipping companies to reduce the cargo weight and volume and because of the draft restrictions. We had the United Auto Workers strike last year that was beginning to have ripple effects on the economy.

Israeli citizens were brutally killed or attacked by Hamas militants in October 2023 leading to the conflict in Gaza that has killed tens of thousands of innocent lives, including many women and children. This conflict is becoming regional not only because of the Houthi attacks on ships making their way through the Red Sea and Suez Canal, but also the actions of Iran-backed groups in Iraq, Syria, and the greater middle east region.

Fifty to sixty percent of the world’s large economies measured by gross domestic product have had or will have elections this year, including in the United States. Depending upon the campaign promises being made – territorial sovereignty in Taiwan, tax reforms in Indonesia, making India the third largest economy in the world, imposition of tariffs in the United States – the supply chain will continue to face shocks in the coming months.

The two leading candidates in the US have differing views on tariffs. While former president Trump wants to impose a flat across the board 10% tariff on all imported goods, President Biden is proposing a “small yard, high fence” approach. An across-the-board tariff will amount to a “tax” for each citizen, much like the goods and services tax levied in many economies.

Studies now show the 2018-19 tariffs cost the US economy jobs and did not do much to raise revenue. The 10% tariffs on $300 billion worth of goods imported from China, raised some revenue, but during the same period the national debt went up sharply, largely due to the corporate tax cuts, but also because the administration had to help farmers by giving them $23 billion to offset their exports which were hit by a 25% tariff in China.

Thus, while the intent was to bring back more jobs back to America, the results were the exact opposite. Jobs were lost and the trade deficit with China actually went up in a two-year period following the imposition of tariffs.

In a complex world with numerous players, each with its own political, economic, sociological challenges, it is believed that the supply chain is no longer a chain, but a complex web. It may be somewhat easy to predict the impact of tariffs in the short term, but extremely difficult to do so for the long term. If one country takes a protectionist measure against a trading partner, the latter is bound to do so almost immediately, producing ripple effects that go beyond the borders of the two countries.

When President Herbert Hoover signed into law the Smoot-Hawley tariff act, there were sharp declines in global trade because other countries began to follow suit. This had a severe and unanticipated effect on agricultural and manufactured products throughout the world.

Many car manufacturers sell automobiles in the US market that are exclusively made in China. These manufacturers include Ford, GM, Volvo, and others who make Lincoln Nautilus, Buick Envision, EX30, and Polestar 2. A tariff will increase costs for US consumers who purchase these cars. This could also impact the labor force in the sales and servicing departments in the dealerships throughout the country.

Tariffs on imported steel impacts manufacturers of soup cans which in turn increase the cost to consumers. There is a significant demand for steel because of mega construction projects already taking place in economies such as India. In a limited supply market, costs are already high. Imposing tariffs on steel could increase construction costs even more.

Temporary tariffs to protect some industries may be necessary and even have a positive impact. For example, if it were not for the 45% tariffs imposed during the Ronald Reagan administration in the mid 1980’s, one could argue Harley-Davidson would not exist today.

The tariffs imposed in 1983, allowed Harley-Davidson to claw back a significant share of the market they had lost to Japanese competitors. Harley’s market share, which was almost 100% a few decades earlier, went down to 15% in the 1970’s and early 1980’s. The short-term tariffs, which were lifted at the request of Harley-Davidson after the company made significant changes to make itself competitive, allowed the company to gain 50% of the market share in just a few years.

My view is that selective, short-term tariffs may be necessary at times, but should not be used long-term or across the board. It may have a political appeal because it gives the impression that domestic jobs are preserved and more goods will be made in the US, but the end result is often unpredictable.

I advocate investment to modernize and expand our infrastructure so the American ingenuity can be unleased. Much of the infrastructure in the US was built several decades ago and it is time for a significant overhaul.

A decade-long investment in securing and upgrading communication networks, production of energy from renewable sources, modernization of energy grids, protection of intellectual property, and updating all the elements of the transportation network, will have a profound impact on making the US competitive, keeping the jobs at home, and leading to innovation in the autonomous and connected world we live in today – in a sustainable manner.

In recent years, the US has taken steps to do so via the Build Back Better, CHIPS and Science Act, and the Inflation Reduction Act. We need more of those in select areas. CS

Sunderesh S. Heragu is a Regents professor and associate dean in the college of engineering, architecture and technology at Oklahoma State University. He is a member of INFORMS, the largest international association for operations research and analytics professionals.