Following the incredible international success of the ‘Trump, Tariffs and Trade’ episode of The Procurement Show podcast, renowned trainer and award-winning author on negotiation, Jonathan O’Brien, provides a simple guide on what procurement needs to do to negotiate through the new world order and international trade wars, brought on by new reciprocal tariffs and supply chain shifts and rising barriers to global trade into the US.
A New World Order
When President Trump announced widespread reciprocal supply chain tariffs across all goods entering the US he was not only making a bold move away from the economic principles of globalization that have powered our planet’s commerce for many decades, he was also signalling the start of a new world order. Global trade is no enemy, in fact it has delivered to each and every one of us, the lifestyles and affordable goods and services that are part of the everyday.
Yet, the shiny polished outer of global trade is now looking tarnished. Post pandemic, we all realized how fragile our supply chains had become. Add to that, wars and geopolitical instability, and distance sources of supply have become more problematic than promising.
And then there is the need to comply with new sustainability legislation, meaning companies now need to give a damn about what happens in remote supply chains. It is fair to say that before President Trump’s second term, global trade was already on the ropes, but not quite out of the running. However, President’s Trump’s impact of tariffs may well have dealt the killer blow to globalization, with the world now compelled to be on a pathway back to localization, or at least some way towards it.
However, there is more to this than shoring up supply chains management in the US. America now wants to turn its superpower status into profit and is on a determined mission to do so, casting aside anyone that gets in the way. Claims by the Trump administration that America has been treated unfairly while the rest of the world are not paying their fair share, doesn’t entirely stand up to scrutiny. When you check the facts and data, it seems that those countries that have been hit with the highest tariffs, are the ones where a number of subjective and somewhat arbitrary determinations have come into play, including assessments of how other countries have utilized American IP.
It seems that within President Trumps determination of tariffs, he is also deciding who he wants in his club and who is less welcome. None of that matters however as the rah rah is enough to rally all the support needed where needed and it has already done just this.
President Trump has made it very clear that as part of the MAGA mission, which has morphed into MAWA (Great becoming Wealthy!) he wants manufacturing and jobs back in the US. This is not a switch you can flip overnight, but rather, a decade of slow changes would be needed to relocate entire manufacturing hubs and supply chain management and value chain networks. Has he missed that nuance? Of course not, and it’s entirely possible that the long-term mission is indeed to make America the manufacturing capital of the world. It’s not a blind bet as already, giant global corporations have pledged approaching $3tn in investment to relocate manufacturing to the US.
But what about now and the next few years, as financial markets react unfavourably to what is playing out and the US economy wobbles, followed closely by an economic downturn across the rest of the world proportionate to the countries most impacted? To understand this, we need to understand the bigger picture and the bigger game that is in motion. What might appear to be crazy, ill-thought-out decisions are the first moves in a global game of chess that has been thoroughly thought through. To predict the next moves, we must understand the tariff impact on supply chain structures, supply chain management, and the role of international trade agreements as bargaining chips:
- The US has some long-term financial challenges with rising national debt and persistent budget deficits and has $7tn worth of debt that needs to be refinanced in 6 months’ time. Currently, the rate to refinance is 4% which would be crippling to the US economy. So, President Trump needs to get interest rates down, but he has no influence over the Federal Reserve System (the central bank of the US). Therefore, he needs markets to show weakness to grow i.e. for investors to stop buying stocks and move into bonds – precisely what happens if you announce widespread import tariffs. In essence, President Trump needs to tank the US economy in the short-term.
- World resources are getting scarce and many of the critical minerals and metals we need in coming decades will, at current rates of consumption, start to run out. Behind many of the actions of the world’s most dominant countries, lies a play to protect existing, or gain access to new, critical resources; Russia’s invasion of Ukraine, China’s export tariffs on key minerals and President Trump’s play-to-buy Greenland (under the guise of protecting international world security). All have access to key resources as a key driving force and signal a universal trend of self-preservation and protectionism.
- Since the end of the Second World War, a new order emerged where Western countries formed a coalition to ensure future security and peace. With this, a new international trade agreement emerged (as the General Agreement on Tariffs and Trade or GATT, now part of WTO), establishing principles around non-discrimination of countries within the new world order, and agreement that counties would treat all trading partners equally (called the Most Favoured Nation clause).
These principles have guided international trade amongst Western nations for 75 years. Yet, President Trump’s tariffs have effectively now torn up this agreement and signalled the US is not afraid to turn away from decades-old dependencies and alliances. Such a move would seem self-defeating, and that would be true if it was truly America’s intention to isolate itself from its allies. However, this is not the case, and it seems that President Trump is confident to bet everything on the fact that America’s allies can’t risk being distanced by the US, but crucially it also provides a stage for America to revaluate who is allies truly are, and who it wants as its future allies. And that brings me to my final point:
- The one thing that President Trump is well accomplished at is the art of doing a great deal, and he has the track record to prove it. What we are seeing, and caught up in, is one big planetary deal with the sole aim of America turning its superpower status into profit. However, in order to do this President Trump needs to compel the other players to come to the negotiating table and show that in uncertain terms, he is ready to pursue alternative strategies. Threatening to pull out of NATO compelled European countries to finally increase their defence spend and rebalance the contributions, so all pay their fair share.
