A Brutal Trade-War Test

For months it’s been talked about, and now it’s here: a trade war between the United States and multiple large trading partners.

Even if companies have spent tens of billions over the last few months stocking up on essential imported materials, experts say that getting through a protracted dispute will take a lot more than that. “It’s better to prepare late for the test than not at all, but you’ve put yourself at a significant disadvantage if you haven’t done preparation,” says supply-chain expert Seth Steinberg, a Korn Ferry senior client partner.

With new tariffs proposed by the United States government going into effect this week, and other import duties potentially around the corner, supply leaders are scrambling both to contain costs and to keep up shipments of the materials their firms need for manufacturing. The US slapped 25% tariffs on many goods imported from Canada and escalated existing duties on many goods from China (an announced 25% duty on imports from Mexico was delayed until April 2). Those countries are in the process of levying retaliatory duties on US goods.

What makes the current escalation of tariffs particularly problematic is how closely tied various industries are to the countries involved. China, of course, is the primary manufacturer of thousands of products marketed and sold in the US by American companies. For some heavy industries, the situation gets even more complicated. For instance, many US automakers might assemble the final product in a US-based factory, but often import their steel, aluminum, and other components from Mexico or Canada. Indeed, according to some estimates, carmakers in the US rely on Canada and Mexico for more than 80% of imports of some key auto parts (this week the US granted automakers a one-month exemption from the new tariffs). 

Over the past few months, in the lead-up to the levying of the tariffs, many firms bought far more materials than usual. Indeed, the US trade deficit for goods went up sharply in January, a result of a record surge of imports. Prior to the advent of new technology capable of accurately forecasting demand, Steinberg says, companies used to routinely front-load—as the practice is known—to avoid being caught short of supplies. Given the new tariffs, front-loading goods from Mexico, Canada, and China might not be economical today, but company leaders might be tempted to front-load from elsewhere if they fear an escalation of the trade wars.

Still, front-loading has its own costs. Excess inventory requires additional storage space, which can drive up costs for warehousing, utilities, and labor. Plus, money spent on surplus stock ties up working capital that could be used elsewhere in the business. “At best, it is a short-term tactic, not a long-term strategy,” says Erik Olson, lead for Korn Ferry’s Industrial Manufacturing practice.

Companies likely will continue their attempts to diversify both their sourcing of materials and their assembly of finished products. After COVID-19, many firms shifted supply chains out of China and into countries such India, Thailand, and Malaysia. They also moved some operations nearer to customers, where possible. This occurred in both directions: Some North American firms opened plants in Europe and Asia, and some European and Asian firms did the inverse. Companies might have to reverse—or at least remodel—some of those systems to reduce the impact on the bottom line.

Experts say the supply-chain leaders best equipped to navigate this trade dispute will have an agile mindset—a willingness and ability to make changes quickly. Some firms tried to internalize an agile mindset after the pandemic, when they were forced to quickly rejigger how they sourced materials. In one Korn Ferry survey, 41% of supply-chain leaders said their company’s post-pandemic culture increased their own personal agility, while 34% said it built up their teams’ resilience.

It’s an unfortunate irony: About a year ago, many C-suites and board directors thought they could finally—after years of near-constant disruption—put supply-chain concerns on the back burner. These disruptions had been a top item on many boards’ agendas due to the pandemic, labor strikes, an accident blocking the Suez Canal, geopolitical turmoil, and trade issues. Even so, experts say, leaders have tended to address supply-chain issues only during crises, rather than holistically and organizationally. And thus far, only a few supply-chain leaders have been appointed to boards.

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