This article originally appeared in the Jan/Feb issue of Procurement Pro.
By: Adam Fletcher, Chairman of the Electronics Components Supply Network (ecsn)
For many years procurement professionals in the electronics industry have had to contend with a number of headaches, the largest of which were triggered by problems surrounding short-term supply, but no longer!
Today their headaches are all about the likely impact of trade tariffs on the electronic components supply network and the ability of their organisation to adapt to a new reality.
In this article, Adam Fletcher, Chairman of the Electronics Components Supply Network (ecsn), reviews the impact that President Donald Trump will have on commerce. According to his rhetoric, Trump intends to both impose sweeping new tariffs on imports into the US and increase existing tariffs in support of his ‘America First’ trade agenda. Back in 2019 I suggested that the “Weaponising of Trade by governments for political gain would make the UK issues around BREXIT seem like a walk in the park.” As we move into 2025 almost all political analysts now judge this scenario as ‘very likely’, if for no better reason than Trump’s need to maintain his political credibility in future US trade negotiations. Commentators see leaving tariffs unchanged as ‘unlikely’, as this would require a shift in the US’ political stance which would undermine the country’s global credibility and upset domestic voters, or for foreign governments to rapidly agree to significant concessions, both of which are considered improbable.
Why tariffs?
Tariffs are a very blunt economic tool used to encourage a change in the commercial behaviour of organisations or countries. Countries generally impose tariffs (taxes they charge on imported goods) primarily as a measure to protect their domestic industries from competition from overseas organisations that they see as having an ‘unfair’ technical or commercial advantage. A technical advantage is often held by an organisation rather than a country but commercial advantage in terms of raw materials or financial subsidies to domestic producers is often in the control of a country’s government. The current aims of the incoming US administration are primarily to thwart Chinese technological advances and maintain the military superior weaponry and systems, alongside the US need to force increased investment in US manufacturing capability and maintain its position as the largest global economy. The US has also sought to use tariffs to ‘punish’ countries using ‘soft’ economic power to achieve political objectives such as improving controls on the US/Mexico border.
Types of tariffs
There are four primary forms of tariffs on goods and services, each designed to yield different results in terms of financial return and/or behavioural change:
- Ad Valorem – a tax expressed purely as a percentage of the goods value, levied according to the value of goods and services
- Specific Tariffs – a one-off flat rate tax imposed regardless of the value the good or service, for example a £100 tax on all new computers
- Compound Tariffs – a combination of Ad Valorem and specific tariffs imposed on import goods based on their number and value. This tariff is calculated on both the price per quantity and percentage of value
- Mixed Tariffs – a rate of duty based on a conditional choice between Ad Valorem’ duty and a ‘specific’ duty, subject to an upper (ceiling) and/or a lower (floor) limit (e.g.: 30% or £2 per kg, whatever is the highest)
Currently the US Trade Representative (USTR) is only proposing Ad Valorem’ taxes, albeit very significant ones, which will simply be added to the unit price of the goods at point of importation regardless of volume or quantity. It’s a simple but very deliberate bid to stop Chinese manufacturers simply discounting the unit price to shield their customers from the tariff hikes.
US tariffs aren’t new
The US has long been imposing a wide range of tariffs. In March 2018, President Trump exercised his authority under Section 232 of the Trade Expansion Act of 1962 to impose a 25% tariff on steel imports, to ‘protect US national security’, but he did grant exemptions to Canada and Mexico. He also imposed tariffs of between 30-50% on solar panels, washing machines and tumble-dryers, presumably in response to some remarkably effective lobbying.
2024 report and findings
Prepared over two years, the wide ranging 2024 Trade Policy Agenda and 2023 Annual Report concluded that Chinese organisations (often under influence of their government’s policies and legislation) are using unfair trade practices to negatively affect the US national economy. Under Section 301 of its Trade Act 1974 the US has already asserted its right to respond to ‘unreasonable, unjustifiable, or discriminatory practices by foreign governments that burden or restrict its commerce’ and accordingly, the USTR is proposing to apply further annual tariff hikes to strategic industry sectors amounting to $18bn. There’s plenty of precedent for this move. Currently Section 301 of the Trade Act 1974 lists over 10,000 tariff sub-headings (products or services) that impact over $516bn of trade with Chinese organisations. The tariff on electric vehicles was increased from 30 to 100% in 2024 but more recent proposals by the US Trade Representative seek to increase the tariffs on these imports to 100% later on this year and add 50% to the tariff on solar cells in the same time frame. Tariffs on Chinese manufactured semiconductors will increase to 50% in 2025 (up from 25% in 2024) whilst importers of lithium-ion batteries will have to pay an additional 25% in 2026.
