Predictable Chaos: Trump’s Tariffs and the Fragility of Global Supply Chains

This Week’s Focus: Understanding Trade Challenges

This week, we look at the impending uncertainties surrounding global trade as businesses brace for the new protectionist trade policies of the Trump administration. While no firm could have entirely ignored the possibility of Trump’s re-election and renewed tariffs, the irony is clear—his unpredictability was, in many ways, predictable.

Today’s article explores how tariffs, despite their intent to protect U.S. industries, often lead to higher costs, reduced efficiency, and unintended economic disruptions. We examine how companies reliant on global supply chains will face sourcing and production challenges, and how instead of revitalizing domestic manufacturing, these tariffs may trigger widespread disruptions.

I doubt there’s a single firm that can honestly say they didn’t assign some probability to Trump being re-elected, imposing tariffs, and generally behaving in an unpredictable manner. Ironically, the unpredictability was…predictable.

(I’m writing this article before the Super Bowl, but if there’s one thing more predictable than a Trump tariff, it’s the refs throwing a questionable “roughing the passer” flag on someone breathing near Patrick Mahomes.)

Surprisingly enough, very few firms prepared for this probability, and now, here we are: President-elect Trump’s latest tariff announcement is yet another expansion of a protectionist trade policy, putting $1.3 trillion worth of trade with America’s biggest partners in the crosshairs.

The proposed measures include a 25% tariff on ALL products coming into the United States from Mexico and Canada (with a 10% exception for Canadian energy products), and a 10% tariff on Chinese imports. Unlike Trump’s first-term tariffs, which primarily targeted China and affected $380 billion in goods, this new wave is expected to impact $1.3 trillion in trade and predominantly affect U.S. allies.

According to the Morning Brew, the immediate business response has been dramatic with retailers like Costco already developing contingency plans for inventory management and alternative sourcing.

The broader economic implications are sparking serious concern among business leaders and economists, and as companies scramble to adapt, their responses range from stockpiling inventory ahead of implementation to exploring alternative manufacturing locations. However, as Doris Dev CEO Justin Seidenfeld notes, these preparations come with their own risks: “pulling orders forward and stockpiling inventory can be a risky move, since buying more inventory without increasing sales can stretch working capital.”

Former Treasury Secretary Larry Summers characterizes it “a stop-or-I’ll-shoot-myself-in-the-foot kind of policy,” warning it “means higher prices for consumers” and “much more expensive inputs for American producers.” This anxiety is also reflected in CEO sentiment, as the Conference Board’s latest survey shows global trade wars have become a top concern for business leaders following the elections, marking a sharp increase from the previous year.

This newsletter has steered clear of political debates, and I intend to keep it that way. Its primary focus is on understanding how policies impact business operations and everyday life.

So today, we’ll examine the complex web of challenges and adaptations businesses must face as they navigate this potential transformation of global trade relationships.

Cascading Failures in Production Networks

What makes understanding the impact of such tariffs difficult is that supply chains’ bullwhip effect, where failures propagate and amplify through interconnected production networks.

The proposed tariffs—25% on Mexican and Canadian imports and 10% on Chinese goods—threaten to trigger exactly this type of cascading disruption across $1.3 trillion worth of trade relationships.

The question is: How do initial supply chain disruptions multiply through production networks, and what implications do broad-based tariffs have for major trading partners?

Baqaee (2018) develops a general equilibrium model incorporating input-output relationships between industries to quantify these network effects. The model accounts for both direct impacts and indirect spillovers through supplier-customer relationships. Using detailed input-output data from 384 U.S. industries, the study examines how shocks propagate when firms face rising costs or exit markets.

The main result demonstrates that network effects can amplify initial shocks by a factor of 3x compared to standard competitive models. Specifically, a 5% productivity shock leads to a 1.35% decline in GDP through direct effects, but cascading supplier exits and rising input costs ultimately reduce output by 4.05%. These magnified impacts occur because, as Baqaee shows,

“...exits in one industry make that industry less productive, due to lower product variety or higher markups, and these reductions in productivity can cause cascades of exits in upstream and downstream industries.”