Tariffs shake things up in the short-term, force interest rates in the US down, and compel other countries to come to the table hungry to do a deal, and ready and willing to now accept a lower tariff than initially imposed where there were previously none. This puts America in a very strong negotiating position to redefine global trade in a way that favours ‘friend’ nations and penalises ‘foe’ nations or those where the balance of trade is not in America’s best interest.
Everything we see playing out may appear chaotic and high risk, yet it is, in fact, one big negotiation, with the sole aim of compelling countries to come to the table if they want to be part of the new, new world order. In this new world a new hierarchy is emerging, and America will be number one, with countries that have resources to trade or who can make a credible threat coming in second and third.
Are Tariffs For Real?
Short-term – yes. Medium term – it all depends on who you are. Expect tariffs to be the number one priority for countries around the world who will now clamber to do a new deal with the US. As the new, new world order emerges, favoured nations will be succesful and get a ticket to the ball, whilst the ugly sister nations that the US doesn’t favour will be left at home, unless of course they have rich reserves of mineral resources to offer up.
What this means is for the short-term we can expect a dip in the US economy through 2025, which will reverberate around the world and cause other economies to dip in response. We will see a series of county-by-country deals being done later this year which will gradually establish who is in the new ‘club.’ There may be some upsides short-term as China looks for new ways to find buyers for the trade it loses in the US. This will mean there are deals to be done, yet the UK and EU may well take steps to prevent this as a flood of cheap Chinese goods into these economies will cause other impacts nearer to home. Also, it could be a good time for sustainability, as localization naturally eliminates many of the challenges of sourcing from remote locations.
The one thing we can be certain of is that nothing is certain, and we can’t know for sure how this will play out. Despite the forecasts, we also have no firm idea of how the world economies and world markets will react or fare. That said, I think we can now bet on the new world order having been permanently changed, and we now have everything to play for as we sail into uncharted territory. For this reason, it’s time for procurement to draw up its battle plans!
Drawing Up Battle Plans - What Should We Do And How Can We Get Out Of This?
The first thing to remember is that we are part of the bigger story playing out. It’s important to keep in perspective of the bigger, macro driving factors I’ve outlined. This means building a number of scenario plans looking short to medium term, but also being ready to make dramatic changes when the time is right. After all, as I said earlier, we can’t simply pivot an entire supply chain that spans multiple global territories onshore overnight and, depending upon where in the world we are, it may not be needed in coming months, but we need to be ready.
Right now, procurement needs to be on a war footing with a robust set of battle plans to win through what is set to be a very difficult year or so. It might seem logical to turn to technology and AI to help here, and we can do this to a degree. Afterall, we are awash with latest generation procurement tech that is slowly changing our industry in ways we never imagined, and AI is powering procurement more than any other function. But technology alone will not bring us out of this. Current procurement technology can play a key role in providing specific intelligence and helping with decision making as we navigate through this.
However, what is available to us today is not sufficiently developed to yield all the solutions we need hard and fast, right now. In fact, if you are a CPO waiting for the magic AI powered button to provide the solution to sort things out, your organization will become an early casualty of a trade war. To win, the battle ahead needs the best procurement talent on the front line, with the best training, and equipped with the best weaponry which may include some technology and AI. It will also include good old fashioned skilled practitioners, working together with the wider organization to determine and implement new procurement and sourcing strategies. There are four steps to take:
- Map the biggest impacts.
- Draw up three battle plans.
- Train and equip the team with the best weaponry.
- Let battle commence – negotiate price hikes down.
I will explore each in turn:
Step 1 - Map The Biggest Impacts
The first step is to map the tariff impact on supply chain. How we do this very much depends upon where in the world you are located and where your supply chains run through and to. Begin by quantifying the impact and mapping the total tariff increases across the highest spend bought in goods. Determine the categories, suppliers and supply chain management where the biggest impacts lie. Pareto principles apply to concentrate on the 20% of spend areas that make up 80% of the impacts. This is the intelligence necessary to build prioritized battle plans.
Step 2 - Draw Up Three Battle Plans
1. Quick wins plan – Determine areas where we can make a change quickly without risk and drive the changes in. Consider:
- What are the areas of supply that we can switch onshore or otherwise to avoid supply chain tariffs easily, where there is market capacity and we can secure comparable, or minimal additional total cost of ownership?
- Are there any ‘tariff workarounds’ that might bring short-term benefits, for example, if we change the specification of what we buy, or if goods are shipped to another before being shipped to the US, will that attract a lower tariff? Any such loopholes are likely to be short lived but might be worth exploiting in the short term.
