What are the new dynamics in distribution chains?

January 2025 by Mario Pires

New distribution chain dynamics

The operations that ensure that a product reaches consumers efficiently are the links in distribution chains and are interlinked in complex gears. When everything works we don't even realize they exist, but countless events have highlighted their vulnerabilities.

Do you know where most of the Artificial Intelligence chips and batteries for electric vehicles come from? From Taiwan and China. Hundreds of products and components like these are manufactured far away from the industries that use them and the consumers who buy them. Ensuring they are efficiently delivered to consumers from production sites requires a series of transactions that cannot fail.

These transactions are the links in distribution or supply chains and are interconnected by complex mechanisms that are essential to the international trade of goods. When everything works we don't even realize they exist, but countless events have highlighted their vulnerabilities.

The COVID-19 pandemic was one of the most extreme events to disrupt global supply chains, but many others, including political conflicts, have disrupted these mechanisms, from the war in Ukraine, which had a major impact on the distribution of grain and energy, to growing insecurity in the Middle East, which led to the diversion of merchant ships from the Red Sea and increased the time and cost of transporting products from Asia.

Locating production 'closer to home' is therefore an issue considered by many companies and decision-makers. But the fluidity of supply chains is not the only reason to favor a 'deglobalization' movement that is changing the dynamics of international trade.

Tariffs: threats and opportunities

The idea of relocating production has also gained traction for protectionist reasons - to protect domestic production by imposing tariffs on products coming from abroad.

The most obvious example of this are the tariffs imposed on Chinese products by the US, which began at the start of Trump's first term, even before the pandemic happened. 

Although these tariffs promote US production (at the expense of imports) and generate revenue, they also affect consumption, which leads to inflation and a number of different consequences:

• products reach buyers at higher prices, which reduces the purchasing power (and choice) of families and makes it more difficult for the companies that need them to compete, which has repercussions on business earnings and employment. 
• They create more financial market uncertainty and greater stock price volatility, especially for the countries, sectors and companies that are most exposed.
• By reducing the income of individuals and companies, they indirectly lead to less revenue from other taxes.

Tax Foundation estimates reveal that Americans paid about $80 billion in additional taxes because of the tariffs during the year 2018-19. The Biden administration kept most of these tariffs and increased them on strategic products such as Chinese semiconductors and electric vehicles, with a tariff increase of around $3.6 billion.

The start of Trump's new term could see an increase in tariffs on Chinese products (10%) and a new tax on imports from Mexico and Canada (25%). The Tax Foundation estimates that, in the long term, the combination of old and new tariffs could cut US GDP by 0.4 percent and destroy more than 344,000 jobs.

But tariffs, when applied strategically, can be an effective way to boost the internal capacity of strategic sectors and products. They can also provide opportunities for those who know how to anticipate a change in international trade dynamics and identify the companies, sectors and regions (countries) that will experience an increase in demand and competitiveness due to deglobalization and protectionism. 

Examples of this situation include markets that are not subject to tariffs and that benefit from the relocation of supply chains, and companies that develop innovative technologies and alternative products for the sectors most affected by “trade wars”.