FacebookTwitterLinkedIn

There has been much speculation about the effects that a Trump presidency could have on U.S. economic growth and global supply chains. While we do not know what the future holds, I believe it could go in very different directions depending on whether actions taken mirror the campaign trail or shift toward pragmatism once President-elect Trump takes office.

Campaign activity suggests there may be a push for congressional approval of a 45% tariff on Chinese-made goods, a 35% tariff on Mexican-made goods, as well as the disassembly of NAFTA. These acts could invite retaliation and overall trade could decline—a lot. This type of trade war—even if contained to U.S.-China and U.S.-Mexico—would bring extreme changes around the world and an immediate increase in U.S. consumer inflation.

These tariffs would be passed on to end users, with many prices staying high for the long term. Manufacturers of Chinese- and Mexican-made goods would move to other low labor cost countries or reluctantly move back into the U.S. despite higher manufacturing costs. The sales of key U.S. exporters, including Apple, Boeing, Caterpillar, J&J, P&G, Qualcomm, Intel and Cisco, would be severely impacted. Overall, global trade volumes would drop and trade routes would shift, decimating ocean shipping and port volumes. Infrastructure deficiencies and shortages of skilled labor in the U.S. would be exposed, and unemployment would surge in China, Mexico, and the U.S. The global impact could even resemble the 1930s, when trade wars drove tariff rates above 50%, causing global trade volumes to plummet and extending the Great Depression.

However, whether due to pragmatism on the part of the new president or simply due to an inability to get extreme measures through Congress, the scenario could look quite different. Assume no tariffs are put in place—other than the ones the current administration has already placed on goods such as tires and aluminum where the World Trade Organization (WTO) has ruled that China has been “dumping” product —but instead businesses are encouraged or compelled to “re-shore” work where there is a good business case to do so. There could be a concerted effort to bring more anti-dumping cases to WTO as well as tax incentives for bringing work to the U.S. and/or repatriating dollars from overseas subsidies.

The President could also employ “name and shame” tactics typically used to drive sustainability or acts of corporate responsibility to bring and keep work in the U.S. While using the threat of public humiliation to keep domestic companies from moving more work overseas, he could also add tax incentives and public praise to compel companies to move work back. According to a study by Boston Consulting Group titled, “Made in America, Again,” for products with high freight costs and relatively low labor inputs (e.g., appliances, furniture, automobiles), the total landed cost of building in the U.S. has become much more competitive. In fact, for many of these products, there is already a business case for building these products domestically. This shift is due to many causes, including labor inflation outside of the U.S., recent history of supply chain disruptions, higher U.S. labor productivity, and just-in-time/48-hour delivery requirements. Moving forward, 3D printing and Robotics 2.0 promise to further reduce the need for low-cost labor.

If President-elect Trump becomes the champion of re-shoring, he might give his supporters the job creation they seek without igniting a trade war. I can imagine him visiting a number of plant openings or re-openings each week, going on television and urging Americans to buy from these companies that are moving work back to the country. A week in a Trump presidency might look like this: on Tuesday he is at a Caterpillar plant re-opening in Illinois; on Wednesday he is at a new Ford plant opening outside Detroit; on Thursday he is at a Wal-Mart where they are displaying 40 new Made in the U.S.A. products; on Friday he is at a fracking oil field which has begun producing oil and natural gas for export to Europe.

Only time will tell which President Trump we will get.

Robert Murray

Associate Academic Specialist, Supply Chain and Information Management