This article originally appeared in the March/April issue of Procurement Pro.
By Adam Fletcher Chairman of the Electronics Components Supply Network (ecsn)
New US President Donald Trump has started to deliver on his promised (threatened?) ultra-aggressive ‘America First, Economic Trade Based, Leveraged Diplomacy’, believing if the US acts powerfully and in unpredictable ways, other countries will limit or change their own behaviour for fear of economic conflict with the US. It’s apparent that the imposition of swinging trade tariffs by the US is rapidly moving from theory to reality and here Adam Fletcher, Chairman of the Electronics Components Supply Network (ecsn), adds to his initial thoughts on the theoretical impact of tariffs on the global electronic components markets that he set out in the last issue of Procurement Pro.
Mercantilism
Mercantilism was the dominant school of economics that started in the 1500s and held sway throughout Europe for three centuries. The movement was led by Austrian lawyer Philipp Wilhelm von Hornick who set out a highly detailed nine-point plan to manage an economy with an absolute minimum of external trade, effectively a zero-sum game. It proved disastrous (Donald Trump take note) and resulted in an extended period of low economic growth. In the 18th century, businesses rejected the practice in favour of the theory of ‘free market economics’ proposed by the economist Adam Smith, the adoption of which enabled the UK government to transition to an economic system which enabled individuals and private groups to carry out wealth creating activities largely free from regulation, restriction, or subsidy.
2024 – European electronic components market decline
Global sales revenues of most electronic components not associated with Graphical Processing Units (GPUs) or high bandwidth memory, were sluggish at the start of last year and in Europe, continued to decline significantly throughout the year. US markets were concerned about the possible imposition of tariffs on goods imported from China and, as a result, US imports of electronic components from China hit an all-time high in Q4’24 as inventory was increased to offset the potential financial risk. Their fears were well founded. In February ’25 the US administration, acting on Executive Orders from the President, imposed an immediate additional 10% tariff on Chinese imports. The really big surprise however was that a tariff of 25% was also to be immediately placed on all goods imported from Canada and Mexico, the country’s well-respected and largest trade partners, amid accusations that the two countries were failing to adequately secure their borders against the movement of illegal drugs and migrants into the US. Politicians, organisations, and business leaders across the world were shocked by this unprecedented punitive action. Canada and Mexico lost no time in imposing tit-for-tat tariffs on US imports while chaos reigned for a time elsewhere in the world at the ramifications of a possible international trade war. Following intense diplomatic efforts, the situation between the US, Canada, and Mexico has been partially resolved (capitulation?). The date of the tariff impositions has been deferred by a month and new dates have been set for high-level negotiations between the American and Chinese presidents.
Chaos diplomacy – a quick US win?
Any period of diplomatic or economic chaos is costly to the states and organisations involved and as a result it usually falls to political leaders to calculate how best to negotiate and subsequently achieve a rational and acceptable outcome, as in the short to medium timescale it’s likely to be the lowest cost solution and help to minimise civil and economic disruption. So, whilst the Trump administration may believe its actions have resulted in a quick win for the US, the country’s reputation for stable international relations has been significantly damaged, especially among its trading partners. Had a solution not been reached quickly with Canada and Mexico, who had initially applied tit-for-tat tariffs against the US, the outcome may have been significantly different and would have led to long term trading difficulties for all three countries. In the meantime, the Chinese government has filed a complaint with the World Trade Organisation (WTO) and is already beginning to add further tariffs on US imported goods. Its final response is not yet known but based on historic experience it is likely to mirror the financial penalties imposed on it by the US.
Industrial and financial lobbying
Much has happened to effect commerce in the US since Trump’s election and it happened very quickly. As a result, there was a total absence of effective lobbying of the US government by domestic US industry and financial organisations but in recent weeks it’s become apparent that trade bodies are now activity raising their objections to the measures proposed and the actions taken. The legal activity has been slow to start but is beginning to act as a check and balance on the actions of government, especially on a state-bystate basis as well as federal law, but these processes are often much slower than the pace of some of the changes already being enacted, possibly in breach of legislation. I have great faith in the rule of law and although there are claims of politicisation within the judiciary, they do provide a high degree of moral authority and make considered publicly available judgements.
