Tools for a Trade War

In an era of unprecedented tariffs, the supply management profession is dealing with uncertainties — and preparing for harsh realities.

By Dan Zeiger

If supply management professionals have been looking for a trade-war survival guide, it’s still a work in progress.

Since President Donald Trump fired the first salvo against China by announcing duties on solar panels in January, then raised the stakes in March by imposing near-blanket tariffs on steel and aluminum — leading other countries, including America’s strongest trading partners, to respond in kind — uncertainty has been the overwhelming sentiment among the procurement community. While the U.S. has withdrawn from trade deals and slapped tariffs on individual commodities before, supply managers have never encountered this level of trade turbulence, including a tariff tit-for-tat with China.

“I’ve been in the business for 40 years,” says Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee. “I can’t recall in any of my experience a trade situation that has been as widespread, as deep and as intransigent as this.”

Fiore has had a front-row seat with the Business Survey Committee that compiles data for the Manufacturing ISM® Report On Business®. While the PMI® composite index has remained healthy despite the trade uncertainty, trade and tariff issues accounted for half of committee respondents’ comments during the summer months. Fiore has said for some time that September and October would be the first true telltale months of the tariffs’ business impact, reflected in companies’ third-quarter earnings reports — which will indicate, among other things, how successfully cost increases were passed to customers.

As a result, important chapters in the procurement survival guide are likely being written right now. “Since we have had very strong growth in the U.S. economy recently, that has masked, to a certain extent, the impact of the tariffs,” says Robert A. Dye, Ph.D., chief economist at Dallas-based Comerica Bank. “At the same time, some companies are highly exposed, and it’s causing a great deal of stress. We know that from talking to our clients and customers, surveys that organizations like ISM put out, and other anecdotal evidence. … Uncertainty is like sand in the gears of the economy, and it delays a lot of companies’ business decisions. We’ll see the effects of that as the tariffs become fully implemented.”

No matter how many tariffs have been proposed, collected or threatened since January, the impact on procurement — aside from uncertainty — was bound to be delayed. “In terms of the supply chain, I didn’t expect to see much of a change in the short term. Contracts with partners and suppliers are long, and it takes a long time for brands to ramp up revisions,” says Nick Foy, chief strategy officer at ModusLink Global Solutions, a Waltham, Massachusetts-based supply chain services provider for software and technology companies.

Fiore, CPO at Miami-based fleet-management company Ryder, says that heavy steel and aluminum buyers like auto manufacturers generally negotiate prices before the start of the economic year, so any price impact may not arrive until January. “Automakers have such clout in the market that they likely won’t see the full extent of the market increase, but there likely will be one,” Fiore says. A company with a good gross margins, he adds, should be able to absorb price increases without passing them to customers.

However, if such conditions continue into 2019, companies — from buyer to CEO — will take measures to avoid tariff impacts.

“Companies will source materials from other countries not subject to input tariffs, or move the manufacturing footprint to countries that won’t be counter-tariffed on the sell side,” Fiore says. “It’s business-planning season, and everybody wants options if tariffs are here for the long term. The challenge that management teams have is, when they put their plans forward, it will be a gamble as to whether they think tariffs will be here for a while or not. And that’s a big gamble.”

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