Tariffs have long been an essential aspect of global trade policy, influencing the dynamics of international commerce. In recent years, tariffs have become a focal point of geopolitical disputes, particularly in the context of trade wars and economic sanctions. Naturally, when one US political party imposes tariffs or economic sanctions, the opposing party inevitably cries foul, regardless of whether the opposing party’s leadership imposed or upheld similar or even identical sanctions or tariffs. That’s just the surreal nature of postmodern politics.

But, setting political infighting aside, why are tariffs actually imposed, and what are their effects on the supply chain and other aspects of the socioeconomic landscape? When viewed objectively, tariffs can serve as a tool for governments to protect domestic industries, generate revenue, and address imbalances in trade. However, the imposition of tariffs can have profound and far-reaching effects on global supply chains, with both positive and negative consequences. Let’s explore the impact of tariffs on supply chains, examine the advantages and disadvantages of this type of sanction, and discuss some real-world examples to shed light on tariffs’ complex role in international trade.

What are tariffs?

A tariff is a tax imposed by a government on imported goods or services. The purpose of tariffs is effectively to raise the price of foreign goods, making them less competitive or less attractive to consumers compared to domestically produced products. Tariffs can be implemented for various reasons, including protecting local industries, encouraging domestic production, addressing trade imbalances, responding to unfair trading practices, or even political grandstanding.

Tariffs can usually be categorized into 5 main types:

• Ad valorem tariffs: These are tariffs that are calculated as a percentage of the value of the imported goods. For example, a 10% ad valorem tariff would mean that for every $100 worth of goods imported, a $10 tariff is applied.
• Specific tariffs: These tariffs are fixed fees based on the quantity or weight of the imported goods. For instance, a $5 “per unit” tariff would apply to each imported product regardless of its value. A $200 “per ton” tariff could apply to imported aluminum scrap, iron ore, or finished rolled steel sold by weight, just as some examples.
• Mixed tariffs: These tariffs may be collected at either a specific or an ad valorem rate, depending on which generates the most (or occasionally least) revenue. For example, Indian import duties (tariffs) on some rayon fabrics might be either 15 percent ad valorem or 87 rupees per square meter, whichever is higher.
• Compound tariffs: These include both ad valorem and a specific value tax. For example, Pakistan might charge a tariff of 0.88 rupees per liter of some petroleum products, plus 25 percent ad valorem. Obviously the actual monetary value of the latter fluctuates as the price of petroleum changes.
• Tariff rate quotas: These are sometimes implemented to initially limit certain imports to what is considered an acceptable quantity, while discouraging higher levels of importation. In these cases, a low tariff rate is established on an initial supply of imports (the desired, within-quota level of product), but then the rate is increased to a very high amount on any imports entering after the initial or acceptable level.

Examples of recent 2025 tariffs signed by President Trump (China, Mexico, Canada)

On February 1, 2025, President Trump signed three executive orders announcing the establishment of additional ad valorem tariffs on products of Canada, Mexico, and China, specifically. These tariffs were imposed in addition to any tariffs currently in place (such as the existing Section 301 tariffs that apply to China-origin products). The Canada order provided an additional tariff of 25% on all “products of Canada” except for “energy or energy resources,” which are subject to an additional 10% tariff. The executive order concerning Mexico provided an additional tariff of 25% on all “products of Mexico.” The executive order on China provided an additional tariff of 10% on all “products of the PRC.” The China tariffs went into effect on February 4, 2025. The additional tariffs on Canada and Mexico were also scheduled to go into effect on February 4, 2025, but were suspended for one month following phone calls between President Trump and the leaders of those two countries.

Importantly, the executive orders do not provide for an exclusion process. In other words, for the time being, there is no mechanism for companies to seek exclusions from the additional tariffs.The short- and long-term impacts of the 2025 tariffs remains to be seen, but let’s examine some potential effects.

