How Nimble Is Your Supply Chain?
This post is part of a series of 20 articles leading up the official start of President-Elect Donald Trump's term on Jan. 20, 2025. But when it comes to trade, his second term already began – not with an inauguration, but with a tweet (or whatever you call a message on Truth Social).
President-Elect Trump posted two messages on Nov. 25, 2024, indicating that until drugs and illegal immigrants stop entering the U.S., on the first day of his administration, he will act to place 25 percent tariffs on Mexico and Canada and an additional 10 percent tariff on China. Irrespective of the merits, these tariffs would be quite impactful. These three countries are the three largest U.S. trade partners, with Cananda and Mexico parties to a free trade agreement negotiated during the previous Trump Administration.
There is a lot to unpack. Is he serious? Is this a negotiating tactic? Can he do this? Will there be exceptions? One thing is clear: Supply chains are going to have to be nimble. Social media posts can be drafted quickly, but supply chains take time to construct. To be nimble, they must include optionality. That is, precleared paths, likely with some volume of production all the time, with the ability to ramp up or reduce production when needed.
When trade was more stable, the predominant focus of supply chains was efficiency. Lean inventory, produced inexpensively, that arrived just in time. The COVID-19 pandemic broke that model for many. But if there was any lingering notion that we would return to pre-COVID traditions, it seems clear that for many industries, that model is too risky. Supply chains must be not only efficient, but also nimble and resilient.
Diversifying a supply chain is like insurance: It may add some expense, but it is a hedge against risk and helps avoid big swings in cost and the downside of a lack of product availability. A potentially volatile future calls for a strategic approach, and there are many layers to that strategy that are bound up with multidisciplinary legal considerations.
For example, moving production from China to Southeast Asia is common, but if the inputs are still coming from China, which is often the case, and the work performed at the new facility is not sufficient to satisfy rule of origin requirements, moving the finishing of production may not be sufficient to reduce tariff rates. Worse yet, U.S. Customs and Border Patrol may hold the goods while it imposes the higher duties.
Mexico has seen tremendous outside investment, with companies attempting to capitalize on labor rates that are generally lower than those in China, along with short transit times to the U.S. and beneficial trade terms. But the new administration's approach to Mexico requires careful analysis. Additionally, when considering suppliers in Mexico, Chinese companies have been major investors in Mexico. A Chinese company may be able to satisfy rule of origin requirements in Mexico, but U.S. concerns about intellectual property (IP) security and geopolitical strategy with China more generally may not be satisfied by rule or origin requirements. These elements are relevant to long-term commitments to utilizing such a supplier.
The U.S. government has been incentivizing U.S. production with billions of dollars in grants and tax incentives. The new administration will be directionally aligned with invigorating U.S. production, but the mechanics of government relations may look different, and there may be different priorities and mechanisms for government incentives. Furthermore, government incentives come with strings attached, which need to be considered.
There is also the blocking and tackling of supply chain, as well as buying, moving and storing goods around the world and financing it all. This means procurement contracts, transportation contracts and warehousing contracts, all with existing suppliers and potential new providers, all of which need to be considered for a future that is less predictable. Larger investments in building facilities means considering financing as well as construction, real estate and land use.
President-Elect Trump's pre-inauguration tariff announcements indicate that a "wait and see" approach may not be fast enough. Shifts in trade policy may come very quickly, and the only way to be nimble enough to avoid getting caught flatfooted is to diversify and create contingency plans in advance. Those plans might be driven by supply chain management professionals, but they implicate legal issues across many disciplines.
20 Posts in 20 Days Leading to Inauguration Day on Jan. 20
Holland & Knight's Transportation & Infrastructure Industry Sector Group is prepared to assist industry clients in adapting to the anticipated changes by the new administration. Our team is writing new blog posts each day leading up to President-Elect Donald J. Trump's inauguration, with insights regarding likely impacts on the various segments of the industry, including Aviation, Construction, Maritime, Freight Rail, Motor Carriers, Transit and Autonomous Transportation. Bookmark our Election Impacts on Transportation & Infrastructure resource page to follow along.