Trade War

A New Trade War Begins

On February 1, 2025, President Donald Trump announced the implementation of steep new tariffs on imports from Canada, Mexico, and China. Effective immediately, a 25% tariff has been imposed on Canadian and Mexican imports, while Chinese goods face a 10% tariff increase along with EU suppliers. Trump’s administration claims these measures are necessary to protect American industries and curb economic imbalances caused by foreign competition (The Wall Street Journal). Even if these tariffs end up not being implemented fully (Mexico has stalled it a month) and are merely used as a viable threat to get other gains for the US, then they must kick-start procurement organizations globally. Trade wars, even in small measures, are a force that will threaten global supply chains, and any procurement organization worth their salt must find alternative suppliers that are not a risk if the president suddenly changes his mind again.

With COVID we saw the supply effect roll rapidly across the globe, but still we mostly had a bit (not a lot) of time to try to find other sources of supply; however, with US-initiated trade wars being just one late-night tweet and a signature away, then the threat is much faster and will persist for the next 4 years (at least).

Procurement teams now face potentially higher costs, disrupted supply chains, and increased complexity in sourcing decisions. Without clear visibility into their supply chains, companies will struggle to react quickly and mitigate risks—this is where procurement analytics platforms like CostBits become invaluable. By providing real-time cost and supplier insights (CostBits Spend Analytics), businesses can navigate these challenges efficiently and quickly focus on finding alternative suppliers, avoiding high-risk nations such as Russia and the USA.

The Structure of Trade Wars

For procurement to act most effectively, we first must understand that trade wars are an old protectionist and highly ineffective invention, but they also follow a predictable structure, often beginning with one country imposing tariffs or trade restrictions on another, as we are seeing now with the US making the first move. These policies are designed to protect domestic industries but frequently result in retaliation from the affected country, leading to escalating trade barriers—equally predictable, all targeted countries have already announced retaliatory measures. Over time, all economies suffer as businesses and consumers face higher costs, supply shortages, and reduced trade volumes.

Most trade wars are either initiated due to dreams of economic nationalism, which seeks to protect local industries from foreign competition, or from political tensions, where trade restrictions are used as leverage in diplomatic negotiations. IF driven by economic nationalism, then the hope is always to reduce trade deficits from a simplistic import/export perspective and fully ignore that in a globalized economy, most countries (especially the US with 18.000 billion USD invested in the EU) have significant non-national investments generating profits back to the home country, which may compensate for any simple trade deficit. (The Economist)

Some of the challenges with trade wars are that they are being started, run, and eventually dismantled by the government and thus NOT by the affected parties, which are businesses and consumers. As a government with nothing at stake except voter support, but no real personal or business skin in the game, it’s an unbalanced act of government force where everyone but the decision-makers feels the impact. (BBC News).

Do Trade Wars Work? Analyzing Historical Outcomes

Protecting key industries has been a significant motivation behind previous trade disputes, such as Trump’s 2018 steel tariffs, which were aimed at revitalizing American steel production; however, the overall effect on the US economy was undeniably negative (Columbia), which makes it even more interesting as to why this tool is again the US administration's first move. This negative effect seems to have been forgotten or ignored by the new US government in its pursuit of other wins.

But given that trade wars are such an old invention and that it seem to come back in favor every so often, its worth considering if they can work…

If a trade war is merely an outsized conversation starter for more border control (a good idea considering the rampant drug usage in the US), then it might work. Pulling a trade war threat before you even make it clear what you want to discuss with your trade partners is an odd move and a kind reminder to all procurement departments to not expect a coherent chain of events with this administration.

If the current trade war threat is a move to enforce nearshoring of critical items such as semiconductors, then it is indeed a valid request but one that should be taken with the suppliers, not with entire countries. There are plenty of ways to motivate, e.g., TSMC to expand their semiconductor operations in the US, and such a move is for the long term—beyond the current administration's expected rule. Trump has already toyed with the idea of a 3rd term, which is already being supported by some (Fox5) and follows the same tactics as we saw with Putin's change of the Russian constitution (EU Parliament). This will stretch the unpredictability of the US trade setup from 4 to potentially 8 years for both US and non-US companies.

History provides numerous examples of trade wars that failed to deliver their intended benefits. One of the most infamous cases was the Smoot-Hawley Tariff Act (1930s), which was implemented to protect American agriculture and manufacturing. Instead of strengthening the economy, it led to retaliatory tariffs from other countries, causing global trade to collapse and deepening the Great Depression (Britanica).

More recently, the U.S.-China Trade War (2018-Present) illustrates the mixed outcomes of protectionist policies. Initiated under Trump and continued under Biden, the trade war targeted Chinese electronics, machinery, and agriculture with tariffs. While some domestic industries saw gains, the overall effects included higher costs for American consumers. supply chain disruptions, and minimal impact on reducing the U.S.-China trade deficit (Harvard).

So while trade wars may seem like an effective policy in the short term, their long-term impacts are often damaging. Initially, tariffs may provide a boost to domestic industries by reducing foreign competition; however, the resulting supply chain disruptions and retaliatory measures can lead to higher costs for businesses and inflationary pressures on consumers. Over time, trade wars tend to reduce overall economic growth rather than foster sustainable economic advantages (Financial Times).

With everyone having easy access to alternative suppliers from the global marketplaces and viable supply chains to support any supplier changes, is it realistic that non-US buyers can continue their business with trusted long-term US suppliers, which overnight went from “stable and trusted” to “high risk”?

What Procurement Teams Must Do ASAP

The stark reality is that long-term US suppliers with great working relationships are being put at risk due to internal US politics, and they have only limited ways of curbing their likely export reductions. Not every export business in the US has the ability to reduce their margins or move their production partially out of the US to avoid the retaliatory tariffs likely to be imposed.

Procurement must once again, as with COVID, immediately spring into action and execute on some very fundamental procurement best practices. None of these practices are new, but just like we excessively over reaped the “peace dividend” assuming that Putin will stop his land grab (Ukraine, not Greenland, Canada, or the Panama Canal), then we again have to get our procurement house in order through rapid execution.

• Immediately identify all goods and services procured from high-risk countries such as the US (or the rest of the world if you are a US buyer). This is a quick one-meeting-only exercise between Procurement, Legal, Finance, and the product owners with CostBits—for non-CostBits users, we wish you luck.
• Increase stock levels for high-exposure SKU’s. This buys the organization a bit of time to activate their “already contracted and engaged secondary suppliers.”
• If you entirely missed COVID's supply effects and don't have secondary suppliers in place, then now is the time to get it done. Obviously from other countries than the ones involved in the trade war. We often see second sources from the same countries—which is great if the issue is on a business level, but it is not good when it is national conflicts. Note that to open up for more suppliers, this might entail lowering compliance requirements for ESG, suppliers financial stability, etc.
• Reassess your products dependency on raw materials and components. Where current specifications dictate single sourcing from a high-risk country, this must be challenged.
• Monitor progress on a daily or weekly basis. Leverage the constant live stream of cleaned supplier and transaction data in CostBits to effectively see your transactions move from high-risk to low-risk supplier countries.

Conclusion; Adapt or Suffer

Trade wars are, as most things involving politicians, unpredictable, but businesses that embrace data-driven procurement strategies will emerge stronger. CostBits ensures that procurement teams have the insights they need to make smart, agile decisions in uncertain times. Staying informed and using data to drive procurement decisions is the best way to survive and thrive in a turbulent trade environment (CostBits Blog).

See also our top 20 free advice for rapidly reducing supplier costs