How tariffs impact supply chains

Supply chains are intricate networks that involve the movement of goods and services from suppliers to consumers. They rely on a balance of cost, speed, and efficiency, making tariffs a critical factor in the smooth functioning of global trade. The imposition of tariffs can affect supply chains in various ways, both positively and negatively. Let’s go over some of the primary potential effects.

1. Disruptions in cost structures (may be beneficial or harmful)

One of the most immediate impacts of tariffs is the alteration of cost structures within supply chains. When tariffs are imposed on raw materials, intermediate goods, or finished products, companies face higher input costs nearly instantly. These increased costs may be passed along to consumers in the form of higher prices, or they may be absorbed by businesses, leading to reduced profit margins. However, this isn’t always the case, and things are often more complicated than they might seem. For example:

• The US/China trade war: The ongoing trade conflict between the United States and China is a prime example of how tariffs have the potential to disrupt global supply chains. In 2018-2019, the US imposed tariffs on $250 billion worth of Chinese imports, ranging from electronics to industrial components. Many US-based manufacturers relying on Chinese imports faced higher costs for materials and components, leading to price increases on consumer goods. Apple, for instance, warned that tariffs could raise the price of its popular products, including iPhones and MacBooks, affecting its supply chain and retail pricing. However, in the end, during 2018-2019, Apple instead chose not to immediately increase prices, but rather to use company surplus revenue to cover the greater expense, and didn’t pass on the costs to its customers.

Since these tariffs, Apple has moved much of its manufacturing from China to India, so it could be argued that the tariffs had the desired effect, at least in part. However, it could also be argued that the real impetus for Apple’s move was the COVID-motivated shutdown of a huge Chinese factory during the pandemic, which caused massive losses.

• US tariffs on imported steel and aluminum: In 2018, the US imposed tariffs on imported steel and aluminum, which had a ripple effect on multiple industries, including construction and auto production. US automakers like General Motors and Ford faced higher costs for foreign-based steel, which induced short-term impact on the prices of cars and trucks. This also affected their supply chain by increasing production costs and potentially reducing demand for their products due to the higher prices. However, though prices did indeed increase, other influences on the supply chain, including the pandemic, meant that demand for new cars and trucks soared to unprecedented levels over the next 6 years. If automakers can sell every car or truck they make, even at drastically increased prices, there is little motivation for them to lower the price until demand slows down.

2. Supply chain diversification/relocation

In addition to tariffs having short- or long-term impact on the prices at the sourcing, production, and/or retail level, they can also incentivize businesses to rethink their supply chains, specifically sourcing, production/manufacturing, and logistics. In response to high tariffs on imports from specific countries, companies may choose to diversify their sources of supply or relocate production facilities to countries with lower or no tariffs. Shifting manufacturing or sourcing in an effort to save resources is sometimes referred to as “tariff-jumping.” Here are a couple of examples:

• Many industries are shifting production from China to other Asian countries: Over the past couple of decades, many multinational companies have shifted production out of China to other Asian or Southeast Asian countries like Vietnam, Indonesia, and South Korea in response to US tariffs on Chinese goods. For example, companies like Nike, Adidas, and Samsung have explored alternatives in Vietnam, where manufacturing costs are competitive and tariffs are lower. This shift in supply chains has led to the growth of new manufacturing hubs in countries like Vietnam, Cambodia, and Thailand. From a socioeconomic perspective, increased manufacturing and industry often improve conditions for workers generally, as long as businesses increase wages and benefits to align with the increased demand for workers.
• The NAFTA to USMCA Transition: In 2020, the United States-Mexico-Canada Agreement (USMCA) replaced the North American Free Trade Agreement (NAFTA), which had been in effect since 1994. The new trade agreement redefined tariffs on various goods traded between the three countries. US companies that previously benefited from NAFTA’s tariff-free trade had to rapidly adjust their supply chains to meet new rules of origin and regulatory standards. In some cases, businesses shifted production between Canada, Mexico, and the US to optimize tariff advantages.
• US domestic steel utilization: We mentioned the impact on cost structures (at least partially) caused by the 2018 tariffs on foreign steel above, but additionally, according to the US Secretary of Commerce, “the initial 25 percent ad valorem tariff imposed by [the 2018 tariffs on foreign steel] has been an effective means of reducing imports, encouraging investment and expansion of production by domestic steel producers, and mitigating the threatened impairment of US national security. Following the initial imposition of 25 percent ad valorem tariffs, the US steel capacity utilization rate increased to above 80 percent” (emphasis added).

