Tugboats assist a container ship as it prepares to dock at the Manila International Container Terminal at the Philippine capital on April 8.Aaron Favila/The Canadian Press
The trade war started by U.S. President Donald Trump is reshaping global supply chains in real time, pushing companies to redirect shipments, shift production and search for new suppliers in an attempt to contain costs as sweeping new tariffs come into force.
Jaguar Land Rover and Volkswagen’s VWAGY Audi brand have paused car shipments to the United States from Europe while Stellantis has idled production at auto plants in Windsor, Ont., and Toluca, Mexico.
Swiss chocolate-maker Lindt & Sprüngli LDSVF said it will supply Canada from its chocolate factories in Europe rather than its facilities in the U.S. to avoid the counter-tariffs Ottawa has placed on American goods.
Big and small companies around the world are running similar calculations, said Jim Kilpatrick, leader of global supply chains and Canadian consumer products at Deloitte. He is in the southeastern United States this week helping a Canadian food manufacturer ramp up its production for the U.S. market in response to tariffs.
“For companies that have the flexibility to move sources and shift the flow of goods within their own networks or from suppliers … say, from a plant in the U.S. or from a plant in Europe or Asia, we are seeing shifts,” Mr. Kilpatrick said in an interview. “Nobody wants to pay an unnecessary cost if they can avoid it.”
Mr. Trump’s announcement of 10-per-cent baseline tariffs on imports, with much higher country-specific rates for dozens of trading partners, has thrown a wrench in the integrated global economy.
Over decades, companies have built vast supply chains, sourcing components and finished goods from multiple countries and moving them great distances by shipping container, truck and railcar – all with an eye on lowering costs and improving efficiency. By erecting the highest tariff barriers in a century, and inviting retaliation from other countries, Mr. Trump is disrupting this complex network and forcing companies to rethink their strategy.
Canada to impose tariffs of up to 25% on vehicles imported from U.S. Wednesday, escalating trade war
So far, executives are focusing on the smaller strategic moves, such as where to ship inventory or whether to ramp up production in one factory and curtail it in another, said Tim Webb, a supply chain and procurement partner at KPMG Canada.
“For the multinationals, they’re not going to move their manufacturing plants quickly. They’re too big, they’re too expensive,” Mr. Webb said in an interview.
But they are already rethinking production and distribution networks, he said: “If I’m creating candy in Canada and I’ve got candy in Texas, well, when Halloween comes about, am I still going to service the northern states from Canada? Or am I going to do it all from Texas and all of Canada from Canada? Then, hey, this leftover capacity that I now have in Canada, how do I cost effectively use that to service … elsewhere in the world.”
The disruption to global trade is much broader than during Mr. Trump’s first presidency, when he put high tariffs on China and several industries, including steel and aluminum, but left most countries and companies alone. This allowed businesses to shift production away from China to other countries with low labour costs, such as Vietnam and Mexico.
This time around, the White House is hammering trading partners that might have otherwise benefited from massive tariffs on China, including Vietnam (which is facing a 46-per-cent tariff), Thailand (36 per cent) and Indonesia (32 per cent).
“Where do you go for other opportunities? Everybody has been hit right now,” said David Warrick, executive vice-president of Overhaul, a supply chain risk management company, and a former head of global supply chain at Microsoft.
Companies may look to jurisdictions facing lower U.S. tariffs, such as the Philippines (17 per cent) or Malaysia (24 per cent), Mr. Warrick said in an interview. But it can take several years to relocate factories and cultivate local suppliers – a risky prospect when U.S. trade policy appears to be changing by the day.
“Then you have to worry about other things: You’ve got to worry about security. You’ve got to worry about compliance. You’ve got to worry about all of these other pieces to make sure that the final product is actually still of the standard of quality that your consumer expects,” he said.
For some industries, it’s relatively easy for importers to find alternative suppliers in jurisdictions facing lower U.S. tariffs, said Philip Damas, head of supply chain advisers at Drewry, a shipping industry consulting firm. U.S. importers of concrete, for example, should be able to substitute products from China, which is facing a 104-per-cent tariff starting Wednesday, with products from Turkey, which will have a 10-per-cent tariff, Mr. Damas said.
But there are other products, such as specialized plastics, where it’s tough to find alternatives, he said. ”We were talking to one of our customers today, and they can source that only from South Korea, it’s so specialized, and they just think, ‘Frankly, we have to take a hit of $4-million a year because there’s no alternative.‘”
Mr. Trump has maintained that companies can avoid tariffs by relocating their production to the United States. Some companies will likely do this, said Mr. Kilpatrick of Deloitte. For mid-sized Canadian businesses that have been eyeing investments in the U.S. for some time “this could be a tipping point,” he said.
But it’s hard for companies to make big investment decisions amid so much uncertainty about which U.S. tariffs are permanent, and what could be negotiated away. And even if tariffs are permanent, it’s not clear that establishing a footprint in the U.S. will be the most cost-effective decision, particularly for labour-intensive manufacturing industries, such as textiles and apparel, Mr. Kilpatrick said.
“With advanced manufacturing that doesn’t rely on labour but it relies on capital investment and automation, it doesn’t take a huge tariff to shift the equation where those jobs come to U.S. soil,” he said.
“But I don’t think it’s in the U.S.’s best interests long term to try and build industries that the U.S. isn’t competitively advantaged in, that just drives to increase prices for consumers.”
Canada may be in a relatively good spot as global supply chains are reconfigured. Mr. Trump has placed tariffs on Canadian goods that don’t comply with the continental free trade agreement’s rules of origin, as well as tariffs on automobiles, steel and aluminum. But he left both Canada and Mexico off the list of new tariffs announced last week, meaning both face a lower effective tariff rate than most other countries.
“Things are still fluid, so it’s really hard to say where things are going to land, but it does open up some opportunity for certain sectors to capture market share, just given their relative advantage,” Stuart Bergman, chief economist at Export Development Canada, said in an interview.
But for Canada to win in a world upended by U.S. protectionism, both companies and governments need to focus on competitiveness, Mr. Bergman said.
“Really my hope is that this forces Canadian exporters to become more resilient and invest in productivity-enhancing machinery, equipment and technology, and to develop other trade links,” he said.
“That’s the best-case scenario: We’ll be able to look back at this period as a potential turning point where we really were forced to address a lot of things we knew we had to address but up until now just didn’t have the incentive to do so.”