Tariffs, Supply Chains, and New Trade Paths

In the wave of globalization, tariff policies are a double-edged sword, protecting domestic industries while disrupting the stability of global supply chains. When traditional sea and air transport routes face uncertainty due to tariff barriers, railway routes, especially the China-Europe Railway Express, are gradually becoming a crucial force in reshaping global supply chains due to their unique advantages. Railways, with their inherent stability, economy, and sustainability, are building a "strategic buffer" against trade risks.

What are the mechanisms by which tariffs affect supply chains?

First, tariffs are essentially an increase in import costs. When taxed imports, semi-finished products, or finished goods enter the domestic market, costs are repriced, profits are squeezed, and companies are forced to weigh prices, sales volume, and production line arrangements. There's no quick fix; an increase in tariffs often translates to higher final prices through increased procurement costs, potentially leading to higher living costs for consumers. This transmission is not instantaneous; companies may buffer in the short term by raising prices, sacrificing profits, or adjusting product mix, while in the long term, they must transform their supply chains to reduce their sensitivity to a single tax system.

On the other hand, tariffs alter companies' choices of suppliers. The tax burden differences resulting from high-cost inputs make strategies such as diversified sourcing, regionalization, and nearshore outsourcing more attractive. This isn't about a romanticized "localization" dream, but rather the practical need to diversify risk and reduce individual tax burdens. If tariffs rise in a region, companies are more willing to establish sourcing channels or localized processing capabilities in other low-tax areas, even if it means increased short-term capital investment and learning costs. Tariffs also stimulate the exploration of alternative materials, with R&D and process improvements becoming one of the means to reduce the tax burden.

Impact of Tariffs

Small Tariff Impacts:

Small tariffs may lead to renegotiation of prices in existing supply chain relationships, increasing the input price of imported goods and worsening terms of trade; simultaneously, companies may change some suppliers. Due to reduced marginal returns from searching, companies will loosen their search rules, ultimately leading to higher consumer prices and price indices.

Large Tariff Impacts:

Large tariffs will cause companies to shift new searches to tax-free countries. Companies may renegotiate with some existing suppliers while seeking alternative suppliers in new countries. Increased tariffs have complex effects on supply chain organization, as well as average input prices, marginal costs, and output prices, and may trigger supply chain restructuring.

The impact of tariffs on terms of trade and welfare is uncertain

Mechanisms by which tariffs affect supply chains:

Unexpected tariffs affect supply chains through multiple mechanisms. In terms of negotiation, tariffs alter search incentives, affecting negotiation outcomes and prices. For example, small tariffs reduce firms' search intentions, giving suppliers more bargaining power and increasing the input price of imported goods. Simultaneously, firms negotiate independently with multiple suppliers, leading to differences between marginal costs and social costs of inputs, influencing the choice of production technology. Furthermore, large tariffs prompt firms to replace inefficient suppliers, triggering the relocation of some links in the supply chain, generating trade diversion and additional search costs.

Complex effects of tariffs on welfare:

The impact of input tariffs on terms of trade and welfare is uncertain. Under small tariffs, welfare changes depend on factors such as labor input, intermediate goods usage, and changes in terms of trade. It may alleviate the problem of excessive use of intermediate goods but worsens terms of trade, making the overall welfare cost difficult to determine. Under large tariffs, if part of the supply chain shifts abroad, welfare may decrease due to trade diversion and increased search costs; if it shifts domestically, welfare changes depend on the distribution of domestic production profits. Taking Trump's tariffs as an example, the US experienced a deterioration in terms of trade and welfare losses due to tariffs, amounting to approximately 0.12% of GDP.

Application and Extension Value of the Model:

The constructed model provides an analytical framework for studying supply chain shocks, which can be matched with actual data through calibration. This framework can be further expanded, such as considering the comparative advantages of suppliers in the production process to explain multi-country procurement; it can also be analyzed in conjunction with relationship-specific investments and the "lock-in" problem in incomplete contracts.

Facing the Dilemma, Exploring New Solutions

From a Macro Perspective

Enterprises should actively seek diversified supply chain layouts. They should seek multiple reliable raw material supply locations, component production locations, and product sales markets globally, avoiding over-reliance on a single country or region, thereby reducing the uncertainty risks brought about by tariff trade wars.

From a Micro Perspective

Strengthening internal digital transformation and intelligent management is key. Utilizing advanced technologies such as big data and artificial intelligence can achieve accurate forecasting, efficient collaboration, and rapid response in the supply chain, thereby improving the overall efficiency and flexibility of the supply chain.

Conclusion

Trump's tariff weapon shattered the old order, but it also spawned a new ecosystem. Entrepreneurs' success no longer depends on scale or cost, but on their ability to agilely restructure supply chains, their wisdom to exploit loopholes in regulations, and their boldness in technological disruption. History has proven that every crisis is an opportunity to reshape the industrial landscape.