3. Increased complexity and administrative costs

Tariffs introduce additional layers of complexity to the logistics and management of supply chains. Companies must navigate the intricate web of tariff classifications, compliance requirements, and the potential for tariff increases or changes, which, as we have seen, can be capricious and volatile. This can result in higher administrative costs, longer lead times, and the need for more sophisticated supply chain management strategies. For example:

• Tariffs’ impact semiconductor industry: The global semiconductor industry has been significantly affected by tariffs, particularly between the US and China. The semiconductor supply chain is highly complex, with raw materials, components, and assembly taking place across multiple countries. The imposition of tariffs on Chinese-made semiconductors by the US government has eventually resulted in increased costs of electronic devices such as smartphones, computers, and cars. We discussed the direct cost-structure impact of tariffs above, but part of these globally growing costs for semiconductor-containing goods results from companies having to invest more in logistics, compliance, and administration costs to understand, navigate, and adhere to (or avoid) tariffs, making the entire supply chain more cumbersome and expensive.

4. Innovation and domestic industry support

On the positive side, tariffs can encourage innovation and the growth of domestic industries, which is one of the impacts frequently sought by governments imposing tariffs on imported goods. By making imported goods more expensive, tariffs can provide an economic cushion that creates opportunities for domestic producers and manufacturers to expand their market share. This is particularly true in industries where a country seeks to promote self-sufficiency and national pride, or simply to reduce dependence on foreign suppliers.

• The US Solar Panel Industry: Along with other Chinese products, the US government imposed tariffs on solar panel imports from China in 2018, citing the need to protect domestic manufacturers from unfair competition. While the tariffs led to higher costs for solar panels in the short term, they also created opportunities for domestic companies to grow. US manufacturers, like First Solar, benefited from the reduced competition and were able to increase production and invest in innovation, ultimately improving the competitiveness of the US solar industry.
• Harley-Davidson vs. Japan: In the early 1980s, the last remaining domestic American motorcycle manufacturer was in dire financial straits due to the onslaught of cheaper (and arguably better) motorcycles from Japan. Less than a decade before, Harley-Davidson effectively had a 100% market share of motorcycles with engines displacing 1000cc or greater within the US. A decade later, H-D’s market share had fallen to less than 15%. The company worked hard and reorganized under new management in the early 80s, but also begged Congress to impose tariffs on heavyweight Japanese motorcycles, the ones most directly competing with Harley-Davidson. In 1983, President Reagan ordered a tenfold increase in tariffs on all imported motorcycles with engine displacement greater than 700cc, almost all of which were then imported from Japan. In the first year of a five-year program, tariffs were increased from 4.4 percent to 49.4 percent (and were then scaled back in successive years to 39.4 percent,  24.4 percent, 19.4 percent and 14.4 percent).

As a result of the reduced economic pressure, Harley executives and engineers had the flexibility to dramatically improve the quality of their product, eventually developing one of the most reliable, durable engines ever produced by an American manufacturer. The company was purchased by a passionate investment group including many H-D employees, completely turned itself around, and became one of the most sought-after brands around the globe, turning record profits (and stock dividends for investors) for the next 2-plus decades. Without the relief provided by the tariff, this could never have happened.

