How Tariffs Impact Manufacturing and the Component Shortage
By the fall of 2018, U.S. tariffs covered about $250 billion of Chinese imports, including capacitors and chips already in short supply. The added cost could reach consumer prices, investment and the shortage itself.
For months, the electronic component shortage was the biggest obstacle in manufacturing. By the fall of 2018, the focus had shifted toward tariffs on imported parts and products, and what they would mean for the manufacturing industry.
The latest round was a 10% tariff on about $200 billion of Chinese imports, in effect from September 24, 2018 and scheduled to rise to 25% on January 1, 2019, according to the Office of the U.S. Trade Representative. It came on top of 25% tariffs on about $50 billion of Chinese goods: $34 billion from July 6 and $16 billion from August 23, USTR said.
With the tariffs in effect, the open question was what they would do to manufacturing and electronic components.
1. Production Could Shift to the U.S.
Much of the tariffs’ purpose was to encourage reshoring by making products built in the United States more competitive against imports from China. With the new tariffs in place, one way to stay competitive was to move production to the United States and work with a manufacturer closer to home instead of a contract manufacturer overseas.
2. Tariffs Could Change the Component Shortage
Tariffs were bound to affect the component shortage, because they fell directly on many of the parts at its center.
The first list, proposed in April, had named capacitors, resistors, fuses, relays, LEDs and transistors, eeNews Europe reported. The 25% tariffs reached certain types of capacitors, including a number of Kemet’s products, and could slow production of the devices that use them, Supply Chain Connect reported in August. The August list added 29 tariff lines covering chips and the machines and spare parts used to make them, according to SEMI, and SEMI counted more than 90 lines central to the semiconductor industry on the $200 billion list.
In theory, higher prices could cool demand for these parts until supply caught up. A quick recovery was unlikely, though. Demand would fall only if companies passed the higher costs on to consumers and the increases were large enough to change what consumers bought.
3. Products Could Cost Consumers More
Higher component prices can reach consumers when companies raise product prices to cover them, so some products with imported parts would cost more.
A 25% tariff does not mean a 25% higher price, though. Tariffs are charged on the value of the imported goods, not on everything a product contains. For a board assembled at Kodiak in Austin, Texas, a tariff reached the listed components imported from China, not the finished assembly.
4. Tariffs Could Slow Innovation and Industry Growth
Manufacturing had grown steadily. The Institute for Supply Management’s manufacturing index reached 61.3 in August 2018, its 24th consecutive month of growth, Supply Chain Management Review reported.
Tariffs could change that quickly. Companies hit by tariffs may raise prices and lose customers to competitors that do not have to pass on higher costs. Higher prices mean less cash to invest, expand and innovate, and at worst lost profitability that reaches the workforce.