Tariff outcomes are not known

Tariffs were a major source of revenue for governments until 1944, when the Allies formulated a new economic structure to enable rebuilding after World War 2. However, tariffs on imports were continued by countries and can be increased and decreased for a range of reasons that last over periods of time.

Whereas in 1947 the average global tariff rates on industrial goods was about 40 percent, by 1994 it had fallen to about five percent. Commencing in the early 2000’s there was an increase in regional trade agreements among member countries, the most prominent being NAFTA (now USMCA) and the EU. While these agreement reduced internal tariffs between members, they also contained protectionist policies. Which brings us to the latest tariffs initiated by the current US administration.

These could have impacts on the global economy, which encourage countries and companies to seek alternatives to trade with the U.S.; affecting supply chains. But do not assume that anyone knows how the tariffs will eventually affect each economy or business, because change takes time to filter through each decision and process.

A recent example of economic change is the disruption to trade caused by the exit of the UK from the EU (called Brexit). Major changes to the UK economy were initiated when Margaret Thatcher was prime minister between 1979-1990 and those changes took 15 years to culminate in Brexit. And then there was another 10 years to sort out the uncertainties that arose from that decision.

Possible changes to US tariffs

Even given the previous paragraph, supply chains professional are expected to have a view about the effects of US tariffs. Blogposts written in 2025 here and here provide some additional background. A reasonable assumption to start the analysis is that US tariffs on goods will remain for many years, even though the form might change.

The directive applicable from August 1, 2025 is that tariffs are paid by the US importer, based on the rate applying to the exporting country. This applies even if specific raw materials are not mined or grown in the US, but are required by domestic companies. The ruling is likely to come under pressure from domestic manufacturers, but any change could go in different directions, continuing the current uncertainties for suppliers.

For example, the country based tariffs could be enhanced to also charge a tariff based on business ownership – the company producing the item and the investment house, business or government entity that is the ultimate owner of the exporting business.

An alternative is to change the tariff regime to that used by countries to protect and grow their domestic manufacturing industries. Here, the tariff regime is: NIL tariffs on raw materials; low tariffs on intermediate goods and high tariffs on finished goods ready for sale.

However, the the danger from this approach is that domestic manufacturers of finished goods grow ‘fat, happy and lazy’ behind the tariff wall and do not invest in improvements and innovation. Instead, they lobby for increased tariff rates as protection. This can continue for some years until an international business that has invested in technologies decides to enter the market and build a modern facility. The outcome is that the new business will either make super profits behind the tariff wall or the government reduces the import tariff for the products.

Neither of these outcomes are good for the long term future of the established businesses. This is because under ‘Game theory’, the ‘Nash equilibrium’ states that when one player upsets the equilibrium, the other players will respond until a new equilibrium is reached, but not in an organised fashion. Unknown are the duration and outcome. When this type of event happened within an industry in Australia, the outcome was fewer companies, caused by bankruptcies, takeovers and mergers that took many years to resolve.

Some commentators have suggested that US based companies should consider moving from suppliers in countries with high US tariffs to lower tariff countries. This sounds easy, but the Atlanta Federal Reserve in the US identified that after the 2018-19 imposition of tariffs on China, US businesses that switched suppliers to another country took, on average, more than 2.5 years to establish new Tier 1 supplier relationships.

Analysis for a response

As supply chain uncertainties, disruptions and events are the ‘new normal’, all businesses that deal in physical goods must be prepared to anticipate, respond and adapt to events. This also applies to enterprises that are not multinational in structure, as they engage with the world through direct or indirect imported materials and intermediate goods.

There is not a standard response to the US tariff imposition, as each company in an industry is different, even if they appear to be similar. Each has their own mix of products, geographies where products are sold, and a different set of countries and suppliers from where items are sourced and products produced. When considering the effects of US tariffs on your business, the outcomes will be different from other businesses.

So, to understand the global connections and risks, build geopolitical knowledge and co-operate with Tier 1 suppliers. And recognise that upstream suppliers, downstream customers, and competitors also have choices and risks, with responses that might not favour your organisation.

Some commentators have proposed that these activities should be conducted through a ‘nerve centre’ or ‘central hub’, but instead, have the enhanced Supply Chains group do the job. In addition to the operational tasks within Procurement, Operations Planning and Logistics; facilitating the tactical and cross-function Sales & Operations Planning (S&OP) process and Scheduling operations, the group can provide information concerning:

• Developments in trade, tariffs and regulations,
• Geopolitical trends that may affect compliance with country tariffs and regulations
• Mitigate the impact of US and other country tariffs and regulations
• Tariff scenarios and proposed actions to enhance Resilience in the business

As an input to the process, it is important that the Supply Chains group map their organisation’s supply chains, or to use its full title, develop the Supply Chains Network Design Map, together with Supply Markets Intelligence. Without it, the group are travelling in the dark and unable to identify internal and external vulnerabilities and capability weaknesses. This knowledge builds the geopolitical knowledge and enables Scenario Planning and Analysis, that models ‘what-if’ scenarios and anticipates and quantifies the possible business impacts of building Resilience.