The Supply Chain Dilemma: Weighing the Costs of Relocation vs. Absorbing Tariffs
The ongoing trade tensions between the U.S. and China have left businesses in a precarious position, grappling with the decision of whether to relocate their supply chains out of China or absorb the increasing tariffs imposed by the Trump administration. For many companies, the cost of moving production to a new country far outweighs the expense of paying higher tariffs. This dilemma has become even more complicated with the introduction of Trump’s latest executive order, which imposes an additional 10% duty on certain goods imported from China. The order, effective as of February 1, 2023, cites China’s alleged failure to combat the illicit drug trade as the primary reason for the tariff hike. While the majority of drugs seized at the U.S.-Mexico border originate from Mexico, the U.S. International Trade Commission has pointed out that 97% of fentanyl in the U.S. is manufactured using precursor chemicals from China.
The Human Impact: Businesses Struggle to Balance Costs and Consumer Pain
For businesses, the decision to relocate supply chains is not taken lightly. Many companies, especially those in highly regulated industries such as baby products, face significant challenges in finding new suppliers that meet stringent safety and quality standards. Michael Wieder, co-founder and CMO of Lalo, a baby product brand with most of its supply chain in China, emphasized that moving production could be "way more expensive than eating the tariff." Wieder explained that products for children are subject to rigorous safety regulations, making it difficult to quickly replace established factories and engineers who meet these requirements. Instead, Lalo is focusing on negotiating with its suppliers to reduce costs and minimize the impact on its business. However, Wieder acknowledged that tariffs are inherently inflationary, leaving consumers to bear some of the burden.
Other businesses, like adaptive wear brand Joe&Bella, find themselves in a similar predicament. Founder Jimmy Zollo explained that many of their specialized products, such as magnetized and dual-track zippers, cannot be sourced outside of China. This reliance on Chinese manufacturers leaves Joe&Bella with little choice but to absorb the tariffs or pass them on to their customers, many of whom are people living with cognitive changes and limited mobility. Zollo likened changing manufacturers to "packing up a suitcase and moving on over," noting that it could take several months of back-and-forth negotiations just to find the right fabric, zipper, and dye. With countless American businesses scrambling to find alternative suppliers, the competitive landscape has become even more challenging.
The Policy Uncertainty: A Bigger Challenge Than Tariffs
The uncertainty surrounding U.S. trade policy has emerged as a significant challenge for businesses. Yossi Sheffi, director of the MIT Center for Transportation and Logistics, pointed out that the unpredictable nature of recent policy changes has made it difficult for companies to plan effectively. Sheffi compared the situation to the sudden imposition and retraction of tariffs on Mexico and Canada, which left businesses scrambling to adapt. "Things are being put on and off seemingly haphazardly, so it’s hard to plan," Sheffi said. "What businesses hate more than anything is uncertainty." This sentiment is echoed by many in the industry, who are now adopting a "wait and see" approach rather than making drastic changes to their supply chains.
The situation is further complicated by the lack of clarity from U.S. Customs and Border Protection regarding previously tariff-exempt imports from China. A source familiar with the situation revealed that the agency is still working through the details, having been inundated with queries from businesses seeking guidance. The Office of the U.S. Trade Representative has also remained silent on the matter, leaving companies in a state of limbo. This uncertainty has forced businesses to navigate a complex web of risks, with no clear path forward.
The Economic Reality: Why Relocation is Often Not Feasible
For many businesses, relocating their supply chains out of China is simply not feasible in the short term. The cost of finding new suppliers, setting up production facilities, and ensuring that new manufacturers meet the required standards is prohibitively expensive. Sheffi described the cost of moving a supply chain as "prohibitive," noting that businesses are now focusing on strategies to mitigate the impact of tariffs rather than undergoing the costly and time-consuming process of relocation.
Instead of relocating, many companies are opting to negotiate with their existing suppliers to reduce costs. Joe&Bella, for example, is working closely with its manufacturers to absorb some of the tariff-related expenses. Zollo explained that his customers, many of whom have limited disposable income, cannot afford significant price increases. As a result, Joe&Bella is taking a cautious approach, ordering more of their popular products at the end of 2024 while exploring alternative strategies to manage the financial impact of the tariffs.
Expert Opinions: The Bigger Picture
Industry experts like Sheffi and Wieder agree that the current trade environment is fraught with challenges. Sheffi emphasized that while consumers may not feel the full impact of the tariffs immediately, every stakeholder along the supply chain—from suppliers and manufacturers to transporters and retailers—will absorb a portion of the shock. This distributed approach may cushion the blow for consumers, but it also means that businesses will need to find creative ways to manage their costs and maintain profitability.
Wieder, on the other hand, is focused on advocating for exemptions on essential items like baby products and healthcare equipment. While the Biden administration maintained some exemptions for these categories, Trump’s latest executive order does not mention them. Wieder expressed frustration at the lack of consideration for parents and caregivers who rely on these products. "It’s not right to drive costs up on the things that parents need to buy for their children and for their babies," he said. However, Wieder acknowledged that businesses have little control over policy decisions, leaving them to do what they can to mitigate the impact of tariffs.
Conclusion: Navigating the Uncertain Landscape
The situation faced by businesses today is complex and multifaceted. While some companies may explore relocation as a long-term solution, the immediate reality is that the cost of moving supply chains out of China is often higher than the cost of absorbing tariffs. Businesses are instead focusing on negotiating with suppliers, absorbing tariff-related expenses, and advocating for exemptions on essential products. However, the underlying uncertainty created by shifting trade policies remains a significant challenge, making it difficult for companies to plan for the future.
As the trade landscape continues to evolve, businesses will need to remain agile and proactive in their approach. Whether through strategic negotiations, cost-cutting measures, or advocacy efforts, companies are doing everything in their power to navigate this uncertain environment. But as Sheffi aptly noted, the main problem is that "nobody knows what to do," leaving businesses in a state of limbo as they wait for clarity and stability in U.S. trade policy.
