Fewer trade barriers and economic reforms in emerging economies have given rise to exploding growth of global supply chains. According to a study published in Informs, many industries have already witnessed dramatic reorganisation in the supply chain within the past three decades around the globe, leading to certain value-adding stages being concentrated in a specific region.
For example, Asia has become the top sourcing destination (exporters) for textile, apparel, as well as semiconductor and electronic circuit components. Asia is also the top producer for steel and iron. The U.S., on the other hand, is the top exporter of agricultural goods, aircraft, and automobiles. These trends could imply that levying of tariffs will discourage central-lead production of the tariffed product categories and promote market-focused network configuration.
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The increment in tariffs
When transhipment costs are low, centralisation configurations are viable choices. In this case, market price differences and demands play an important role in deciding on which market to centralise the raw material facility. High transhipment costs drive firms to establish raw material facilities locally in each market. The market-focused configuration dominates hybrid configuration when the transhipment cost, that is, the cost of exercising the ex-post transhipment option, is prohibitively high.
Moreover, the raw material stage will increase output and potentially further capacity investments of the U.S.- based steel and aluminium. For downstream manufacturers, such as aircraft, automobiles, canned fruits and vegetables might increase their local input material sourcing albeit there some increase input material costs.
Impact of tariffs uncertainty on business
The American Iron and Steel Institute reported that the U.S steel mills saw a 4.6 percent increase in shipment in 2018 compared to 2017. The markets, however, are concerned with the effect of downstream manufacturers through increased costs, which might hurt their own demand if they increase prices. Reflecting such concerns, stock prices of some of the nation’s biggest steel markets dropped by almost 50 percent in 2018.
Further, tariff increment gives a big impact on business when there is an effort to pass a substantial portion of the cost to dealers and consumers. Harley Davidson, for example, saw an increase in production costs in the U.S. due to the 232 tariffs on steel and aluminium. The European Retaliatory tariffs also increased its transhipment costs to Europe by adding on average US$2,200 per bike.
Worrying that the costs shipment and raw material impact business cost to dealers and consumers, Davidson shifted away from a centralised network with heavy investments of component facilities in the U.S. to a market-focused solution with regionalised U.S. and European supply chains. As a result, the impact of tariffs on upstream and downstream stages points to the same direction profit and remedial solution wise.
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