Financial and equity markets
Whilst undoubtedly the world’s largest economy, the US is still highly reliant on the strength of sentiment and activity in global financial, capital, and equity markets, which are in fact significantly more important, stronger, and influential than any government, high net worth individual or President. If these markets believe the US administration’s actions are detrimental, they will likely bet against it by demanding higher interest rates on borrowing or affecting stock values of leading organisations, potentially causing severe economic damage to the country.
A truism has it that ‘money flows to where it is most loved’ (where it receives the highest return for any given, perceived, or actual risk) and today money is able to ‘flow’ very quickly to where it will deliver the best return. As a result, politicians are generally wary of significantly disrupting free market activity without considering the likely impact of any proposed changes and without carefully explaining the rationale behind their choices to the markets.
More to come?
The US administration has stated that by mid-February ‘25 they are likely to impose tariffs on the European Union and possibly the UK but the basis for this action has not been well explained beyond some ‘levelling up’ of economic activity related to the balance of trade. When this happens, and it does now look inevitable, it will prove to be a major problem across all industries, and it will be interesting to see and understand how the EU and UK governments will respond. The generally held assumptions are that any tariffs applied by the US are going to be in the range 10%-to-25%, that they will be immediately applied, and that the EU and UK governments will immediately apply tit-for-tat tariffs in advance of a fuller, more considered response.
Impact on UK electronic components market
Fortunately, almost all electronic components, manufacturers, and authorised distributors operating in the UK already hold Authorised Economic Operator (AEO) status with the UK’s HMRC and the local country taxation authorities across Europe, which means systems are already in place to manage import duties and local taxation systems. The ‘frictionless trade’ that comes with AEO status allows goods to pass through borders and get to their destination with the minimum of delay by enabling companies to immediately react to changes and accurately record their financial transactions as goods come into and out of each jurisdiction. Import tariffs are added to the value of goods along with freight and insurance costs and in the case of the UK, VAT (value added tax) is calculated and added, and this total cost is either paid immediately or for a short time, held on account. Most manufacturers hold tens of thousands of stock keeping units (SKUs), whilst authorised distributors often hold over a million. They need to track each individual SKU identifying which items are ‘duty paid’ and if shipping directly to a customer, reflect this in the selling price. If some or all of this is SKU transferred internally to another location outside the UK or returned to the supplier, both the duty and VAT paid can be easily recovered.
I must confess that ecsn doesn’t know (and doubt if any organisation does know) the total value of the electronic components imported from the US to the UK but anticipate it to be in the range 30%-to-40% of the total goods purchased in any given period but perhaps only 10%-to-15% by volume shipped. The additional financial impact of a tariff at 25% on electronic components is therefore substantial and will be an additional burden on the cash flow of manufacturers and authorised distributors, adding significantly to the cost of maintaining the inventory their customers rely on. Organisations will inevitably seek to minimise these additional costs, as will their end customers, so the overall supply network inventory will come under further pressure for additional reduction. Just what ecsn members needed!
Reflecting the additional import duty, systems integrators (EMS or OEM) will see increases in the unit prices of some US sourced electronic components, which may prompt them to seek to change the primary suppliers on their equipment BOM in favour of sourcing nonUS components, but this may be a difficult to achieve if alternatives are not available. If the equipment these organisations produce gets sold and exported to the US a 25% tariff will be added to the purchase price, making it more expensive to purchase and potentially more expensive than equivalent equipment produced domestically in the US or in a third country where no tariffs are applied. The only other alternative is for the system integrators to absorb some, or all of the duty increase to maintain competitive pricing. Just what our customers needed!
Concluding thoughts
In a public forum like Procurement Pro magazine, I couldn’t possibly repeat the range of expletives used by industry leaders I have spoken with on the subject of Donald Trump and his tariff policies. On the back of the existing economic problems, they are a very unwelcome and unpopular move by the US government that is going to inflict a great many problems upon the global electronic components supply network. Here in the UK and Ireland I’m certain that ecsn members and their customers across the electronic components supply network will work diligently together to find practical solutions. Despite the current industry concerns, I remain very optimistic that the checks and balances operating in a free-market economy will quite quickly bring about the necessary changes to US (and other governments) policies and restore a more stable economic environment for all.
May I take this opportunity to urge procurement professionals globally to continue working closely both up and down their organisations supply network to identify and mitigate any potential problems as they arise.
