What is the Hoopla Surrounding Tariffs

Tariffs, tariffs, and more tariffs dominate the conversation. If we had a $1 for every conversation and/or question about tariffs, we would be rich! The world is buzzing about tariffs, especially in circles that might be impacted from tariffs and /or those concerned about potential impacts on the economy. There are concerns about inflation and trade wars, and on the other side, there is a keen interest in mitigating risk, expanding manufacturing capabilities and supporting critical industries. And, of course, nothing is as simple as it appears!

Tariffs Related to the Border: Mexico, Canada, China, Colombia

Trump kicked off by talking about a 25% tariff for Mexico and Canada and a 10% tariff for China if the U.S. did not receive help in getting the border and drugs under control. Drugs come over both the northern and southern border, and China sends the ingredients to Mexico to produce the drugs. He postponed the tariffs for Mexico and Canada when they put resources towards solving the issue, and the tariffs went into effect for China. China responded with additional tariffs on U.S. products but did not address the drug issue. In addition, Trump threatened 25% tariffs on Columbia as well but rescinded it when they agreed to take deportees.

Who are the U.S. trading partners? Let’s start with China since those tariffs went into effect. the U.S. had a $295 billion dollar trade deficit with China in 2024. This trade deficit is lower than it was during Trump’s first administration before the first round of tariffs (which Biden kept intact). The record trade deficit was $418 billion in 2018. There are many concerns about imports from China related to national security. Mexico is the U.S.’s largest trading partner with a trade deficit of $172 billion on a total of $506 billion of imports. The deficit is not as large as China’s; however, it has more than doubled since 2018. Canada is the U.S.’s second largest trading partner with a deficit of $64 billion as import and export trade is closer to each other.

Supply chains cross the Canadian and Mexican borders frequently with the USMCA agreement. Since supply chains are intermingled, tariffs become a far greater challenge as products might get additive tariffs multiple times if they cross back and forth. On the other hand, according to a paper presented at the Federal Reserve Bank of Kansas City’s annual Jackson Hole conference, there is evidence that Chinese manufacturers have mitigated the impact of tariffs imposed by the previous two administrations through increased exports to and foreign direct investment in Vietnam and Mexico. Trump has talked about addressing this issue.

For example, he said that China was building huge car factories in Mexico and stopped when they thought Trump might win. Also, according to a trusted advisor focused on helping companies start, transition, and/ or increase manufacturing in Mexico, the China investments which spurred 80% of her business came to a screeching halt around the same time. In talking with another Mexico expert, these investments remain on hold although the rest of the manufacturing base continues to grow with the labor cost advantages, close proximity (shorter lead times), and USMCA agreement benefits.

Tariffs Related to Steel & Aluminum

Quickly after the border/ drug tariffs, Trump instituted additional tariffs on steel and aluminum. In essence, he increased tariffs from 10% to 25% and eliminated exceptions. The purpose of these tariffs is to eliminate foreign dumping and support critical industries in the U.S. For example, the U.S. plans to catch up on infrastructure and defense production, and the idea is to encourage domestic production so that the U.S. is not reliant on other countries for these critical areas.

Not surprisingly, those industries are celebrating, and manufacturers reliant on low cost steel and aluminum are concerned. Steel and aluminum mills are not manufacturers that can be “partially pregnant”. You must have volume to cover your fixed cost base. In fact, this is true for all types of mills and unique to this type of manufacturing. Additionally, the fixed costs are extensive, and so it is unknown whether the tariffs will encourage enough investment. On the other hand, the reason there is an interest in these tariffs aside from the steel and aluminum workers relates to essential infrastructure and manufacturing capabilities. For example, if the U.S. plans to build ships, these industries will be vital. China has 200 times the navy warship production capacity as the U.S. currently, and steel and aluminum are required. Stay tuned….

Reciprocal Tariffs & the World

Of course, it doesn’t stop there. The item that has many people up in arms throughout the world is Trump’s announcement of reciprocal tariffs. In this case, he is saying that if country x puts a 20% tariff on the U.S., and the U.S. puts a 10% tariff on them, the U.S. would increase the tariff to 20% unless country x lowers their tariff to 10%. There is quite a bit of concern in Europe and around the world about these tariffs going into effect. There is also concern with the markets since tariffs can be inflationary and can cause issues with trade.

