US Tariffs: Run, Don’t Walk, Toward Regionalized Supply Chains 

New US tariffs signal the impending reality that businesses everywhere will need regionalized supply networks to thrive in the next decade.  

The upcoming US election is a choice between starkly different candidates, yet both offer huge doses of protectionism in global trade. This means that the world’s traditional champion of free trade has lost faith in a bedrock economic policy principle that has been around since WWII. Whether this is good or bad is now irrelevant. All that matters is how ready supply chain leaders are to live with it. 

Politics Beats Economics for Now 

The Biden Administration has announced a series of targeted drastic tariff increases, including: 

• on EVs, from 25% to 100%, 
• on lithium-ion EV batteries and other battery parts, from 7.5% to 25%, 
• on photovoltaic cells for solar panels, from 25% to 50%, 
• on ship-to-shore cranes, from 0 to 25%, 
• on syringes and needles, from 0 to 50%, 
• on some personal protective equipment (PPE) for medical uses, from 0 to 25%.  

These hefty and specific hikes are intended to protect domestic producers from competition so they can grow. The same logic justifies policies enacted for the semiconductor manufacturing and renewable energy industries under the CHIPS Act and Inflation Reduction Act, both signed into US law in 2022. These moves make political sense in a world where countries compete using industrial policy. And for now at least, politics is beating economics in the court of public opinion. 

China is stuck in a spiral of government-led industrial manipulation that can’t solve its demographic problems or ease political pressure on Xi Jinping unless trading partners go along, which most did until Covid shocked the world. Since then, rising doubts about the domestic economic benefits of free trade weighed against national security concerns for “strategic” industries have upended the politics. Add a hot war in Ukraine and nationalistic challenges from India and the EU, and it now seems certain that we’re entering a new era of protectionism. 

Supply Chain Strategy Anticipates the New Order 

A recent article in The Economist talks about how political trends are metastasizing into economic transformation, “…growing global variation suggests that the world economy is atomizing rather than integrating.” Luckily for big global brands like Unilever, Nike, and Samsung, which are already regionalizing supply chains, this “atomization” creates opportunity.  

Instead of hyper-concentrated global manufacturing centers like Shenzhen for electronics or Dhaka for apparel, the new wave is toward regional hubs. The idea is to reduce risk, cost, and carbon associated with long-distance supply lines while making it easier to design products for local tastes. 

And yet global sourcing of certain materials and expertise will remain essential for years to come. Apple’s shift of iPhone manufacturing volumes to India, for instance, is a multi-year process with challenges in scaling capacity and expertise among tier suppliers and a sticky situation with sales to Chinese customers. For many global companies, the toughest problem ahead is how to stay friendly with Chinese business partners while political leaders throw grenades at each other.  

Many companies now treat “Greater China” as supply chain hub unto itself, isolated operationally from most global supply chain dependencies. The same is increasingly true for North America, Europe, and as many as seven other multi-country regional agglomerations. In each such hub, local talent supports regional supplier development and product innovation suited to geographically-specific tastes and resources. 

Lean into Regionalization  

China’s long dominance in manufacturing may be over politically, but capacity and competence are still there. Exploiting a regional supply chain strategy can, and in many cases must, still include China – for a while, at least. But developing new supply bases like India for mobile devices, Vietnam for apparel, and Mexico for automaking is now more important than ever. 

Supply chain leaders should try to reverse the process China has driven since the 1990s by scaling technical talent among critical suppliers and developing partnerships that reward collaboration on new product development and process design. Establish local planning and control tower capabilities to solve supply/demand problems in-region rather than relying on long lead time inventories from low-cost manufacturers. And treat regionalization as an opportunity to build truly closed-loop supply chains with better take-back systems and more recycled content. 

The transition will be difficult, but the payoff should be faster, cleaner, and more personalized supply chains.