Tariffs policy can change overnight but supply chains cannot | Forexlive

With the US and China striking a deal to lower tariffs after the talks over the weekend, we’re going to see things go back to normal now right? Well, not quite. The thing is tariffs policy can change on a flick of a dime. However, the issue with the impact that it causes is that supply chains cannot adjust and change up that quickly.

After the tit-for-tat retaliation last month, the tariff levels have effectively placed a trade embargo between both countries.

In essence, that has caused shipments to be paused with empty containers building up at major ports. Meanwhile, some factories have also surely decided to halt production during this period. When shipments are paused, suppliers will also stop production as there is little certainty on how this tariffs war was going to play out previously. It’s only prudent from a cost-saving perspective.

But what happens now that the US and China have suddenly decided to drop back tariff levels again?

Sure, 30% is still high but now that’s a cost that some firms will have to decide whether they can absorb. I mean after 90 days, who is to say that tariffs won’t return to be higher again? That’s the risk and uncertainty that many firms are squaring up to right now.

If you can absorb that, it means trying to rush as many orders out in the next 90 days as possible. However, supply chains can’t turn back on with a flip of a switch.

Everyone scrambling to stock up on inventory again and shipments will resume. But amid the rush, vessels will face space limitations and ports will face heavy congestion and bottlenecks. Just think back to how it was back during the Covid pandemic when lockdowns eased. It’s the same thing.

And even for factories resuming production, it’s not that simple. It takes time for production lines to get back to full speed and some may have even already reallocated labour work during the past month. This may take weeks in certain situations.

It’s all very messy and less straightforward as saying that with lower tariffs, things can easily go back to where they were.

All this is not to mention the thousands of backlogs that have been caused in the last month that still needs catching up to do. If you haven’t already booked shipments from China to the US, you’re already probably too late.

So even with the reduction in tariffs, firms will still have to plan for potential delays due to backlogs and the time needed for shipments and factories to ramp up again.

At best, these delays might just last for a month or so. However, they could easily be prolonged for the next three to four months in some cases as well. That will make for a challenging summer for major firms reliant on supplies/inventories from China. If you’re a big player like Amazon or Walmart, you’ll do fine. But for the smaller guys, it’s going to be tough.

The good news at least is that the tariffs reduction looks to be coming just before major ports in the US are to receive shipments from China in any case.

So, any major disruptions from the initial tariffs that caused the trade embargo was due to hit around mid-to-end May at the earliest. But I guess, that can be course corrected now.

That being said, the cascading effect to supply chains is something that won’t be so easy to fix. With the 90 days pause, US consumers are also going to get in as much orders as they can now in case there might be future price hikes again. And in turn, that will drain existing inventory at a much quicker pace too.

All of this will lead to a bullwhip effect that will just exacerbate the supply chain problems as listed above.

The spike in demand that we’ll see during this period will lead to shipments being overbooked (shipping costs to surge as such) with not enough vessels to accommodate the surge in orders. That will then lead to ports being congested and facing bottlenecks (causing delays and adding to backlogs of inventories). Eventually when it all dies down, firms may fall into an overstock cycle.

And if tariffs are to be raised again, then we’ll just start this whole process once more. And again, it will take months for supply chains to return to normal – if it ever does.

So, yeah. Tariffs policy can change overnight but supply chains cannot.