5. Disruption to modern global supply chains

The imposition of tariffs can disrupt well-established global supply chains, which these days are often finely tuned to minimize costs and maximize efficiency. Many industries rely on just-in-time (JIT) inventory systems, where components are delivered precisely when needed, reducing the necessity for businesses to maintain large stockpiles. Tariffs can dramatically interfere with this model, causing costly delays and requiring businesses to react by holding more inventory than is strictly necessary to mitigate the impact of potential disruptions.

• The automotive industry and US-imposed tariffs: The automotive industry is a prime example of how tariffs have the potential to disrupt global supply chains. In 2018, along with the multiple goods discussed above, President Trump also considered imposing tariffs on imported automobiles and auto parts, which would have had a significant impact on automakers that today source components from all over the world. Basically, every auto manufacturer, such as Toyota, Honda, and BMW relies on a complex network of suppliers from multiple countries. Tariffs could have led to delays, increased costs, and potentially fewer vehicle models being available to consumers. Additionally, even supposedly domestic auto brands such as Ford rely on foreign-made electronic components and parts, so a tariff on all imported auto parts would have had a detrimental impact on such domestic automakers. A careful vetting of the tariff bill could potentially have mitigated such issues, but it would seem somewhat hypocritical for Honda, building many cars in Ohio using US workers, to be hit with tariffs while Ford, building many cars in Mexico, perhaps wouldn’t have. In any case, this particular tariff was rethought and not imposed, but it’s obvious how much havoc it could have wreaked. This example also highlights the intricate dance that governments and businesses must undergo when messing around with tariffs, as they can often have far-reaching and unintended consequences.

Pros and cons of tariffs’ impacts on supply chains

We’ve covered several examples of beneficial and potentially harmful economic impacts of tariffs above, but let’s briefly list some more of the pros and cons of tariffs on foreign materials, goods, and components.

Pros:

1. Domestic industry protection: Tariffs can shield domestic industries from foreign competition, helping to preserve local jobs and stimulate growth in key sectors.
2. Revenue generation: Tariffs provide governments with an immediate source of revenue, which can be reinvested in domestic infrastructure or public services.
3. Encouragement of innovation: As mentioned earlier, tariffs can prompt domestic businesses to innovate, increase efficiency, and enhance competitiveness.
4. Trade balance adjustment: Tariffs can help correct trade imbalances by making imported goods more expensive, thus reducing reliance on foreign products and boosting domestic demand.
5. Self-reliance and domestic economic growth: As domestic demand increases and the infrastructure to supply that demand returns to in-country sources (along with related supply chains), local and national businesses have the opportunity to thrive and grow, if the businesses are willing to innovate and produce on a competitive level.

Cons:

1. Higher consumer prices: As tariffs increase the cost of imports in an increasingly global marketplace, consumers face higher prices for goods, especially when there are limited domestic alternatives due to previous outsourcing.
2. Supply chain disruption: Tariffs can disrupt established supply chains, leading to delays, inefficiencies, and the need for costly adjustments. Businesses that don’t adapt or that haven’t established effective alternatives for sourcing, production, warehousing, and logistics will find themselves struggling to compete.
3. Retaliation and trade wars: Tariffs can lead to retaliatory measures from trading partners, resulting in escalating trade wars that can harm global economic stability.
4. Loss of competitive advantage: For companies that rely on low-cost imports for raw materials or components, tariffs can erode their competitive advantage in the global marketplace. While this could be viewed as a positive from a somewhat nationalist perspective, when domestic companies struggle or fail, it can have devastating economic consequences, despite the best of intentions by lawmakers.

US companies need to move quickly to take advantage of the 2025 tariffs

It’s clear that tariffs have the potential both to cause great economic harm as well as create stronger domestic companies, products, and supply chains. However, it’s vital that US businesses strike while the iron is hot, rethinking and reworking their supply chains, and innovate during the period when the pressure from inexpensive foreign products is lessened. If business leaders simply take a relieved breath but continue with business as usual, they will find themselves swamped by hungrier, faster global companies that innovate and better-navigate the tumultuous economic environment caused by these tariffs.

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