It feels like no day goes by without a new headline about tariffs. The current trade war between the United States and China reached new levels recently when China instructed its airlines to halt deliveries of Boeing aircraft. This most recent escalation followed the imposition of significant US tariffs on Chinese goods and retaliatory Chinese tariffs, which threatened to more than double the cost of American planes for Chinese carriers.

This example highlights the ever-evolving landscape for the procurement professional. Procurement must now be much more than cost minimisation and compliance. Procurement professionals must now also actively engage with and mitigate against geopolitical risks. These risks can force businesses to reevaluate their sourcing strategies, making continuity of supply and cost stability higher priorities for procurement professionals.

The consequences of geopolitical events can often extend far beyond the initial disruption. The US-China trade war, for example, not only affects trade flows but has also prompted broader strategic shifts. One practice that has quickly emerged is supply chain diversification, whereby organisations have started to explore “China plus one” strategies by seeking alternative manufacturing hubs in countries such as Vietnam, Mexico, or India, to reduce their reliance on a single geopolitical hotspot. A further likely consequence is reduced innovation or collaboration, essential practices in most markets, as trade restrictions and political mistrust can hinder international research and development partnerships.

Thankfully, procurement professionals can leverage their knowledge of supply chain management to reduce the impact of such geopolitical instability. First, organisations can identify and quantify geopolitical risks in key sourcing regions by adopting a systematic approach to environmental scanning. Based on the findings of their research, procurement professionals can engage in scenario planning and consider alternative suppliers or logistics providers to mitigate the risks. Suppliers must be risk-assessed against cost and quality metrics, as well as their exposure to geopolitical risks, based on their location, ownership structure, and dependence on specific trade routes.

Second, once the risks have been identified and are understood, procurement professionals should improve supply chain resilience. In addition to supplier diversification, procurement professionals can explore nearshoring by considering sourcing options closer to home, which can reduce exposure to long-distance shipping disruptions and geopolitical flashpoints. A further valuable practice in this area is to enhance supply chain visibility by working with Tier 1 suppliers, then Tier 2 suppliers, and beyond, to understand product and information flows and gain early warning of disruptions.

Third, when developing new commercial agreements, procurement professionals should negotiate flexible contracts that incorporate clauses addressing potential geopolitical disruptions, such as force majeure provisions that explicitly accommodate political events or tariff changes. Post-contract, procurement professionals should foster a culture of developing strong supplier relationships. By facilitating open communication and collaboration with key suppliers, procurement professionals can understand the supply base's risk mitigation strategies and use this opportunity to develop contingency plans with them. A prerequisite to such supply chain integration is internal integration. Procurement professionals must collaborate with other internal functions, such as legal and finance. Production, marketing, and the C-Suite to ensure an integrated and coordinated organisational approach.

While the approaches discussed offer a roadmap through the current challenges resulting from the tariff escalation, there are additional considerations. Mitigation measures represent a shift away from an optimal sourcing strategy. Assuming that the five rights of procurement were diligently applied when making the incumbent sourcing decisions, these then represent the optimum procurement solution. Simply put, risk mitigation requires financial investment. Additionally, these solutions not only require resources but also a significant amount of time to implement fully.

The ongoing trade tensions offer crucial takeaways for the procurement profession. Most importantly, volatility is in the new normal in supply chain management. Geopolitical landscapes can shift rapidly. Therefore, long-term sourcing strategies must support a dynamic sourcing strategy. Second, the globally interconnected nature of supply chains amplifies the risk. Procurement professionals must consequently adopt a global perspective of the sourcing landscape. Finally, by embracing proactive monitoring, diversification, collaboration, and flexibility, procurement professionals can navigate the political headwinds and deliver wider procurement value.

References

Congressional Research Service (Dec 19, 2023). U.S.-China Technological Competition. https://crsreports.congress.gov/product/pdf/R/R45764 (Illustrates broader tech competition context)

fDi Intelligence (Jan 8, 2024). Geopolitical risk is top concern for business leaders in 2024. https://www.fdiintelligence.com/content/data-trends/geopolitical-risk-is-top-concern-for-business-leaders-in-2024-83367

Gartner. Nearshoring as a Supply Chain Strategy. https://www.gartner.com/en/supply-chain/trends/nearshoring-supply-chain-strategy

McKinsey & Company (Feb 13, 2024). Taking stock of the China Plus One strategy. https://www.mckinsey.com/capabilities/operations/our-insights/taking-stock-of-the-china-plus-one-strategy

Peterson Institute for International Economics (Ongoing). US-China Trade War Tariffs: An Up-to-Date Chart. https://www.piie.com/research/piie-charts/us-china-trade-war-tariffs-date-chart

Reuters (May 15, 2024). China says higher US tariffs will raise costs for Boeing planes. https://www.reuters.com/business/aerospace-defense/china-says-higher-us-tariffs-will-raise-costs-boeing-planes-2024-05-15/ (Used for context on tariff impact on Boeing)

Reuters (May 15, 2024). China says higher US tariffs will raise costs for Boeing planes. https://www.reuters.com/business/aerospace-defense/china-says-higher-us-tariffs-will-raise-costs-boeing-planes-2024-05-15/

U.S. Chamber of Commerce (Aug 18, 2023). The China Plus One Strategy Explained. https://www.uschamber.com/international/the-china-plus-one-strategy-explained

Verisk Maplecroft. Global Risk Analytics. https://www.maplecroft.com/ (Example of a risk intelligence provider)