Q&A: Could High Tariffs Affect Manufacturing Supply Chains?

March 13, 2025
Illustration of a hand cutting through a chain with scissors

Uncertainty over new tariffs and how much they may cost could affect the supply chains that bring material and parts to manufacturers around the world, a Darden School of Business expert says. (Illustration by John DiJulio, University Communications)

From clothing to cars to canned peaches, American-made products are made of parts – often parts sourced from other companies in other countries.

Supply chains are critically important to domestic and global commerce, connecting manufacturers with the raw materials and parts they need. Economic policies, including tariffs, in the countries they export from and import to directly impact those supply chains.

To better understand supply chains and how government decisions affect them, UVA Today checked in with Vidya Mani, associate professor of business administration at the University of Virginia’s Darden School of Business.

Q. What is a supply chain and how does it work in basic terms?

A. A supply chain is a series of linkages from raw materials to final product for end use and back to raw materials after use. Each stage of the supply chain involves a transformation step through a manufacturing or a service process and a network of people, companies, organizations and governments.

If you look at a car, you have the motor, which includes gear boxes that contain clutches whose parts include pressure plates made from steel blanks produced from steel, which is made from minerals. At each stage, a manufacturer could choose to make the complete product or buy parts from suppliers and assemble it for sale at the next stage.

Portrait of Vidya Mani

Vidya Mani, associate professor of business administration at the University of Virginia’s Darden School of Business, says unintended tariff consequences could disrupt the supply lines of American manufacturers. (Contributed photo)

The supply chain is built by picking the next link upstream that offers the least cost while maintaining quality standards.

Q. Why would high tariffs or a trade war affect a supply chain?

A. When you have a global supply chain, the flow across country borders is governed by rules of import and export as set by the countries in the chain. This is why tariffs are impactful.

For products and components that we have no or very little capability to build within the U.S. and are sensitive to price, high tariffs will significantly impact the supply chain. Each company in this scenario will then have to weigh major questions:

  • Is the tariff affordable to continue with the existing sourcing arrangement?
  • Can it be sourced from a country not subject to next round of tariffs that has the capability to manufacture at a viable cost?
  • Can it be made in-house?
  • Should the technology be changed to use other components not subject to the tariff, which can be a very long-term undertaking?

Q. Are you seeing supply chain changes now?

A. Changing the supply chain in response to high tariffs is a massive undertaking. The current response is to build buffers against disruption. We saw a pile-up of inventory, especially in the retail sector, before the tariffs.

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We are also seeing Chinese manufacturers ramp up production in other low-cost places like Vietnam to allow for a way around the tariffs. The rhetoric around tariffs and unfair trade practices has been around for a while and spiked in 2016. So, Chinese manufacturers had time to invest in other countries that allowed them to create alternative manufacturing locations should such a scenario arise.

Currently, given the wide range of industries that would be affected by high tariffs, many companies are in a wait-and-see scenario. Some of the trade agreements are due for review and renewal in the near term, so companies are building buffers for critical products, passing along some of the costs in terms of price increases, cutting down on expenses and exploring other options.

Q. What are some examples of things Americans buy that are exposed to supply chain disruptions?

A. Apparel and automobiles are two good examples.

We import a majority of our apparel. We have very limited production in the U.S., and even though the U.S. has free trade agreements with Mexico, Canada and Central America to allow for import with zero tariffs under certain conditions, this has not stopped us from importing a major percentage of apparel from China.

We do not have access to raw materials and have limited processing capacity in this sector. The cost differential makes it cheaper to continue to import from China even if we raise the tariffs to 10% or more. Unless there is a ban, it will be very difficult to effect significant change from tariffs on this supply chain.

On the other hand, we produce more than half of the passenger cars within the North American region. The existing USMCA agreement allows for zero tariffs on imports if certain rules are met. However, to meet those rules, 75% of the value of the car must be made within the region. If not, they pay a 2.5% tariff.

Depending on the access to components, car production can happen in Mexico, Canada or the U.S. A potential 25% increase will now make cars more expensive because we do not have the manufacturing capacity to produce everything here.

If we are not careful, we can end up with completely unintended consequences. An easy example is food production. We grow most of our food in the U.S., so one might expect this sector to be insulated. But agricultural machinery, fertilizers and the seeds may all come from other countries, and if these costs go up significantly, food prices will increase. This is the impact of a global supply chain that supports a national supply chain.

Media Contact

McGregor McCance

Darden School of Business Executive Editor

Article Information

March 21, 2025

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