Explain how eliminating tariffs increases outsourcing: A case study on the impact of trade policies on global business practices

In today’s interconnected world, international trade has become an integral part of any business strategy. Companies now rely heavily on outsourcing to reduce costs, increase efficiency, and access new markets. However, trade policies such as tariffs can have a significant impact on a company’s ability to engage in international business practices.

Tariffs are taxes imposed by governments on imported goods. They are typically used to protect domestic industries and raise revenue for the government. However, tariffs can also have unintended consequences, particularly when it comes to outsourcing.

How tariffs impact outsourcing

1. Increased costs: Tariffs add to the cost of imported goods, making them more expensive than domestically produced products. This increase in cost can make it less attractive for companies to outsource production to foreign countries with lower labor costs.

2. Reduced competition: Tariffs can protect domestic industries from foreign competition, making it more difficult for companies to find suppliers that offer better prices or higher quality products. This lack of competition can make it more challenging for companies to source materials or services at a lower cost, which can impact their ability to engage in outsourcing.

3. Uncertainty: Tariffs can create uncertainty in the global marketplace. If a government imposes new tariffs on imports, it can lead to retaliation from other countries and further trade disruptions. This uncertainty can make it difficult for companies to plan their supply chain and engage in long-term outsourcing arrangements.

Case Study: The Impact of Tariffs on US Automotive Industry

The US automotive industry has been heavily impacted by trade policies such as tariffs. In 2018, the US imposed tariffs on imported cars and parts, with the goal of protecting domestic manufacturers and reducing the trade deficit with China. However, these tariffs had unintended consequences that impacted outsourcing practices in the industry:

4. Increased costs: The tariffs added to the cost of imported cars and parts, making them more expensive than domestically produced products. This increase in cost led to higher prices for consumers, which in turn led to a decline in sales for US automakers. In response, some companies started outsourcing production to countries where labor costs were lower, such as Mexico.

5. Reduced competition: The tariffs protected domestic manufacturers from foreign competition, making it more difficult for companies to find suppliers that offered better prices or higher quality products. This lack of competition made it more challenging for companies to engage in cost-effective outsourcing practices.

6. Uncertainty: The tariffs created uncertainty in the global marketplace as other countries retaliated with their own tariffs on US goods. This trade war led to further disruptions and made it difficult for companies to plan their supply chain and engage in long-term outsourcing arrangements.

In conclusion

Eliminating tariffs can increase outsourcing by reducing costs, increasing competition, and reducing uncertainty. However, companies must also consider the unintended consequences of trade policies such as increased costs, reduced competition, and uncertainty when making outsourcing decisions. By understanding these impacts and their potential consequences, companies can make informed decisions that align with their business goals and minimize any negative effects on their global operations.