2. Build short-medium term attack plans – Each impacted category, supplier or supply chain will be different and will have a unique set of challenges, demanding its own plan of attack to mitigate risk and impacts. Some will need new category strategies determined and driven in fast, for others, we may need to reposition key supplier relationships, drive hard negotiations and re-shape an entire supply chain. In particular, procurement functions need to be doing the following as appropriate for each area of tariff impact:
- Ultra-current macro environment and market intelligence – Establish and maintain a picture ongoing of the changing external macro environment as well as individual marketplaces for each impacted area. Tools like good old fashioned PESTLE analysis and Porter’s Five Forces are key here, along with ultra-current market intelligence. Technology and AI can play a key enabling role here too.
- Determine risk exposure – Update or establish risk and contingency plans for each impacted area and review frequently.
- Map supply chains – Map out the most problematic supply and value chain networks in full, determine points of tariff induced risk and opportunity, and pursue actions to change supply chains.
- Re-evaluate key suppliers – Based upon the most impacted areas of supply, determine how the current body of important or strategic suppliers needs to change. Determine who can help us (e.g. by switching new areas of supply to them or incentivising them to increase existing onshore/rightshore capacity), who might not have a place moving forward, and where we might need some new partners. Pursue plans to establish new supplier relationships.
- Revisit category strategies – Existing category strategies may not be fit for purpose in the new tariff driven world. What seemed like the optimum sourcing arrangement last year may now be working against us. For the most impacted categories, it’s time to revisit the category strategy fast, and re-consider the fundamental need being fulfilled. Also consider what the new business requirements to do this might look like, as well as which value levels will have the greatest leverage in the new world. It’s time for hard and fast Category Management with rapid implementation of new category strategies to drive change. It may also be time to prematurely renegotiate key supply contracts to achieve this.
- Negotiate down price rises – Of course, where suppliers are impacted by tariff rises, they will seek to pass cost increases on. Now is the time for hard negotiation to mitigate price hikes – more on how to do this shortly.
3. Medium to Long-term plan – In case supply chain tariffs remain, and they may not, in parallel with the above we need to build plans for the long-term to onshore, rightshore, insource or other action that removes the impact of tariffs. This is no small task and would typically involve reconsidering what the core business of the company is and the fundamental ‘make vs buy’ decision.
As a minimum, a long-term plan might involve finding new suppliers closer to home who we could transition to, and then they would need to have sufficient capacity amidst the rest of the world, doing the same as we are doing. It might mean we need to help existing suppliers transition to expand capacity to take on new production. It might also mean we need to set up our own new manufacturing facilities and vertically integrate entire supply chains into our business, again whilst the rest of the world looks to build new factories in America.
Much of what is needed here could take many years and involve complex real estate deals, difficult contractual negotiations, transition plans, new logistics arrangements and so on. Whilst the long-term plans may not, in time, be actioned if tariffs are short lived, doing the planning now is essential to create a readiness to move.
Crucially, procurement should not go it alone for this long-term planning, but rather, how to move forward here are in most cases wider strategic business decisions that need the involvement and support of the executive team.
Step 3 - Equip Your Team With The Right Weapons And Good Battle Training
This period of instability in global trade and supply chain management demands exceptional, talented and highly skilled procurement people operating strategically to find the ways through this, working together with the wider business using a common language, process and ways of working. The problem, however, is that both investment in training and good strategic procurement have been pushed aside in recent years. This has happened in order to enable technology adoption and deal with the perfect storm of procurement challenges we’ve been hit with. This means rapid upskilling and equipping, with three areas being of critical importance right now. To pull the organization through this, procurement now needs:
- Advanced negotiation capability – including specific training on price hike mitigation
- Strategic capability to review, determine and implement new category strategies – teams need advanced Category Management capability, including the approaches needed for rapid category project deployment.
- Strategic Supplier Relationship Management with accomplished supplier management experience – including building new collaborative relationships, managing risk, problem resolution, supply chain management and determining new strategic and important relationships.
Step 4 - Let Battle Commence - How To Negotiate Tariff Price Hikes Down
Finally, procurement is about to be bombarded with price hike requests from those suppliers who are impacted by supply chain tariffs. As we saw in the years post pandemic, having a contract with fixed pricing, or a price review mechanism, will not prevent a supplier claiming, ‘the situation has changed’ and seeking to justify breaking contract. Furthermore, where suppliers struggled to pass on cost increases before, we can expect them to be much more ready and equipped to do this and not afraid to threaten to halt supply unless we meet them. So here are the four key steps to negotiate tariff price hikes down and mitigate the degree of increase:
We can help – want to know more?
We can help your procurement team navigate out of this and get to a strong position fast.
Find out more about how we can train and equip your team for advanced negotiation using the Red Sheet® method, how we can rapidly equip your team to review key categories using 5i® Category Management, and how we can help your team work with your key suppliers to find a way through this using Supplier Relationship Management.
And, find out how our Procleus platform for strategic procurement, powered by AI, will equip, enable and support your team to do all these things.