Memo|Economy   6 Minute Read

Trump Doesn’t Understand Global Supply Chains

Published September 13, 2016

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In the early 1910s, the Ford Model T was produced entirely at the Highland Park Ford Plant just outside of Detroit, using products exclusively from the surrounding area.1 Now? Ford relies on over 11,000 total supplier companies in more than 60 countries to make their cars and trucks.2

Ford isn’t alone. Because we can now send goods and information quickly and easily across the globe, companies have transformed how they make things. This phenomenon has marked the rise of “global supply chains”—where American and foreign components are now used together to make products more cost-effectively.

But while more companies are tapping into these global supply chains, some of Donald Trump’s most notable protectionist policies would throw these supply chains out of whack—increasing costs for business and for consumers. Just take the popular Apple iPhone—by our estimates, Trump’s policy would increase its price by over $100.

This paper will explain how global supply chains work and why they’re vital. Then, we will show how protectionist trade policies, like Trump’s 45% tariff on Chinese goods, will impact these global supply chains, raise the costs of everyday goods, and potentially affect jobs.

What Are Supply Chains?

The way we make things is drastically different than how it was done in the past. As noted above, Ford’s Model T used to be made from products exclusive to the surrounding area. But today’s Ford Mustang couldn’t be more different.

The Mustang’s windshield is produced by Japan’s Asahi Glass, the dashboard and center console by France’s Faurecia, and the seats by Recaro, a German company.3 Meanwhile, the Ford Focus also has parts from all over the world. The bumper is from Canada’s Magna, the seatbelts are made by a Swedish company called Autoliv, and Johnson Electric, a Chinese-company, produces the climate controls.4 These parts, plus thousands more, are made around the globe and then get sent to a single factory where the car is fully assembled.

With a global supply chain, a company enlists a number of suppliers from all over the world to produce an item. Global supply chains allow businesses to specialize, which means lower costs for consumers.5 While they are complex and have many moving parts, global supply chains are highly critical and a central part of the U.S. economy. It’s estimated that over half of U.S. imports are what’s called intermediate imports—items that will go into another product as part of a supply chain: steel, for instance, that will be used for a car, or yarn in the production of clothing, are both good examples of intermediate imports.6  

Nothing quite captures the complexity of global supply chains like the airplane. The Boeing 787 has about 2.3 million parts, which come from all over the world.7 The landing gear is from the United Kingdom, while the wheel well for the landing gear comes from Japan. The fuselage is produced in three separate pieces and comes from factories in Italy and the United States.8 The wings have components from Korea, Japan, Australia, and Canada. The engines are made in either the United Kingdom or the United States, depending on the type, and the passenger entry doors are from France, while the cargo doors are from Sweden.9

All these pieces, plus the millions more from other factories around the globe, are sent to either the Boeing 787 final assembly factory in Everett, Washington or the one in Charleston, South Carolina.10 Once they’re put together, the plane is painted and sent to the airline that ordered it.

Global supply chains are important and are used in a number of industries—from car and plane manufacturers, to food and beverage companies, to industrial supply companies. They are an important part of trade, so without global supply chains, there would be a significant negative impact on the U.S. and global economies.

What Would Trump’s Protectionist Trade Policies Do To Supply Chains?

Because global supply chains are so important to the U.S. economy, it is a big concern that Donald Trump, the Republican presidential nominee, wants to raise tariffs on goods from China and Mexico, two of our largest trade partners. As we have previously highlighted, leading thinkers on both sides of the aisle have said Trump’s policies would launch a trade war, double the unemployment rate, and shrink the U.S. economy.11 Trump’s policies would also squeeze supply chains—since he wants U.S. companies to build their products here in the United States—which, in turn, would lighten the wallets of American consumers and could even eliminate jobs here in the United States.12

To show you how this would work, let’s first look at how this would affect American consumers through a product that millions of Americans have bought: an Apple iPhone.

Apple’s iPhone 6s Plus costs about $236 to produce, with pieces coming from a number of countries, most of which are in Asia.13 These pieces then go to an assembly plant, which puts together all of these components. Six of Apple’s seven final assembly plants for phones are in China. While we don’t know the exact output of each plant, let’s assume that each factory assembles an equal share of phones; that means about 85% of all iPhones are produced in China.14 So, of the 231 million iPhones sold in 2015, 85%, or 196 million iPhones, were made in China.

