The potential for tariffs to “bring jobs back to America” is a hot topic, and I’ve been thinking about the near-term implications (while ignoring the reality that US unemployment is only 4.2%.) I’ve also talked with several owners of the small and medium job shops here in Northern California. Here’s a mix of my thoughts and theirs. This applies mostly to specialized, high tech, and/or low volume parts (<10k/year), or the tools that make higher volume consumer goods.
Some Scenes from the big picture:
Detroit Industry by Diego Rivera. Photo By Lars Plougmann
Tariffs of 10-25% on raw materials only won’t bankrupt manufacturers—it’s a fraction of the commodity cost spike seen during/after Covid. If 25% of a product’s cost is materials, a 25% tariff increases costs ~6%.
Some shops reported increased order quantities for existing products, but it’s too early to tell if that’s coincidence or tariff risk mitigation. They aren’t seeing any new business related to tariffs yet. I suspect this is because Trump’s erratic moves can’t be used to justify launching an onshoring project immediately.
The breadth and suddenness of change will likely result in a nightmare at Customs (DHL appears to be already anticipating this…) Manufacturers who have non-US sources should expect delays and related costs.
Tariffs will actually spur some offshoring, as companies with an international customer base will flee the new uncertainty of the US. They can avoid both ends of the retaliatory war by avoiding the US in their supply chain.
If these tariffs are genuinely intended to shore up American manufacturing, the US needs to train legions more skilled workers. Shops are already struggling to hire competent people to run existing jobs. A well planned policy change would have included a massive worker training program for operators, installers, and service techs.
A well-planned policy would also include a carve out for imported tooling and equipment, at least in the short term. You can’t get to work without tools, and high-end manufacturing equipment is sourced world-wide from a finite number of tool builders, often with long lead times. If buying that equipment costs a US firm 25% more, their foreign competitors gain even more edge.
This engineer’s attempt at economic analysis
As long as the US has a higher standard and cost of living than China, Vietnam, etc, it will need higher labor efficiency to compete. Consider an American CNC machinist paid $57k/year to make 1000 widgets ($57/widget), competing with a Chinese CNC machinist paid $21K/year to make those 1000 widgets with 100% tariff ($42/widget)—the US made part is still more expensive.
I’m greatly simplifying by ignoring differences in healthcare, shipping, energy, regulatory, and overhead costs, but the point still stands—even with tariffs, the US worker has to be >25% more efficient, and then keep increasing his or her efficiency, because their counterpart in China is trying to get better too. Efficiency gains often require capital expenditures, but owners will be hesitant to commit millions of dollars on a business case that can be collapsed by a 2 AM Truth Social post.
Am I changing my business plans or advising my clients differently?
No, on balance. Last week, I ordered small volume custom parts from both US and Asian suppliers. I chose US suppliers when I needed more control over a multi-step supply chain. I chose an overseas machine shop for parts that will ship direct to my client’s UK office, thus avoiding the US tariff mess altogether. I likely would have chosen them anyway, for piece and shipping cost reasons ($500 vs. $1100, delivered…). I prefer local suppliers for inspection and logistics purposes, but I also have a responsibility to deliver value to my clients.
I have a few more thoughts regarding inshoring, but will save those for the next post. Hopefully I’ll get it written before the rules change again…