The principle behind tariffs may be sound; however, their anticipated benefits might not materialize due to a mismatch between tariff volatility and the time required to implement the necessary resources to achieve the intended outcome.
Tariffs are designed to make the cost of imported goods equivalent to that of locally produced ones, addressing trade imbalances and favoring local production. However, this view oversimplifies the situation.
Recent talks about tariff increases under the Trump administration suggest we might see a new wave of hikes. Companies like Edgewell are already trying to lock in prices with Chinese suppliers for the next 3–4 years in anticipation of these hikes.
But let’s take a step back and examine the bigger picture. Consider the USA-China AHS AVE Tariff (Applied Harmonized System Ad Valorem Equivalent Tariff), a metric used to calculate the average tariff rate applied to imports for specific countries or product lines. This "effectively applied" tariff accounts for actual tariffs, considering preferential trade agreements. The ad valorem equivalent (AVE) translates tariff values into percentages of a product’s value, simplifying cross-product comparisons.
From 1995 to 2004, this percentage steadily declined, while imports from China increased. After stabilizing within the 6%–7% range, imports continued growing. Even the tariff increases under Trump did not significantly alter this trend. The only substantial impacts on imports came from the Great Recession (2008-2009) and the COVID-19 pandemic (2019-2020). While these events impacted certain categories more than others, the broader trend shows little movement.
So, why isn't the tariff strategy moving the needle?
For one, tariffs need to truly bring the cost of imported goods in line with local production costs — but that’s not always the case. Even more crucially, the volatility of tariffs, often tied to political cycles, complicates the transition from imports to local production.
Shifting to local production requires scaling up or building new facilities, which involves significant investments in fixed assets (beyond regular working capital) that must be amortized over long periods. Additionally, other time-bound resources, such as building local knowhow, wait for expiration or pay for patent or other legal protections, identify and hire qualified resources not necessarily readily available, are essential.
Ultimately, if tariffs don't bring cost parity or if the transition to local production fails due to tariff volatility, consumers will bear the brunt of the cost increases — leading to inflation and reduced purchasing power.
In conclusion, while tariffs may help, successful implementation requires thoughtful execution and careful planning to address all related implications.
#Tariffs #TradePolicy #LocalProduction #EconomicStrategy #GlobalTrade #SupplyChain #BusinessStrategy #Inflation #Manufacturing