Of all the iPhones that are made, anywhere from 40-50% head to the United States. Assuming the lower bound (40%) of those Chinese-made iPhones head to the United States, this means about 79 million Chinese-made iPhones are brought into America, costing about $18.5 billion.15 Phones currently enter the United States duty free. These phones, regardless of the origin of their components, would be subject Trump’s tariffs because of where they are assembled: China. A 45% tariff on these phones, like Trump wants, would raise the cost by $8.3 billion to $26.8 billion, or $106 per iPhone sold.16

Tightening supply chains affects more than just consumer pocketbooks—it also affects jobs. Take the globally interconnected automotive supply chain, where nearly 40% of U.S. auto parts get exported to Mexico.17 This includes parts from small, medium, and large companies throughout the United States, like tires by Michelin, headlights made by Stanley Electric, and drivetrains from Dana. Some of these U.S. parts are shipped and assembled in Mexico, and the finished car is then sent back across the border, ready to be sold. Because of NAFTA, this assembled car currently faces no tariffs, but Trump wants to levy a 35% tariff on Mexican auto imports. This means prices of cars assembled in Mexico that use U.S. auto parts will increase, affecting the thousands of U.S. workers who produce these auto parts and rely on a competitive price in order for the car to sell.

For example, the Ram 1500 truck, which is assembled in Mexico, could see its base price jump by $9,000 to $35,000.18 This huge price jump might mean that consumers now look at other, comparable trucks. This will hurt Ram 1500 sales, but also the sales of American companies that supply parts to the Ram 1500. Similarly, Ford trucks are assembled in the United States, but use Mexican-made engines, which would be subject to Trump’s tariff.19 This tariff means a price increase for the F-150, America’s best-selling truck, putting Ford as well as the other American suppliers at a disadvantage. No matter how you slice it, the tariffs mean higher prices for consumers. And that could also mean American jobs are on the line.

There’s no telling exactly what these trade policies will do to global supply chains, but they’ll definitely be thrown out of whack. And they’ll almost certainly start a trade war with other trade partners, raise the prices of goods for American consumers, and might even cost Americans their jobs.

Conclusion

In the last two decades, the world economy has become highly integrated with supply chains that span the globe. Countries that were barely linked a decade ago are now close trading partners and clearly see the benefit of economic connections. Levying tariffs already raises prices for American consumers. And now because of strong global supply chains, levying tariffs on foreign goods could mean you’re hurting American consumers even more. Trump has said that his trade policy is aimed at protecting American workers and supporting American consumers. It’s sad that his policy won’t do either.

  1. “100 years of the Moving Assembly Line,” Ford Motor Company. Accessed August 26, 2016. Available at: http://corporate.ford.com/innovation/100-years-moving-assembly-line.html.

  2. “Supply Chain Overview,” Ford Motor Company, Accessed August 26, 2016. Available at: https://corporate.ford.com/microsites/sustainability-report-2014-15/supply-overview-abf.html.

  3. Julian Buckley, “Supplying Ford,” IHS Automotive/Supplier Business, 2015, pp. 130-132. Print.

  4. Julian Buckley, “Supplying Ford,” IHS Automotive/Supplier Business, 2015, pp. 17, 108-120, 130-132. Print.

  5. This refers to the comparative advantage, the foundational theory behind trade. Explanations of this can be found in: José María Caballero, Maria Grazia Quieti, and Materne Maetz, “International Trade: Some Basic Theories and Concepts,” in Multilateral Trade Negotiations on Agriculture: A Resource Manual, Food and Agriculture Organization of the United Nations, Rome, Italy, 2000. Accessed August 30, 2016. Available at: http://www.fao.org/docrep/003/x7352e/x7352e02.htm; See also: Ana I. Eiras, “Why America Needs to Support Free Trade,” Backgrounder #1761, Heritage Foundation, May 24, 2004. Accessed September 6, 2016. Available at: http://www.heritage.org/research/reports/2004/05/why-america-needs-to-support-free-trade.