In terms of Trump’s Tariffs, this framework suggests the proposed tariffs could trigger severe supply chain disruptions. For example, the auto industry, where “a single car may pass the US-Canada border eight times before reaching dealers,” faces acute risks. Industry analysts estimate the 25% tariffs would add $3,000 to average vehicle prices.

Multiple automakers including Mazda, Tesla, and Stellantis have already paused investments due to tariff uncertainty. The model predicts particularly severe impacts for industries with limited supplier substitutability (like specialized auto parts), high degrees of cross-border integration (83% of Mexico’s exports go to the U.S.), and thin profit margins that are vulnerable to cost increases (retail faces 10-20% margin compression).

Eugster et al. (2022) examine how tariffs affect global value chains, highlighting that trade restrictions in an interconnected world create ripple effects that extend beyond the directly targeted industries or countries.

A comprehensive analysis of tariff impacts reveals that trade restrictions significantly harm economic activity—a one percentage-point increase in upstream tariffs leads to a 19.4% decline in value added, while downstream tariffs cause a 12.6% drop in labor productivity. In a simulated reciprocal tariff increase between the U.S. and China, both countries suffered severe economic losses while creating negative spillovers for closely linked economies like South Korea and Japan.

The study highlights that supply chains do not adjust easily to protectionist measures, and while some countries benefit from trade diversion, the overall impact of tariffs on global economic activity remains negative. These findings align with broader empirical evidence: free trade policies tend to support long-term productivity growth, while protectionist measures frequently backfire, increasing inefficiencies and disrupting supply chains.

As Conference Board data shows, CEO concerns about trade wars have risen sharply since the election, with CFO risk appetite hitting six-year highs, suggesting business leaders are preparing for significant supply chain restructuring.

The academic model’s prediction of 3x shock amplification aligns with industry estimates that tariffs could reduce U.S. GDP by 0.9% through higher consumer prices alone.

Supply Network Formation and Fragility

To try to better understand these cascading events, Elliott, Golub, and Leduc’s “Supply Network Formation and Fragility” (2022) examines how modern supply networks’ complex structure can create systemic fragility despite rational firm behavior.

The paper responds to recent events, including COVID-19 disruptions, that demonstrated how small shocks can cascade through supply networks with devastating effects. These disruptions highlighted a crucial gap in our understanding: while existing research has extensively studied input-output relationships between sectors, less attention has been paid to the specific sourcing relationships between individual firms and how these relationships’ strength is determined by firms’ investment decisions.

The authors develop a theoretical framework to analyze how firms’ decentralized choices about investing in supply relationships affect network robustness.

The authors’ main finding is the existence of a “precipice” phenomenon in supply networks. The analysis reveals that this fragility emerges from the interaction of complex production requirements (needing multiple inputs) with firms’ endogenous investment decisions. The authors show that when production requires only a single input, the precipice phenomenon disappears. They also demonstrate a “weakest link” property where fragility in one part of a network can spread to other parts through input-output relationships.

These theoretical insights help explain several puzzling features of recent supply chain crises. The model shows why seemingly small disruptions, like temporary COVID-19 restrictions or port congestion, can have outsized effects on aggregate production. It also suggests why certain policy interventions might fail: small subsidies or other marginal interventions may be insufficient to move a network off its precipice.

The implications of Trump Tariffs are interesting.

Policy-induced fragility: By raising costs for imported inputs, Trump tariffs inadvertently pushed many firms into the critical regime, increasing supply chain vulnerability.

Ineffective interventions: Attempts to incentivize domestic production will fail based on this model because supply networks are already fragile, meaning small shocks have outsized effects on production stability.

Lessons from the 2018 U.S.-China Trade War

This is not Trump’s first tariff rodeo.

Tang et al. (2022) examine how tariff trade barriers affect U.S. firms, particularly in terms of inventory management and profitability. While multinational corporations have long benefited from globalization, the rise of protectionist policies has disrupted traditional sourcing strategies, forcing firms to adapt to a more constrained trade environment.

