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well obviously so many questions around the
new tariffs and their impact not only on the
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American economy but the global economy as well
as to what this will mean for supply chains We
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welcome in Cynthil Viraaban who is professor of
operations information and decisions here at the
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Wharton School Cyntho great to talk to you again
How are you sir i'm well Dan How are you i'm doing
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well Obviously this is a very again unique time
I know we had this type of a conversation when
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COVID kind of broke out but this is obviously how
different is what we're going to potentially see
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play out with supply chains now in comparison
to four years ago It is it is going to be very
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different Um I believe mainly because um there
was some uncertainty during co the uncertainty
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was related to whether vaccines will be here and
what the potential healthcare damage would be and
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um eventually everybody believed supply
chains would be back to what they were before
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um the pandemic Um now we are in a new territory
Um it's unclear um to me and as well as a lot of
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uh economists looking at this whether um we are
seeing a reset of the global economy and trade and
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um and therefore uh we are in new territory for
sure So then when you think about the impact of
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tariffs and supply chain what are the areas that
really draw your attention the most well first
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tariffs are a kind of a levy and a tax So uh the
immediate um the immediate effect is going to be
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very related to what an increase in tax would
do to a lot of consumption So the first thing
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you're going to see is consumption go down Um and
uh as a related effect uh the prices will also go
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up depending on how much margins companies
have to to absorb some of the cost shock and
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um transfer some of the cost shock to its
consumers So prices go up uh willingness to
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spend goes down Uh this is uh generally bad for
supply chains Um it's particularly bad for cheap
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industrials Um particularly if you have cheap
apparel supply chain that's going to suffer a
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lot of damage Um if you're thinking of auto
supply chain or industrial supply chain with
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a lot of equipment manufacturing you will have a
lot of parts that are cheap parts that have very
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low margin Uh those costs are going to go up and
uh we're going to see price increases there there
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as well So it's um yeah that's the first order
effect and and it's not only uh obviously uh
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the parts and the components to whatever companies
are building out but obviously finished product as
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well Uh companies are going to reassess you know
the the types of shipments of finished products
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they make to and from the United States Yeah Of
course Yeah Yeah This is exactly the problem So
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when you when you saw one of the news items that
I saw that caught my attention was um the plant
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production uh plant production plants went down in
Mexico because of tariffs and immediately um there
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was a reaction from the US auto supply market as
well because the components that so typically an
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auto manufacturing a car manufacturing company a
finished good is a car but you would imagine at
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least four different supply chains in the backend
integration that uh parts come in from China parts
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come in into Mexico back into the US go back
to Mexico go to Canada come back into the US
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as a final finished product So everybody is kind
of backing off on their capacity and their plant
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layoffs and so that's going to be a problem Yeah
How long how long does it take for those impacts
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to kind of really work their way into the system
and be seen by the consumer i I think it's almost
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going to be immediate this time I believe because
the first thing is going you already see that in
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um um in the resale value of uh old cars um
because there is only limited inventories that
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are among and the car prices were going down uh
resale value for most cars and there started going
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up just like what you saw during the pandemic
and um the problem with inventories unlike
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um problem with financials is there is always some
uh value in willingness to trade about variance
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People like some kind of shocks Um people trade
buy low and things like that Inventories it they
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are a depreciating asset Uh you hold inventories
you're going to lose value over time The only
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way to kind of tide over this is to buy a lot of
inventory at cheap uh but as the prices uh if the
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prices go down on the cost of these materials it's
going to be a problem If the prices go up also
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it's going to be a problem So you're in a tight
spot right and so for a lot of companies that
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have been moving material and product into the US
to try and get ahead of these tariffs the hope is
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that they can still sell it at a a regularly
normal price But that potential of prices you
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know seeing that impact is going to be coming here
really quickly isn't it yeah that's going to be
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that's going to be uh the first order problem as I
said The second order problem is there's going to
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be some time that's required and that's where your
question comes in um to build these things It's
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not easy to build a washing machine right away You
need to train people to build things and yeah we
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it's possible to get using an industrial policy
to get to that position over a year Um but those
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changes need to be gradual and patient Uh but
unfortunately uh my own view is that's not what we
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are seeing So a company like uh Jaguar Land Rover
who announced uh that they were going to pause
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shipments to the US for a month because of these
tariffs I guess the expectation is we're going to
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see more companies make moves like that because of
of the impact that they might start to feel in the
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near future Yeah absolutely Because um the other
company I was thinking of just as you were uh
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talking about Land Rover was uh Nintendo uh Switch
2 is coming out and um and they have um passed all
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the pre-orders Um essentially um thinking about
this is uh there is a pricing question going on
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here How much can we absorb going back to my first
comment um all these companies are thinking there
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is a price margin We're going to get hit on the
price margin how much are we going to absorb and
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how much can we realistically transfer it to
consumers Um that creates a unfortunate effect
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here for a company like Jaguar or Nintendo there's
consumers world over Um so if you can sell to
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those consumers because you're limited in capacity
you would first go there and uh instead make
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margins I I'll finish up on this So then companies
that are in the shipping industry and the trucking
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industry and the rail industry the ones that are
normally moving a lot of this product they have to
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be very worried at this point Yeah we are seeing a
decoupling going on in uh in in live action right
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now uh because as soon as China announced a
reciprocal uh tariffs of 34% Um the simply
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shipping costs will go up um because you're going
to end up paying tariffs everywhere along the way
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and now more countries are going to get in and
rebalance their tariff rates and things like
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that So yeah it's going to be a tough problem Uh
let me ask you one more thing because I think it's
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the the question on a lot of people's minds is are
we in a tariff war right now we are we are there
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is no way no I I think that's a escalation of
terms so I'd like to not think about it that way
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um but um but yeah we are in in uh in an economic
um contradiction where uh people are disagreeing
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and one of the tools that countries are bringing
in to deal with each other is increasing and
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negotiating through tariffs And how much of it
is negotiation and how much of is it uh pushing
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their costs uh that depends on whether we want
to call it war or negotiations really So Cynthio
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great to have you with us Thanks very much All
the best Thank you Thank you Cynthio Vera Ragavan
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who is professor of operations information
and decisions here at the Wharton School