Nada Sanders, distinguished professor of supply-chain management at Northeastern, talks about the economic ramifications on supply chains and prices.
President Donald Trump imposed a blanket 25% tariff Tuesday on all products imported from Canada and Mexico. However, he relented a bit Wednesday, announcing that the levy imposed on cars would be delayed for one month at the request of the Big 3 automakers — General Motors, Ford Motor and Stellantis.
News of the tariffs had spooked the stock market, which fell on Tuesday before rebounding Wednesday. Canada responded to Tuesday’s levies with a $107 billion tariff package on U.S. products, and Mexico’s president said it would announce retaliatory tariffs to begin on Sunday.
How do tariffs actually impact prices, and what kind of effect on the economy can we expect?
Nada Sanders, distinguished professor of supply-chain management at Northeastern, talks about the economic ramifications. Her comments have been edited for brevity and clarity.
We say tariffs, but tariffs are simply taxes. They’re simply taxes paid by the importer. Somebody has to pay them, so they have to be passed on somewhere, and usually they are passed on to the consumer. The idea then is that consumers, faced with these taxes, would be incentivized to seek out domestic producers because those items would be cheaper. An apple purchased in the U.S., the logic goes, would theoretically be cheaper than the apple purchased in China, provided that you can buy an apple from the U.S.
What is different about this round of tariffs compared to the previous is that these are very broad, sweeping tariffs. They’re sweeping in the sense that they’re not just targeting steel, lumber or petroleum, for example, which we’ve seen in the past: they will affect a whole suite of goods as it relates to Canada and Mexico in particular.
This is problematic because a lot of supply chains are still rebounding from the pandemic. And what a lot of organizations have done since the pandemic is they’ve restructured their supply chains to focus mostly on North America. This has been particularly true of the auto industry. When it comes to the auto industry, the U.S., Canada and Mexico are now highly integrated. We see subassemblies and compound parts come across the border many, many times throughout the day between the U.S. and Canada, for example. So, I foresee these sweeping 25% tariffs, having a potentially significant impact on prices if they’re set in stone.
About two-thirds of vegetables in the U.S. come from Mexico. About half of the fruit and nuts come from Mexico. Just think about tomatoes: we grow tomatoes in the summer, but the rest of the year we have access to tomatoes because we get them from Mexico. Ninety percent of avocados we get — full stop — from Mexico. Also, Mexico is the largest coffee exporter.
Then you take the fact that in many parts of the world, we’re seeing the impacts of climate change and droughts, for example. We have been facing lower coffee crops in places in South America, like Brazil, irrespective of the tariffs. But if you couple that now with 25% tariffs on coffee — what does that mean? Well, that means there are fewer goods, and the goods that you have access to are much more expensive.
Not necessarily. It depends on several things. It depends on how much inventory is in queue and how long the tariffs last. Remember, the tax is imposed on the cost of the goods — not the retail price. The importer may not pass on those costs completely. It just depends on how much they’re willing to take on themselves, and whether they can source the product from other places.
Manufacturing and agriculture are the big ones. But we’re also looking at other industries that are getting less play, such as housing, construction. Seventy percent of material for drywall comes from Mexico. We’re looking at lumber. We have a housing industry that already has issues in the U.S.
Then we have machinery. A lot of agricultural machinery or farm equipment comes from China. We look at feed for livestock, which comes from Canada. These are some very intertwined supply chains — which, again, is something that we saw play out during the COVID-19 pandemic.
Global supply chains and all the goods that we purchase: they’re all intertwined. From the packaging and shipping, to equipment needed to harvest, move it, consume it, offer it at our restaurants, at our grocery stores — they’re all going to be impacted. For some items, it will be less than the tariffs; but for other items, it could be more because of cascading effects for the various parts. Even if this were to come to a halt all of this by the end of day today, we would still see an impact because it takes a long time for supply chains to start back up.
For many industries, we simply don’t have the infrastructure. And building infrastructure takes a really long time. This is really not something that we can do overnight. While I think it is an incredibly important goal, it is not something that can happen quickly. It took China a decade to build the infrastructure to support its export economy, and it would likewise take a while to build our own infrastructure here for our purposes.
From a supply chain standpoint, cooperation is something that is essential in order to get a variety of goods and ensure the economy stays online. We have a term “coopetition,” or cooperation among competitors. We know that this works when we are cooperating with competitors, let alone allies. If we want to get our coffee, our avocados, our cocoa — all of the things that we want from all over the globe that we simply cannot harvest or grow alone — then we need to be able to do it in a way that lets us afford these goods. In the short run, there’s no question that we’ll have higher prices and other economic effects as a result.