Increased tariffs imposed by the U.S. have been a hallmark of the first months of the second Trump administration.
The back-and-forth policy changes from Washington threaten to upend economic growth and recent cooling inflation, as well as the global supply chains that have developed under free trade.
To Haitao Li, chair of the supply chain analytics department at the University of Missouri-St. Louis, the Trump administration's rollout of tariffs in recent months appears to neglect the ways modern supply chains operate.
"I don't think it's a good idea to have a generic list, any type of list, whether [it's] a list of countries, products or industries," he said. "Simply trying to impose tariffs in a reciprocal way, I feel, doesn't pay enough attention to the needs of a global supply chain."
Li explained that there are two main incentives to imposing tariffs: increasing revenue and protecting domestic industry. He argues that it appears Washington is trying to achieve both goals.
And there are some industries where there's good reason for some protection, Li said, like active pharmaceutical ingredients or critical minerals, both industries with limited domestic footprints. China recently banned the export of rare minerals to the U.S., a sector that country dominates.
Bolstering domestic production, while an important goal, takes time because of the infrastructure needed to develop, Li said.
"I think about the suppliers in those countries who were imposed that tariff, it may reduce the imports from those countries," he said. "On the U.S. side, manufacturers will have to think about ways to seek different sourcing options for those inputs."
To Li, this means any new tariffs should be more targeted to achieve the most for the U.S.
St. Louis Public Radio's Eric Schmid sat down with Li to talk more about tariffs and the supply chain.
This interview has been edited for length and clarity.
Eric Schmid: How do the effects of tariffs depend on where in a supply chain they are imposed?
Haitao Li: If tariffs are imposed on the finished goods of an end-to-end supply chain, presumably the immediate impact would be the market price and [borne] by consumers. But comparing that to the input sector, when tariffs are added on raw materials or parts, it is the manufacturer or processor who is going to immediately bear that increased cost.
Schmid: How does increasing the cost along the early supply chain affect consumers later on?
Li: When you think about the supply chain structure, cost and value are added step by step at the same time in a cumulative way. That simply means the increase of cost at an early stage of a supply chain will ultimately be accumulated to the consumers.
Schmid: What products or services in particular are you paying most attention to, as it relates to the tariffs that are being implemented or not?
Li: I'm very concerned about food because this is a sector that touches normal people's lives. We're still having this huge challenge of food insecurity, even in the U.S. We have many people who still do not have easy, quick access to nutritious food. I'm also very concerned about the pharmaceutical industry, the active pharmaceutical ingredients, which will potentially impact the national public health of this country. Another one I can think of is the critical mineral industry because these are the type of raw materials that we use a lot to manufacture the EVs and batteries, which is projected to grow. Currently the U.S. only has a very small portion of the critical mineral supply chains.
Schmid: What are some of the ways that tariffs can be effective when applying them from a supply chain perspective? How do they work best when considering the supply chain?
Li: Using a bit of terminology in manufacturing, a supply chain can be described by the "bill of materials" that includes all the required inputs, raw materials, parts, semifinished goods, including their dependencies. When you see that structure representing, we will be able to precisely capture the cost added at every stage cumulatively through the supply chain. There are analytical approaches now available, models and methods to optimize a certain amount of tariff we want to impose. For an entire supply chain one of my questions would be, "What is the optimal way to distribute that tariff along the supply chain? Differentiating between finished goods versus working processes, products, parts or raw materials."
Schmid: You mentioned the "bill of materials," all of the things that go into that product. If you were to take the example of active pharmaceutical ingredients, how would you consider making a tariff policy that achieved reshoring while minimizing damage?
Li: This is an excellent example to help us understand the need to differentiate where in an end-to-end supply chain, tariffs are better to be imposed. If we impose the tariff on the generic drugs itself, presumably that will reduce imports and will also potentially increase the drug price. But it depends. If, at the same time, we are able to start manufacturing that generic drug inside our country in a cost-effective way, there will be less negative impacts. Then think about the tariff added on raw materials. I think that will be potentially problematic. Where are we going to source the raw materials, the key starting material, the solvent? All these are needed to manufacture active pharmaceutical ingredients.
Schmid: How would a tariff approach for protecting critical mineral resources be different? Because critical mineral resources are those raw ingredients more so than the finished product.
Li: Every industry, every sector, is different. Critical minerals is a very different industry. I know the U.S. does have some production capacity, including Missouri. The fundamental approach can be similar. We can think of a structure representation of a critical mineral supply chain that connects starts with mining through the manufacturing down to the battery. Where are the markets we're trying to serve and see, where are the better stages to impose that tariff, yeah, if not directly on the critical raw materials directly?
Schmid: How quickly can something like a supply chain change where a production facility is, whether that's in a different country or moving it back to the U.S.?
Li: It does not happen overnight. I think many of us saw that kind of shift of global trade and economy years ago, certainly before the pandemic. With the booming of the Chinese economy, the labor costs there have been increasing over time. Before the pandemic, some U.S. manufacturers had already shifted their sourcing, their suppliers or manufacturing in South Asia, beyond China.
We're potentially talking about building or rebuilding or expanding capacity of existing manufacturing facilities because of this infrastructure investment. It might take three to five years, but in some cases, companies would not always have to start from scratch. They can work with existing manufacturers locally, or consider renting some facility, at least in the short run that might be possible to shorten the lead time needed to build these infrastructures.
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