The findings reveal that U.S. firms sourcing from China experienced an average increase of 22% in inventory days (firms trying to stockpile), reflecting growing supply chain inefficiencies, while the ROA (Return on Assets) declined by 6% following tariff implementation. The impact was particularly severe for firms with complex supplier networks and lower levels of vertical integration. The study reports that firms heavily reliant on Chinese suppliers saw an average decline of 4.5% in gross margins, significantly reducing their overall profitability.

Similarly, in their analysis of the 2018-2019 U.S. trade war, Handley, Kamal, and Monarch (2023) found that tariffs (which increased on average by 24%) on 12% (about $290 billion) of U.S. imports led to a 17% decline in imports of affected products, with over half of this decrease coming from terminated supplier relationships rather than reduced volumes from existing suppliers. Industries with concentrated supplier bases showed more resilience—each standard deviation increase in supplier concentration reduced import decline by 0.5%, affecting strategic sectors like rare earths, chemicals, and pharmaceuticals where alternative sourcing options were limited.

The study also identifies significant spillover effects on U.S. exports, which declined by 2.9% in 2019 due to rising input costs and supply chain disruptions. Products highly dependent on newly tariffed imports faced an additional 2% effective tariff burden on their exports, with those most exposed experiencing an export reduction of up to 4% or more. These trade adjustments were not immediate but accumulated over 2018–2019, as firms attempted—but often struggled—to diversify suppliers.

The findings challenge the assumption that tariffs would successfully reshore production, and instead of strengthening domestic manufacturing, the tariffs increased costs for U.S. firms, disrupted supply chains, and weakened export competitiveness. Firms faced significant frictions in restructuring their supply chains, especially industries with fewer supplier alternatives.

Instead of shielding U.S. firms from economic harm, tariffs imposed on Chinese imports caused firms with complex supply chains to struggle with adjustments and incur significant costs in the process.“These tariffs, rather than promoting domestic manufacturing, primarily introduced inefficiencies that hampered firm-level performance,” the authors conclude.

The Role of Supplier Capital

Nevertheless, some firms are undoubtedly more prepared than others.

Liu, Smirnyagin, and Tsyvinski (2024) examine how firms respond to supply chain disruptions, introducing the concept of supplier capital—a firm’s ability to maintain and develop stable supplier relationships over time. As global trade becomes increasingly volatile, understanding how firms invest in supplier capital to mitigate future risks is critical for both policymakers and business leaders.

The results indicate that supply chain disruptions have increased significantly over the past decade, with notable spikes during economic downturns and global crises. Firms that experience disruptions tend to increase investment in supplier capital, but only if they are financially unconstrained. Financially distressed firms exhibit a much weaker response, indicating that liquidity constraints limit their ability to adapt.

Industries reliant on critical supply chains, such as semiconductors and pharmaceuticals, suffer the most severe output declines following disruption shocks. The study quantifies that firms heavily dependent on critical imports experience a 20–30% greater decline in output than those with more diversified supply chains. Moreover, using a dynamic model, the authors predict a ten-quarter recovery period for firms affected by major supply chain disruptions, a finding consistent with empirical observations from past economic shocks.

The findings also highlight a fundamental weakness in tariff-based trade policies: firms require financial flexibility to effectively adjust their supply chains.

The tariffs imposed by the Trump administration in 2018 increased costs and uncertainty, harming firms with lower access to capital disproportionately and exacerbating supply chain fragility. The study warns that without parallel policies to support supplier capital investment, tariffs can increase supply chain inefficiencies rather than strengthen domestic resilience. The authors argue that instead of broad tariffs, policymakers should focus on targeted incentives for supply chain diversification and resilience investments, which are more effective in enhancing economic stability.

Resilience Beyond Assumed Supply Chains: The Role of Flexibility in Adapting to Political Shocks

Much of the existing literature on tariffs assumes a relatively stable supply chain, analyzing how disruptions impact pre-existing trade relationships.