The Chinese response
It’s perhaps understandable that the Chinese government is not happy with the response from the US and (potentially) other countries. They have referred the matter to the World Trade Organisation (WTO) but rulings from this body take a very long time and there’s no guarantee that the ruling China requires will be handed down. In the short-term, China imposed more tariff measures of its own in 2024 that targeted imports of US produced agricultural products; primarily soya beans, alongside currency devaluation, to compensate for the $34bn tariff. China could go on to take a great many other actions that would destabilise many international markets where they are the dominant supplier e.g. PCBs, injection moulded plastics, batteries etc., but to date their response has been fairly benign.
The UK and European response
The UK and European governments managed to negotiate exemptions (quotas) from the US’ 2018 steel and aluminium tariffs but are now growing very concerned about Trump’s proposal to impose a 10-20% tariff on all imports to the US from the rest of the world. It is likely that in this proposed scenario the rest of the world would then consider ways to impose tariffs of a similar US$ value on goods imported from the US in a ‘tit for tat’ policy on tariffs that will simply exacerbate the problem.
Impact on the electronic components supply network
Whilst there is undoubtedly some reasonable logic (under Section 301) behind most of the US’ actions, particularly with regard to Chinese exports of electric vehicles, an international trade war cannot be considered good news for economic growth, for political and economic stability, and certainly not for the global electronic components supply network, which has operated very successfully without tariff barriers since the 1970s. The ERP systems of components manufacturers and their authorised distributors can cope with the addition of tariffs on products, but it adds another layer of cost and complexity into the mix, especially when components are moved internally between the different geographic locations owned by the same organisation. Large US based systems integrators will encounter a similar problem when transferring inventory from the US to a third country location.
Most semiconductors are ‘global products’ designed, manufactured, packaged, and tested in multiple locations based on factors such as cost and the availability of appropriately skilled labour. Is the ‘country of origin’ the country where the wafer was diffused, probed, tested, packaged, and stored, or the country where the brand is owned? Semiconductor products solely produced in China are today largely multi-sourced, lower cost, ‘commodity’ devices but Chinese semiconductor companies are rapidly progressing up the learning curve and have established a strong foothold, particularly in electric vehicles and autonomous automotive driving applications. By working closely with the leading domestic automotive manufacturers to maintain their current global leadership position, giving rise to concerns by the US Administration that Chinese semiconductor organisations will ‘out develop’ its domestic organisations possibly by infringing international IP legislation and come to dominate critical new markets such as artificial intelligence (AI).
The rapidly emerging electronic systems markets in India and Asia may gain an unfair competitive advantage if China starts ‘dumping’ Chinese originated semiconductor products and electronic components that have zero tariffs applied. It may help kickstart their domestic electronic systems markets and help them compete on global markets. Fortunately, in these developing economies the very large system integrators who have migrated from China are very likely to continue to exercise significant control over both their bill-of-materials and the choice of organisations from whom the electronic components are purchased. But there are always organisations trying to gain commercial advantage so it’s likely that third party ‘brokers’ will try to leverage the arbitrage between pricing in different geographic markets.
So why tariffs?
Tariffs benefit specific industries by allowing inefficient producers to charge higher prices, which in turn boosts job creation in these protected industries with the costs dispersed right across the economy. Policy makers like tariffs because their imposition can lead to shortterm benefits and give the impression of action, but economic theory suggests that their imposition raises consumer prices, reduces employment, increases inflation, and harms the overall domestic economy by driving down international growth. That said, targeted tariffs may be politically and economically necessary to protect very specific key industries, ensure their survival and retain domestic capacity, but the very wide ranging, broad application of tariffs proposed by the new Trump administration looks to be poorly conceived.
Concluding thoughts
There are great many problems that an international trade war between the US and the rest of the world could inflict upon the global electronic components supply network. It now looks fairly certain that the electronic components supply network will have to cope with more ongoing issues as a result of tariff increases over the next few months. I urge procurement professionals globally to continue working closely with components manufacturers and their authorised distributor partners to identify and mitigate any potential problems within their supply network as they arise.
