Supply Chain Leaders, Be Prepared, Trump’s Campaign Promises of Import Tariffs May Have Unintended Consequences
By Jim Szakacs
Editor’s note: To coincide with the inauguration, Supply Chain World is running a series of articles from industry experts about how they expect the policies of the Trump administration to impact the supply chain. Read Part 2.
As the world watches the inauguration of the 45th president of the United States, regardless of political affiliation, there are feelings of anticipation, trepidation, anxiety, eagerness and definitely uncertainty. But one thing is certain, change is coming and supply chain leaders must commit to an assessment of their processes and the potential impact new policies may have on them. More importantly, the political changes in 2017 may not be unique to the United States as both France and Germany also hold presidential elections.
For U.S. companies with a global supply chain, the biggest threat a Trump presidency proposes are punitive tariffs on imported goods as well as restructuring NAFTA and the Trans-Pacific Partnership, all of which would have serious implications. But this would not be the first time that the United States has passed similar tariffs with the same expectation to increase the employment rate. The McKinley Tariff of 1890 increased the import tariff by 30 percent but ultimately caused a drop in the gross domestic product (GDP) while unemployment skyrocketed. The Fordney-McCumber Tariff of 1922 attempted to do the same but this time the global community retaliated by increasing their tariffs as well thus reducing American exports. Again, in the heart of the Great Depression, the Smoot-Hawley Tariff was passed as a protectionist measure that ultimately caused a 67 percent drop in American exports followed by a 40 percent drop in GDP. History often repeats itself and we’ve seen first hand the historical impact of increased tariffs on American exports and trade. Considering we thrive in a much more dynamic global economy than we did during the Great Depression, the impact would likely be immediate.
Trump has also called for increased investment in U.S. infrastructure, reduction in the corporate tax rate and increased exports. This all sounds positive, until you weigh it against uncertainty in the European Union following Brexit and the stronger dollar, and it will be very difficult to increase exports without reducing the cost of American goods and the dollar. European companies are already dealing with uncertainty. “Many companies are already feeling the impact of the Brexit and the U.S. elections on their cash flow”, adds Geert Vanhove, partner at Bluecrux, an award-winning supply chain consultancy based in Belgium. Additionally, infrastructure improvements would require a significant import of steel, which would ultimately cost the American taxpayer more if tariffs were passed.
But let’s focus on pharma as a few days ago we saw uncertainty continue to prevail when a single press conference moved markets in 20 minutes. Trump’s recent attack on the pharmaceutical industry saying many companies were “getting away with murder” and that there would be more competitive bidding practices for federal contracts in his administration did not go unnoticed by Wall Street as the NASDAQ Biotechnology Index responded by dropping 3 percent.
However, the price of drugs to the consumer is not simply a result of simple manufacturing processes and global logistics. It is the result of many years of research and development, even decades, as well as compliance with significant regulatory requirements. The pharmaceutical industry in particular would require significant restructuring and investment to move the bulk of manufacturing back to the United States, the costs of which would ultimately be passed onto the consumer. Another consideration is the fact that innovation has created a manufacturing process that relies heavily on factories with minimal personnel and robots working 24/7 on drug production. These “jobs” would not reduce the human employment rate if they returned to the United States. And to add insult to injury, many pharmaceutical components, or active pharmaceutical ingredients (APIs), for generic drugs are manufactured in China before being shipped back to the United States for assembly.
Trump has also been critical of regulatory requirements that curtail innovation and significantly increase the cost to get products to market. The pharma industry may experience a streamlined FDA approval process to get drugs to market faster, thus increasing the top line. This may be a negotiating tactic for Trump to move the drug manufacturing process back to the United States while reduction in the corporate tax rate may also incentivize the industry to re-invest in research and development.
So, what can we do about uncertainty? What is the next step for supply chain leaders?
- Develop a strategy that has some elasticity to respond quickly to change but is still in alignment with the organization’s vision and growth expectations. The supply chain network must be an intelligent network, one that can respond, not just react, to external influences.
- Understand your end-to-end process and assess the potential impact of global economic transformation. This should be an ongoing exercise regardless of political maneuvering.
- “Hope for the best, but expect the worst.” In other words, if Trump’s plans become reality, have a clear path forward for any possible bump along your supply chain. Essentially, get control of your supply chain and you can control the impact from outside influences. Develop an ongoing, best-practice process for evaluating each link in the chain to identify new sources of supply for materials while continuing to invest in innovation to increase the reliability of the chain. Don’t rely on a “wait-and-see” strategy; move forward with a carefully managed infrastructure that can withstand any tweet.
As the chief financial officer of TayganPoint Consulting Group, Jim Szakacs is responsible for all finance/accounting, HR, information technology risk management and insurance, banking, audit, legal and personnel relations. He also develops the firm’s financial models for growth. He can be reached on Twitter at @Jim_Szakacs or on Linkedin at www.linkedin.com/in/jimszakacs.
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