How effectively can supply chains be shifted due to tariffs?

Shifting supply chains is a lot more difficult than it seems.

As an example, if the United States applies new tariffs on China, but not on Vietnam, it may seem like an obvious solution to source from Vietnam. There are several problems that emerge. First, even if China and Vietnam were equally capable of handling orders, it would take time and money to make the shift. Companies place orders in advance and have established relationships with vetted suppliers.

Second, one reason that so many supply chains run through China is that over the decades China has become adept at managing supply chains and supplying products. While other countries are improving, they often cannot match China for quality or scale (this, of course, depends on the product).

Third, even if there is sufficient productive capacity in a new country to handle the diverted supply chain, there can be real questions about infrastructure – are roads and ports equipped to handle the new volume of trade? One important point here is that many companies are dealing with the same question at once. That can strain resources in a less-developed country.

Finally, there is the question of the permanence of the policy change. It can be costly and time-consuming to rework supply chains. Such a strategy can pay off if the new tariff landscape persists. But companies have little appetite for doing this if a trade resolution is close at hand. That has forced companies effectively to place bets on the likely outcome of trade negotiations.

Disclaimer: Provided for informational purposes only. Flexport does not guarantee, represent or warrant any of the statements in this answer because they are based on our current beliefs, expectations and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur.