Impact of Tariffs on Manufacturing
The U.S. and China are the world’s largest trading partners. Almost $439 billion worth of goods were imported by the U.S. from China in 2024. Trade in the opposite direction was valued at $144 billion. The imports from China to the U.S. represent 13.3% of the total goods imported by the U.S.
President Trump announced tariffs on China and 57 other countries recently but announced a pause for 90 days after the bond market spiked and the stock market saw a steep decline. The tariff regime appears to change on a day-to-day basis. It is neither easy to understand the real reasons for them nor predict the end results. As they stand today, tariffs on Chinese products imported to the U.S. will jump to 125%. For all other countries, the new tariffs are set at 10% for 90 days.
The U.S. is heavily dependent on China for much of its commodity items. These range from items found in a hardware to furniture to electronics to clothing stores and many more. It is also dependent upon its immediate neighbors – Canada and Mexico – for a variety of items, including those imported from China, but also autos, auto parts, potash, fruits, vegetables, nuts, beer, liquor, lumber, crude oil, and so on.
I fully anticipate prices for a vast majority of the items consumers purchase will go up significantly. These prices increases will be felt by consumers within the next four to six weeks. Supply chains cannot be turned off and on like a light switch. It takes years to develop and deploy a strong and stable supply chain with vendors. It requires good faith negotiations on price, quality, reliable and timeliness of delivery. It also requires all the parties in the supply chain to be constantly working in concert, not only to satisfy their own goals but also that of their supply chain partners. Many aspects of design, manufacturing, sourcing, assembly, and logistics must come together perfectly to deliver what the consumer needs at a low cost, but at high quality. The current models of supply chain not only help us achieve economies of scale, but also economies of scope. Product innovations can also occur at a faster rate when these chains are stable. Apple would not have been able to keep innovating if it were not for its ability to design unique products and scour the world for sourcing, manufacturing, assembly, packaging, and delivery partners.
The Trump administration has called for making all the products consumed by Americans to be produced in the U.S. Consider the example of iPhones. Making them entirely in the U.S. – from design to delivery – is easier said than done. To shift the entire supply chain into the United States – even in a matter of ten years – is unrealistic. It is also not effective. Dismantling existing supply chains and re-drawing new ones is not easy, especially in the high-tech sector. While we have the talent to design chips and smartphones in the U.S., we need to build up sufficient capacity to manufacture semiconductor chips, make them, assemble the components in the U.S. and deliver from these assembly factories to consumers. There are several flaws in this thought process. First, design is a high-value service and done well in the U.S. by American companies and American employees. Making chips in the U.S., also a high-value item, is a good goal, but the infrastructure to build it will take years to accomplish. Companies such as Nvidia, AMD, Qualcomm, and others only design their chips in the U.S. and have companies like Taiwan Semiconductors or Samsung perform the manufacturing. There are economies of scale and scope to contend with. The CHIPS and Science Act, signed into law by the Biden administration in 2022, is a step in the right direction with respect to making high-end chips, especially those used in the defense sector and for competitive artificial intelligence (AI) applications. Currently, a vast majority of the semiconductor chips are made in Taiwan, South Korea, and China, with more than two-thirds of the supply of semiconductor chips coming from the “big three.” The U.S. and a few other countries also make chips. With regard to assembly of smartphones, much of that is done in China and Vietnam. Recently, Apple has begun making iPhones in India. Thailand and the U.S. are also locations for assemblies, albeit at lower levels. Past experiments aimed at assembling high-tech devices in the U.S. have not worked well. Recall the $10 billion investment by Foxconn to produce liquid crystal displays (LCDs) never materialized.
Unless there is a heavy investment in automation of the smartphone assembly process, the cost of assembling smartphones in the U.S. is going to be significantly higher than in low-cost countries. Already, there is much labor shortage in many sectors of our economy. The recent changes with respect to immigration policy also mean that we will have fewer laborers to operate the farms and factories, including high-tech factories. This will in turn raise the labor cost even more. Even if we were able to shift the entire supply chain to the U.S., this will only help meet the demand of the consuming U.S. population. We will not be able to sell to other countries because they will have their own protective measures. Countries such as China and Korea may get better at designing devices and making them cheaper. The U.S. consumer then is put at a significant disadvantage with respect to availability and superiority of high-tech products. While I have cited smartphones as an example, this analogy can be applied to automobiles, clothing, furniture, machinery, and a host of other consumer goods.
In my opinion, tariffs are a waste of time and talent because the world is not focused on bringing more efficient and effective goods and services in a sustainable and profitable manner to a world population that is growing and now stands at more than 8.2 billion. Instead, we are focused on disruptive tariff wars that do not seem to have a positive outcome for anyone.