Thus far, there seems to be progress with the goal behind reciprocal tariffs. For example, according to the Financial Times, the head of European parliament’s trade committee is willing to lower its import tax by 75% to what the U.S. charges. India also agreed to LNG imports and to start trade negotiations as there are significant tariffs in reverse. Similarly, Europe is also interested in LNG exports. This picture will continue to evolve.

Tariffs According to the U.S. Treasury Secretary

According to the U.S. Treasury Secretary, he is not concerned about the negative impacts that could occur with tariffs. He said that tariffs are used for three purposes:

• Revenues: When looking at the deficit and financial objectives, tariffs will increase revenue for the government. For example, a 10% global tariff would bring in $2.5 trillion in 10 years.
• Fair trade: The reciprocal trade tariffs are leveling the playing field. It could reduce tariffs and costs and boost trade if other countries lower their tariffs.
• Negotiating: When reviewing tariffs to get the border addressed, he sees tariffs as a negotiating tool.

In a recent interview, he said that he does not believe they will be inflationary. Instead, he expects currencies to adjust, certain exporters (China) to absorb most of the tariffs, and as overall costs come down as energy production and deregulation efforts ramp up, inflation to remain in check.

The LMA Forecast

We expect tariffs to be mildly inflationary with volatile periods during the first year as they roll out. In essence, we think most of the tariffs will be used as a negotiating tool with periods of panic, fits and starts. Reciprocal tariffs are likely to result in some additional tariffs that will add cost into goods and will take cost out of other goods. Thus, the devil is in the details depending on which industries and companies relate to your business. There will be additional tariffs focused on national security and/or expanding manufacturing capabilities. Companies will absorb a portion of these tariffs and a portion will get passed on to consumers.

On the other hand, as manufacturing ramps up, it will have a positive impact on the economy. According to the National Association of Manufacturers, for every $1 invested in manufacturing, $2.69 is added to the overall economy. Manufacturers require material suppliers, logistics providers, employees, etc. Manufacturing jobs are considered to be higher paying jobs in comparison to many other industries such as healthcare, logistics, and service. Thus, it will benefit the economy; however, not immediately as these things do not occur with the snap of your finger.

When it comes to Canada and Mexico, we believe the value of interconnected supply chains will be relevant as currently determined by USMCA. With that said, strategic conversations will occur as it relates to increasing U.S. exports to align the trade deficit and stimulate U.S. manufacturing especially of automobiles. China will not be able to build plants in Mexico to get around the tariffs; however, what that means for that situation if/where it already exists is unknown. Overall, we expect for the deficit to decrease over time with trade remaining robust and continuing to grow. Canada has significant energy, natural resources, and is integrated in the automobile and aerospace supply chain. Mexico can produce to scale with lower labor costs which is key for labor intensive industries, and Mexico is interconnected with several supply chains.

Clients must take control of their end-to-end supply chain, ramp up manufacturing capabilities, and build resilience into their supply chain. To read more about how tariffs will impact manufacturing, read our article, “Manufacturing Resurgence Takes Flight“. From a purchasing and logistics standpoint, prepare for volatility, uncertainty, complexity, and ambiguity (VUCA). Don’t wait to see what happens. Instead, diversify your supply chain and develop plans for resilience and expansion. The proactive will have more opportunities than ever before. The weak will slowly deteriorate and sell.

Last but not least, embark on a journey to transform your supply chain processes. Roll out a SIOP (Sales Inventory Operations Planning) process to navigate profitable growth, mitigate risks and ensure success. Upgrade your planning and scheduling processes such as MRP and APS, improve your order fulfillment processes and increase predictive capabilities in your end-to-end supply chain with AI and advanced analytics. Upgrade to a modern ERP system, automate processes and roll out robotics and advanced technologies. To read more about what experts think you should be thinking to craft tomorrow’s supply chain today, refer to our special report, FutureScape.

If you are interested in reading more on this topic:
Impacts from the Threat of Tariffs in the Supply Chain