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Who Else Could Benefit From President Trump’s Tariffs: Supply Chain Business

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Who Else Could Benefit From President Trump’s Tariffs: Supply Chain Business

Why We Are Qualified To Write This Article?

Over the last three decades we have led and worked on more than 500 projects in supply chain projects in dozens of industries and countries.

VERY FEW PEOPLE KNOW GLOBAL SUPPLY CHAINS LIKE WE DO - Retail, beverages, food, milk, dairy, meat, livestock, explosives, chemicals, cotton, rice, graphite, solar power, natural gas, crude oil, fertilizers, electronics, packaging, glass manufacturing, machine parts, automobiles, industrial goods, mining, etc are just some of the industries where boards and executives have benefited from our proprietary knowledge.

Since when no one had heard of supply chain, our co-founder Vivek Sood has been considered one of the most authoritative professionals in the field when it comes to the subject of supply chains restructuring in his clients’ corporations in Australia, Asia, North America, South America and Europe.

He has written four seminal books about restructuring supply chains to gain massive advantage in business. He also regularly delivers keynote speeches at business schools and conferences such as University of Technology Sydney, Supply Chain Asia, Asian Bankers Forum, APEC Business Advisory Council.

He has been quoted in the authoritative business press and over 100 academic papers written by supply chain researchers around the world. Vivek and his team have examined thousands of supply chains during their projects over the last three decades and helped hundreds of executives build safe, cost effective and sustainable supply chains and careers. 

You may also find it useful to read our FAQs on supply chains management. 

As the saga with the US tariffs on Chinese goods is playing out in the public arena, there is a lot of speculation about who the ultimate losers and winners in this game will be.

There Is Plenty Of Shallow Analysis in Supply Chain Business

Most journalists do not have time to think it through deeply, and most serious commentators are economists, who take a game theoretical approach.

I want to add one more, a real-world analytical perspective to the debate – the supply chain perspective – something that most economists and game theory exponents lack.

The Results Of Deep Analysis Are Startling in Supply Chain Business

If President Trump knew this, probably he would not impose the tariffs, and perhaps even remove the existing ones.

So, what is the conventional wisdom about tariffs in general? Economists believe that all tariffs come out of the pockets of the end consumers – but that is because economists lack a deep supply chain perspective.

Let’s Go Deeper – Smile Curve on Supply Chain Business

If you deeply explore the supply chain margins for a typical Chinese import into the USA – you will eventually come to the smile curve as shown below:

Global Supply Chain Group - web lunch

A typical smile curve lays out the entire supply chain on the horizontal axis and the margins of each activity on the vertical axis. It allows companies to decide where, in the entire supply chain, is the highest margin.

Intuitively, or explicitly, almost every company is doing this analysis to determine where to play, and what to outsource.

There is a lot more to be said about this body of work, that is relevant to strategic supply chain decision making, which I am not going into at the present moment.

I will keep that discussion to another blog post.

Manufacturing Margins in Supply Chain Business

Only one activity – manufacturing (that is shown in a box) – is carried out in China for most items imported into the USA. This activity also happens to have the lowest margins in the entire supply chain.

Every company configures its own business network of internal and external teams to carry out all the tasks on the smile curve. Almost all other teams have a higher margin than the manufacturing team.

So, when it comes to bearing the cost of tariffs, manufacturing is not in the position to bear it. This is because, for a sneaker that is sold for $100 in the shipping mall, the manufacturer will be lucky to get around $15.

International Supply Contracts Are Very Clear

Imagine a sub-contractor in China – manufacturing shoes, or shirts, or bathroom scales, or anything out of countless numbers of items being imported from China on a daily basis.

Almost all of their contracts with the US buyers are signed on FOB (with the occasional exception of CIF) basis. In both cases, the duty (tariffs) are paid by the US importer.

In fact, in all but one case (DDP – Delivery Duty Paid), the tariff is paid by the US importer.

To get the details of these terms, and what they entail, look at the figure below. Each row below shows a different type of international sale contract and who is responsible for what activities in that type of contract:

The last row of the table above shows DDP – an import contract that is almost never used in practice.

This practice is so deeply entrenched that out of all the possibilities shown above only in a handful of cases have I seen DDU in while examining tens of thousands of import contracts in over 30 years of experience.

I do not expect President Trump to know this because he has barely any experience in the international sale of goods.

However, his negotiation team and strategy planning team would have clearly known this because the table above is derived from the International Chamber of Commerce (ICC – 2018), and is common knowledge.

Why Importers Pay The Tariffs in Supply Chain Business

In our work we never recommend this type of contract, precisely for this reason – you cannot control unexpected imposition of tariffs any time after signing the contract, and before delivery of goods.

Global Supply Chain Group - wwwlunch

Additionally, there is no margin in this activity, so why take responsibility for extra work with no reward in return.

The Key Question – Who Will Bear The Burden Of The New Tariffs?

So if importers are going to paying the tariff, would they be able to pass these on to the end consumer?

That depends entirely on the price elasticity of demand and pricing power enjoyed by the importer, or end retailers.

To answer that question let us look at the latest news (April 2019) here. The most relevant quote is below:

America has too many stores.

This year, US retailers have announced that 5,994 stores will close.

That number already exceeds last year’s total of 5,864 closure announcements.

https://edition.cnn.com/2019/04/16/business/store-closures-retail-bankruptcies/index.html

I do not want to belabour the point because it is amply clear that store chains have almost no pricing power left. Unfortunately, neither do their suppliers – the importers.