However, modern supply chains are not static; they are designed to be resilient, capable of adapting to a variety of disruptions, including political and trade shocks. Resilience, in this context, is not just about recovery but about anticipation and adaptation—ensuring that firms can withstand unexpected changes such as tariffs, trade restrictions, and geopolitical tensions without suffering prolonged inefficiencies.

Political resilience in supply chains means the ability to reconfigure supplier relationships, production networks, and logistics flows in response to sudden changes in policy.

As I mentioned earlier, no firm can credibly claim they hadn’t at least considered the possibility of Trump being re-elected, imposing tariffs, and generally governing with a degree of unpredictability. If anything, his unpredictability was one of the most predictable aspects of his administration.

And yet, despite this foreseeable uncertainty, most firms failed to prepare.

It is clear that some firms and industries are better equipped for this than others. The study “Adapting to Disruptions: Flexibility as a Pillar of Supply Chain Resilience” by Amico et al. (2023) provides a quantitative framework for understanding how flexibility in supply chains mitigates disruptions. Instead of focusing solely on traditional approaches to supply chain shocks—such as rationing or establishing entirely new supplier relationships—the study introduces substitution flexibility, which allows firms to respond dynamically to disruptions using existing trade networks.

The study models supply chain resilience by examining the ability of firms to substitute products and suppliers within their existing distribution networks, using empirical data from 40 billion observed distribution paths in the U.S. opioid supply chain.

The research identifies three major ways in which firms adapt to disruptions:

Supplier Substitution: When a disruption occurs, firms that have alternative suppliers in place can reduce supply deficits by 50% compared to those that rely on a single supplier. The ability to switch quickly to a new supplier reduces the impact of political shocks, such as tariffs on specific imported goods.

Dynamic Distribution Links: Firms with diversified logistics and transport options can reduce cost increases from trade shocks by 30%, as they can shift production and delivery routes in response to disruptions. This highlights the importance of multi-region supply chains rather than over-reliance on any single country.

Modular Supply Chains: Companies that design their products using interchangeable components from multiple sources recover from disruptions twice as fast as those that rely on country-specific or firm-specific production inputs. This is particularly relevant for industries like semiconductors and pharmaceuticals, where geopolitical conflicts cause severe bottlenecks.

The research also develops a stress-test model to simulate how supply chains respond to a sudden supply shock. It finds that:

Without flexibility, a 6% supply deficit emerges within 40 days of a shock, equating to over 3 million missing product units in the analyzed distribution network.

With moderate flexibility, supply deficits shrink by approximately 1%, meaning that an additional 500,000 product units reach final buyers.

Highly flexible supply chains extend their resupply window by up to 80%, giving firms significantly more time to adjust to disruptions.

These findings highlight that flexibility is a key pillar of resilience in global supply chains. By proactively designing systems that can substitute products, reroute shipments, and shift production capacity, firms can significantly reduce their exposure to trade disruptions, including tariffs.

But investing in flexibility is costly, and usually requires long term thinking. And bold leadership.

And unfortunately, both long term thinking and leadership are in short supply these days. You know…due to supply chain disruptions.

Conclusion

The research reviewed in this article highlights the significant disruptions caused by the Trump administration’s tariffs. While intended to protect U.S. industries, these tariffs often resulted in higher costs, reduced efficiency, and unintended economic spillovers. Firms reliant on global supply chains struggled to adjust, with many facing long-term challenges in sourcing and production.

The message is clear: Trade wars have unintended consequences. Trump’s tariffs will likely lead to widespread disruptions in U.S. manufacturing and increased production costs, rather than achieving a significant reshoring of production.

The broader lesson is that trade policies, particularly those affecting supply chains, must be designed with a nuanced understanding of interdependencies in the modern economy. While the intent may be to protect domestic industries, the execution can inadvertently damage them by increasing costs and reducing operational flexibility. Moving forward, policymakers must consider the broader implications of trade barriers on supply chain resilience and economic stability.

In many ways, Trump’s tariffs resemble the Super Bowl—high stakes, intense competition, and questionable calls that leave everyone arguing long after the final whistle… especially if the Chiefs were somehow to win again (... which they didn’t).