The Rippling Impact of Tariffs on Production and Engineering

February 22nd, 2019 Posted by Engineering 0 thoughts on “The Rippling Impact of Tariffs on Production and Engineering”

The full-blown trade war between the U.S. and China has been characterized by tit-for-tat tariffs, retaliatory duties, and continued threats. The impact of tariffs on Chinese imports totals a hefty $250 billion, while China has placed tariffs on $110 billion worth of U.S. imports.

Some believe that tariffs help protect proprietary information and domestic manufacturing industries. But the past and present may tell us a different story.

The impact of tariffs from the U.S.-China trade war can increase the cost of manufacturing, pass on ballooning prices to consumers, and hinder the efficiency of production. With these factors at work, the rippling effect of tariff war can lead to inflation and a downturn in economic growth.

So how much of these “mays, cans, and ifs” are actually true? What’s the reality of the impact of tariffs on production, manufacturing, and engineering? And which industries benefit from tariffs, and which are at stake to shoulder additional costs?

Overview of Tariffs in U.S.-China Trade War

In today’s globalized economy, where the design, engineering, and manufacturing of products happens across borders, tariffs have more ripple effects on the global supply chain and throughout the U.S. economy than ever before. The American Society of Mechanical Engineers projects the cost of tariffs could be upwards of $500 million annually in the U.S. alone.

So why do tariffs today have such a big impact? Because U.S. tariffs are targeting major Chinese imports including steel, electrical machinery, railway equipment, instruments, and apparatus. These tariffs have been linked with price hikes on everything from cars, robots, and drones to energy and industrial equipment, computers, and supercomputers.

The most impactful tariffs are the 25% steel tax and the 10% aluminum tax, which can inflate the cost of vehicles, industrial products, and inspection equipment. The 25% tariff on semiconductors and sensors imported from China, which are directly involved in nearly every U.S. industry today, is also tied to soaring prices.

The impact of the tariffs in the automotive space is quite pronounced because of the reliance of the automotive industry on robotics and automation technologies, which currently have a substantial tariff tax. Different types of manufacturing tariffs can increase costs and delay the process of bringing new vehicle innovations and technological developments to fruition.

Impact of Tariffs on Production and Innovation

When a trade war breaks out and tariffs are imposed, manufactures and engineering companies inevitably have to either raise prices or absorb costs. So tariffs may impact the quality of production because companies get awfully creative to dodge tariffs during times of trade war.

The impact of tariffs may cause engineers to reimagine how products are produced and adopt innovative manufacturing strategies and tools in order to bypass tariffs, keep prices down, and remain competitive. On the flip side, reinventing the wheel to duck tariffs may lead to the sourcing of cheaper parts and materials, handicapping the quality of engineered and manufactured products.

Engineering companies and U.S. firms that ideate in the states, but manufacture products in China are especially feeling the impact of tariffs. Many are even considering or have already built R&D facilities overseas because of the high cost of tariffs.

Some also say that tariffs may threaten U.S. global leadership in the development and advancement of the Internet of Things (IoT), 5G, artificial intelligence, robotics, machine learning, cloud computing, data analytics, and other breakthrough digital technologies of the fourth industrial revolution. But it’s yet to be seen whether tariffs have a significant impact on the rate of innovation and growth of our technology footprint.

Industries that Benefit from Tariffs

When we don’t have tariffs or trade wars, markets typically weed out inefficient manufacturers. But tariffs help weak links survive (and sometimes even thrive) by allowing these manufacturers and producers to tack on random product costs by masking them as tariff taxes.

U.S. iron and steel manufacturing plants, for example, have benefited from the whopping 25% steel tariff on Chinese imports. Manufacturing tariffs are anticipated to increase the amount of U.S. plant jobs by about 23,000. This rise in employment is attributed to U.S. plants and steel producers charging higher prices, reopening U.S. plants, and absorbing healthy profits.

The price of lithium batteries has also increased because of the impact of tariffs on U.S. exports to China. Batteries are in high demand as we shift toward additional renewable capacity because of their role in managing the consistent flow between renewable energy sources.

With the tariff on lithium-ion batteries, vanadium redox flow batteries (VRFB) are becoming more prominent in the distributed and renewable energy engineering sectors because they can be built much cheaper and larger than standard lithium-ion batteries. Supplies of vanadium, however, are becoming more and more scarce and important to protect. But with the impact of tariffs on the price of lithium, the huntto find new sources of the rare and endangered vanadium mineral is in full swing.

Industries Taking an L from Tit-for-Tat Tariffs

The impact of tariffs on aluminum and steel manufacturing and use, in addition to the threat of additional tariffs on imported cars and auto parts, will likely hurt the U.S. economy and automotive industry. We could end up payingthousands of dollars more for new vehicles because of the accumulating effects of tariffs on production. With various manufacturing tariffs pinching the automotive industry, up to 700,000 jobs could be lost in the sector.

Compared to larger U.S. plants that benefit from expensive steel, smaller manufacturers like Harley Davidson that rely on steel are feeling the brunt of the effect of tariff war on manufacturing costs. Some are even moving production overseas and/or cutting jobs. In fact, a study by The Trade Partnership indicates current steel and aluminum tariffs could potentially wipe out 400,000+ U.S. jobs, 19,000 of which in manufacturing alone.

Comprised of mostly steel alloys, turbines could also feel the negative impact of tariffs on production. The extent to which, however, remains unknown because there are so many American-derived contents in turbines.

Moreover, the impact of tariffs on solar cells imported from China, which is currently set at 30%, will likely raise the cost of installing home solar panels. This could add a year to the average 9-year payback for home solar installation, reducing the number of solar cell installations by 11%. To put it another way, the effects of tariffs could lead to about 23,000 people being unemployed in solar manufacturing and engineering industries.

For the first time in almost 20 years, Apple dropped its revenue projections because of decreasing demand in China stimulated by the trade war. Robotics and the industries that depend on robotics technology and solutions providers have also experienced the negative impact of tariffs from the U.S.-China trade war. The semiconductor manufacturing process, which has a hand in almost every industry today, is another player getting hit with the dark side of manufacturing tariffs.

Impact of Tariffs in the Road Ahead

What does the impact of tariffs mean for the future of development and innovation in artificial intelligence, autonomous driving, machine learning, supercomputers, and other emerging technologies of the fourth industrial revolution?

Technological innovation is inevitable and profitable. So it’s unlikely that we’ll see a noticeable decline in the rate of technological advancement because of the impact of tariffs in the U.S.-China trade war. But companies make clever maneuvers to avoid tariffs and stay competitive during times of trade war. So it’ll be interesting to see how the impact of tariffs on production quality and engineering processes imprints the state of the economy.

In order to cope with the effect of tariff war, it’s best to ensure your business and operations are diversified. Striving to become a low-cost operator (LCO) who produces goods and equipment at a lower cost than other companies is one way to increase the breadth and depth of business operations and safeguard from the effects of tariffs. By working towards an LCO status, you can spark demand, broaden market opportunity, and remain resilient against the impact of tariffs.

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