Supply chain strategies for tariff-driven markets
When confronted with trade barriers like tariffs, businesses face significant challenges in maintaining cost-effective supply chains. However, history provides valuable lessons about successful adaptation strategies. Evenett referenced Australia’s own experience with Chinese economic coercion as a model worth studying.
“At IMD, we teach the playbook that Australian companies used to deal with this, and a lot of that playbook, including the supply chain part of it, is what executives need to consult at this time,” he explained.
The fundamental principle of this playbook relies on the bilateral nature of trade sanctions. Evenett elaborated: “Most trade sanctions are bilateral. That is, country X takes action against country Y. Well, what that often means is, if you can’t export or source from country Y, then find country Z, which you can either export, or source from.”
This approach proved effective for Australian companies when China took punitive action against Australia and its economy in retaliation for Australia’s call for an investigation into the origins of the COVID-19 pandemic. Evenett cited Australia’s Casella wines as a notable example: “One response it made was to buy a vineyard in Chile, and then export from Chile to China, taking advantage of the Chile-China free trade agreement. So, essentially, migrating the supply chain, sourcing, or production is a response for affected firms.”
However, this strategy has limitations. For premium products tied to specific geographical origins, supply chain relocation presents significant challenges. “If you’re Penfolds or Treasury wines, and you’ve got vineyards which have this particular terroir, you can’t do that strategy,” Evenett noted.
Strategic diversification and regionalization
Recent efforts by the US to “de-risk” supply chains from China, without fully decoupling, show that strategic diversification remains a priority beyond partisan trade wars. Multinational firms are actively adjusting their sourcing strategies to reflect this new landscape, increasingly exploring options in Southeast Asia, India, and Mexico – regions that benefit from proximity, cost advantages, or geopolitical alignment.
Beyond immediate responses, businesses must consider longer-term structural changes to their supply chains. Both Evenett and Dong emphasized the importance of diversification as a foundational strategy.
“Geographic diversification is needed, and I think that’s not just because of Trump’s new tariff policy, but because of the global trend of local protectionism,” said Dong.
For multinational corporations, this means avoiding over-reliance on single markets, particularly in politically sensitive regions. “Diversifying their supply base across multiple countries and even continents. In that way, they can better absorb the shocks of tariffs or other trade barriers,” she said.
However, diversification comes with trade-offs that businesses must carefully consider. “Once you diversify your supply base or your customer base, that means supply complexity will increase a lot, and that adds to the costs and systemic risks stemming from this complex supply base,” she cautioned.
Another strategic approach involves nearshoring and regionalization. Nearshoring involves relocating supply chains closer to a company’s home base, while regionalization focuses on prioritizing specific regional markets. Post-US-China trade war research indicated that US firms followed predictable patterns based on their market priorities. “US firms, if their major market is in the US, will choose to re-shore or nearshore their suppliers. But for the US firms whose major markets are not in the US, they will choose those suppliers far from North America,” Dong explained.
