A year later, tariffs’ challenge to supply chains is only greater

A year ago this month, NRF Vice President for Supply Chain and Customs Policy Jonathan Gold and I visited with several NRF member companies at their sourcing offices in Hong Kong to discuss the impact U.S. tariffs on products from China would have on their supply chains. Those meetings were held shortly after the first tariffs on consumer goods had taken effect and the trade war was only beginning to build, but the message was clear — tariffs would definitely disrupt the supply chain.

This past week, we went back to Hong Kong and also to Shenzhen, China, and met with some of the same senior sourcing executives plus suppliers, U.S. government officials and others to discuss what is now a full-blown trade war with escalating tariffs that have hit a much wider range of consumer goods. Not surprisingly, the message was much the same — that overall trade uncertainty and the imposition of substantial tariffs have been extremely disruptive to the retail industry and the economy as a whole. The challenges posed by the trade war have only grown over the past year.

Overall trade uncertainty and the imposition of substantial tariffs have been extremely disruptive to the retail industry and the economy as a whole.

Matthew Shay, NRF

While tariffs have accelerated companies’ efforts to shift supply chains, retailers cannot move everything out of China. There simply isn’t another nation that duplicates what is available in China. Even if another country has the capacity in terms of factory space and number of workers, there are key issues such as the skills and reliability of workers, knowledge about the products being made, reliable infrastructure, quality control, the working relationships between companies and a host of other issues. Such radical transformation takes time, in many cases a minimum of three to five years, disrupting supply chains, creating operating inefficiencies and straining capital investment decisions and resources. And beyond the time involved in the mechanics of rebuilding a supply chain, it can take much longer to establish trust in its reliability, quality and flexibility.

Nonetheless, it is clear that retailers do need to diversify, and not just because of tariffs. It has been evident to leading retailers for many years that they should not rely entirely on any single country, and retailers are continuously looking for ways to spread out their sourcing. Tariffs might well be the catalyst that will drive change, and disruption can be a good thing. But innovation is supposed to be driven by the quest for efficiency and competitiveness — not “sourcing mitigation,” as one company called the current reaction to trade policy. Setting up new supply chains is difficult enough if retailers are forced to move away from one country, but what happens if the country they move to is targeted next?

Even retailers with access to substantial scale and resources are facing challenges from the radical disruption of the supply chain wrought by tariffs; these challenges are magnified for medium and small brands that do not possess these advantages.

There is broad agreement about the need to address the fundamental issues with U.S.-China trade relations. We agree with the administration about forced technology transfers, lack of intellectual property protections and other issues threatening U.S. companies that operate in China. But the overwhelming sentiment is that tariffs are not the right approach. As both the world’s largest market and its largest supplier, we can’t just walk away from a trading partner as essential as China. Instead, we need to find a path that addresses the ongoing issues in China without negatively affecting the U.S. economy.

Container cargo ship in port

While our nation’s economy remains strong, we continue to see the negative impact of the tariffs on both consumers and industries that rely on this critical relationship. Whether it’s the tariffs the United States has imposed on China or retaliation by China, U.S. companies are feeling the impact. We need to work with strategic allies who share our concerns to win binding commitments from China for significant and lasting structural changes. We need to aggressively negotiate new free trade agreements, either bilateral or multilateral, that ensure U.S. leadership on the global level.

Used appropriately and judiciously, tariffs can serve a purpose. However, there is a long history showing the unintended consequences of using tariffs as a weapon. We continue to call upon the administration to negotiate a deal with China that addresses the core issues, but a key element of that must be removal of all tariffs imposed to date. The administration has already put forward a sign of good faith by postponing a tariff increase that was scheduled for October 15. A similar delay of tariffs scheduled for December 15 and a pledge to remove those already on the books as soon as possible would be a welcome holiday season gift for retailers and the nation’s economy.

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