Helping businesses cope with large tariff increases

The problem

Policymakers often say that putting tariffs on imported goods helps American companies, giving domestic businesses the opportunity to grow and improve performance. But significant tariff increases can actually cause problems, such as hindering access to affordable parts from overseas and potentially reducing their efficiency.

The research

This study looked at 52 times when the US greatly increased tariffs between 1990 and 2020, and how they affected 258 American companies. Specifically, the researchers looked at risk and gain. The two main findings were that large tariff increases made it more likely for companies to lose money, and harder to make extra money when opportunities came up. The second point was particularly true; tariffs got in the way of companies taking advantage of good situations. The research also found two factors can help reduce the negative impacts of large tariff increases (LTI) on a company's operational efficiency: having potential suppliers available within the country and a leadership team with experience managing supply chains.

The impact

By revealing the holistic effects of LTI on operational efficiency and identifying mitigating factors, the study makes several contributions to the operations and supply chain management literature while also benefitting domestic firms and policy makers. Businesses can factor in new insights about the adverse consequences of LTI, the importance of monitoring geopolitical risks with global supply chain, and of having managers with supply chain experience. Policymakers are better placed to design of policies that do in fact help domestic competitiveness – rather than unintentionally constrain growth and competition. The findings are relevant beyond the US too, including for the Australian context.

Department: Management and Marketing 
Area: Tariffs