  6. United States, Executive Office of the President, Council of Economic Advisers, “The Economic Benefits of U.S. Trade,” May 2015. Accessed August 25, 2016. Available at: https://www.whitehouse.gov/sites/default/files/docs/cea_trade_report_final_non-embargoed_v2.pdf.

  7. Randy Tinseth, “Our Supply Chain,” Randy’s Journal, The Boeing Company, February 21, 2013. Accessed August 26, 2016. Available: http://www.boeingblogs.com/randy/archives/2013/02/supply_chain.html.

  8. Randy Tinseth, “Our Supply Chain,” Randy’s Journal, The Boeing Company, February 21, 2013. Accessed August 26, 2016. Available: http://www.boeingblogs.com/randy/archives/2013/02/supply_chain.html.

  9. Randy Tinseth, “Our Supply Chain,” Randy’s Journal, The Boeing Company, February 21, 2013. Accessed August 26, 2016. Available: http://www.boeingblogs.com/randy/archives/2013/02/supply_chain.html.

  10. Randy Tinseth, “Our Supply Chain,” Randy’s Journal, The Boeing Company, February 21, 2013. Accessed August 26, 2016. Available: http://www.boeingblogs.com/randy/archives/2013/02/supply_chain.html.

  11. Bob Davis, “How Trump’s Hard Line on Trade Could Backfire,” The Wall Street Journal, March 24, 2016. Accessed September 6, 2016. Available at: http://www.wsj.com/articles/how-trumps-hard-line-on-trade-could-backfire-1458848243; See also: Jim Tankersley, “Donald Trump’s Trade War Could Kill Millions of U.S. Jobs,” The Washington Post, March 25, 2016. Accessed September 7, 2016. Available at: https://www.washingtonpost.com/news/wonk/wp/2016/03/25/donald-trumps-trade-war-could-kill-millions-of-u-s-jobs/.

  12. Keith Wagstaff, “Trump Says He Would Make Apple Build Computers in U.S.” NBC News, January 19, 2016. Accessed August 30, 2016. Available at: http://www.nbcnews.com/tech/internet/trump-says-he-would-make-apple-build-computers-u-s-n499531.

  13. Andrew Rassweiler, “Upgraded Components In iPhone 6S Plus Costs Apple an Extra $16 per Device,” IHS Inc., October 1, 2015. Accessed August 30, 2016. Available at: https://technology.ihs.com/549740/upgraded-components-in-iphone-6s-plus-costs-apple-an-extra-16-per-device.

  14. “Supplier Responsibility,” Apple, Inc., Accessed August 31, 2016. Available at: http://www.apple.com/supplier-responsibility/progress-report/.

  15. This follows on the formula provided in Chuck Jones, “Trump Could Cost US Consumers $6 Billion Per Year By Imposing a 35% Tariff on Apple’s iPhones,” Forbes, January 19, 2016. Accessed August 29, 2016, Available at: http://www.forbes.com/sites/chuckjones/2016/01/19/trump-could-cost-us-consumers-6-billion-per-year-by-imposing-a-35-tariff-on-apples-iphones/#6ea02739cde9.

  16. Given that we’re making a number of assumptions, including basing this on the cost of the 6s Plus, the most expensive iPhone, this is only an estimate. But it does show a rough figure of the impact of Trump’s tariffs on a popular product made by a company that relies on supply chains.

  17. United States, Department of Commerce, International Trade Administration, “2016 Top Markets Report: Automotive Parts,” April 2016. Accessed September 6, 2016. Available: http://trade.gov/topmarkets/pdf/autoparts_Top_Markets_Report.pdf.

  18. David Lawder and Roberta Rampton, “Trump’s Tariff Plan Could Boomerang, Spark Trade Wars with China, Mexico,” Reuters, March 24, 2016. Accessed September 6, 2016. Available: http://www.reuters.com/article/us-usa-election-trump-trade-idUSKCN0WQ0WG.

  19. David Lawder and Roberta Rampton, “Trump’s Tariff Plan Could Boomerang, Spark Trade Wars with China, Mexico,” Reuters, March 24, 2016. Accessed September 6, 2016. Available: http://www.reuters.com/article/us-usa-election-trump-trade-idUSKCN0WQ0WG.

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