That eco-system is already drying up – otherwise, why would those stores be closing left, right and centre?

Who Has The Pricing Power?

Only one company has the margin, and pricing power in this entire supply chain as is clear from the info-graphic below (click to see larger scale version):

Global Supply Chain Group - web

It will take an entire blog post to go into the reasons for the pricing power differential between Amazon and its competitors. So I will not get into that discussion here. Let’s move to the impact of this differential.

Tariffs Would Lead To Closure Of More Stores And Shopping Malls

In the short run, tariffs will accelerate the migration of market share to Amazon and its marketplace.

This will be a surprising development given the other history between President Trump, and Mr Bezos – the owner of Amazon.

Amazon Would Be The Biggest Beneficiary Of These Tariffs

In the medium run – given Amazon’s growing pricing power, as the store chains close down – it is likely that some of the tariffs will be passed on to the end consumers too.

I would not like to speculate, how the tariffs will pan out in the long term because of much wider implications for the two economies that so closely intertwined.

Effect Of The Trade Wars

“The benefits and costs of these tariffs are not falling where they were expected. In fact, their impact will be opposite of what was intended. If China retaliates, the effect may be even worse because the export commodities supply chain smile curve looks very different.”

Global Supply Chain Group - vivek sood image

Vivek Sood

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Copyright - These concepts, frameworks and ideas are copyright of GLOBAL SUPPLY CHAIN GROUP from the time of their creation. Do NOT copy these without permission and proper attribution.

Notes:

1. These ideas and concepts will be usually expressed by our thought leaders in multiple forums - conferences, speeches, books, reports, workshops, webinars, videos and training. You may have heard us say the same thing before.

2. The date shown above the article refers to the day when this article was updated. This blog post or article may have been written anytime prior to that date.

3. All anecdotes are based on true stories to highlight the key points of the article - some details are changed to protect identification of the parties involved.

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Table of Contents

ABOUT THE PRINCIPAL AUTHOR

Today, Vivek and his partners are among 20-30 people on the planet earth who have this deep understanding of supply chain systems, practices and tools. CEOs, COOs, executives and Boards call them in most challenging situations once they know the full potential of supply chain based transformations. Following are key milestones in Vivek's journey:

  • Started in 1983 as a merchant navy cadet at 18 years age, worked his way to qualify as a Captain – qualified to take command of any merchant ship, worldwide.
  • Earned a top tier MBA from UNSW at the top of his class.
  • Joined highly regarded strategy consulting firm Booz Allen & Hamilton, consulting to the CEOs, Boards and senior management of global corporations within Australia.
  • To learn and specialise in supply chain – against all odds, sought out the co-inventor of supply chain in Germany and convinced him to be a partner in his firm, GLOBAL SUPPLY CHAIN GROUP, launched in January 2000.
  • More than 500 successful blue chip projects with high impact business transformations in large corporations using the full power of SUPPLY CHAIN MANAGEMENT.
  • 4 Seminal and path breaking business books IN SUPPLY CHAIN MANAGEMENT – these are available in bookstores and universities and libraries worldwide.

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OUR CLIENTS

Our Clients come from a variety of industries – yet they have a common element. They rarely rest on their laurels, and are always looking to do better.

OUR PROJECTS - EFFECTIVE TRANSFORMATIONS

In the last 20 years we have completed more than 500 projects. Click below to see a sample of our projects.

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5.0
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THE 5-STAR BUSINESS NETWORK

If you are deeply passionate about the world of business and supply chain networks as I am, and enjoy digging answers to critical questions that will help build and steer your business with wisdom, then join me. This book is a journey of exploration through the world of business networks that run along the veins of today’s commercial world.

4.3
4.3/5

OUTPERFORM OUTSOURCE OUTPROFIT

The trend of outsourcing continues to grow unabated with the whole gamut of services, from simple to mission-critical tasks. There is not a single company on earth that does not outsource anything. It is not just about cost arbitrage, it is also a finer expression of division of labour at the organisational level. Like all leverage, outsourcing is a double-edged sword too. On one hand, it allows you to do more, faster. On the other hand, if it goes bad, it can easily kill your business. If you do not believe that is possible – you can google the Fox Meyer saga from the 90s and see for yourself.

4.3
4.3/5

UNCHAIN YOUR CORPORATION

Businesses Are Chained By Unseen Chains. If You Are Looking For Ways To “Unchain Your Corporation” A Successful Business Transformation Is Required.

Successful Business Transformations Are Difficult, Yet Rewarding.

Business Transformation Is Fast Becoming A Question Of Survival In The Modern Globalised Era.

Modern Supply Chains Integrate Businesses And Economies Faster By Systematic Information Sharing From Internal And External Sources.

Companies Can Multiply Profits By Progressively Ramping Up Cohesion And Collaboration Of All Moving Parts In B2B Network To Achieve Tighter Integration.

4.3
4.3/5

GREEN SUPPLY CHAIN – AN ACTION MANIFESTO

It is generally accepted that environmental consciousness is now changing to environmental proactiveness as organizations are discovering that it makes good commercial sense.

Boards are asking the management to review their policies related to environmental norms, not only to bolster their corporate social responsibility aims, but also because consumers are asking for greener supply chains

It is also widely agreed that consumers will increasingly prefer to buy more and even pay more for products or services provided in an environmentally sound manner.

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