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Tariffs & The Impact on the Supply Chain | What We Know and What to Expect

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Tariffs impact on freight and capacity

Regardless of industry, shippers cannot avoid the topic of tariffs. Recent economic policies and changes in Washington have left many in the transportation industry wondering how this will impact the future of their businesses.

Tariffs are a tax on imports and have largely been used as an instrument in national trade policy to protect American industries from foreign competition by raising the cost of foreign-produced projects. While this may make American-made goods more cost competitive, it does raise overall costs for American companies that use foreign-made inputs to manufacture and produce their goods.

The tariffs, as they are currently enforced, have yet to negatively impact consumer purchasing, which has kept upward pressure on freight demand. For most shippers and carriers, this means business goes on as usual, however shippers should be wary of potential risk as current and future tariffs could have inadvertent effects on the supply chain.

As tariffs start to make their way into the retail markets, these policies could, should they remain in effect for an extended period, have a more material impact on consumer demand, and, as a result, freight demand. As the cost to produce goods increases, producers and retailers are essentially given three options: pass the added cost on to consumers through price increases, cut costs in other areas like laying employees off and/or reducing capital investment, or they can choose to absorb the added costs to their own detriment.

Scenario One: Increased Costs for Consumers

As tariffs are imposed on imported material inputs, such as steel, aluminum or other intermediary goods, the cost for companies to produce goods rises. To make up this increased production spend, businesses may pass the cost along to consumers and charge increased prices for goods. If employee wages aren’t able grow at the same rate that prices are increasing, you could expect to see consumers begin to reduce their consumption. This is likely to put downward pressure on freight demand. The downward pressure could free up freight capacity and decelerate line-haul rate increases and possibly lower the cost to move freight.

Recent tariffs on foreign goods, such as steel, have already been cited by some manufacturers as a contributor to a decline in sales during the second quarter of 2018. The impact is being felt even more in industries such as consumer appliances, which rely on those raw materials. If more U.S. manufacturers increase prices for consumers, you would expect to see a decrease in the demand for freight as sales potentially decline, which would result in lower freight costs.

Scenario Two: Cost Reduction

Instead of increasing the cost of goods for consumers, companies could also choose to reduce costs in other places to keep consumer prices low. One such place could be in employment reduction. If companies decide to go this route, it could negatively impact consumer sentiment.

If consumers begin to worry about unemployment remaining low or a turn in the job market, they may become wary of the economy’s future. Should this happen, their propensity to consume could shift to saving more and spending less, reducing the amount of goods sold and the demand for freight to move products.

Companies could also choose to reduce capital investment to reduce costs. We’ve already seen early cases of this in the solar energy sphere, as companies had to halt projects due to the increased costs associated with tariffs. If additional tariffs are imposed, we will likely see this play out in other industries as well and the impacts could be felt for carriers, shippers, and investors alike.

Scenario Three: Absorb Added Costs

The third scenario is that companies could choose to absorb the costs themselves at the expense of their margins. As margins shrink, stock performance and the stock market would likely decline reducing consumers’ overall feelings of wealth. Consumer Sentiment would likely diminish leading to reduced spending and a decline in overall demand, again, putting downward pressure on freight demand.

What Should Shippers Do Now?

Though we likely won’t see any changes in freight demand in the immediate future, shippers and carriers should continue to monitor the impacts of tariffs on the American economy. Industries such as manufacturing often serve as early indicators of change in the supply chain and alert the transportation industry that change is on its way.

For example, if you were to see a reduction in orders and hours worked in factories, this could indicate the economy is beginning to slow and freight demand will start to fall. Conversely, ongoing job growth and increased orders would signal that demand for freight is on the rise and carriers should begin to prepare.

As tariffs continue to unfold and the economy reacts accordingly, let data drive your decisions. Contact us today to learn how Breakthrough can help optimize your supply chain and manage fuel spend with our Supply Chain Consulting Service.

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