What are the short-term effects? What about the long term?
After the November 2024 election, LogicSource, a sourcing and procurement firm focused on indirect and non-clinical spend management, received a surge of calls from customers. With tariffs a key part of President Trump’s platform, clients were anxious to understand the potential impact on costs, including packaging, construction, and hardware.
“We knew tariffs were, at the very least, going to be used as negotiation leverage to drive policy, and at the most going to be used to bring manufacturing back into the U.S.,” said James Bouchard, associate partner, Center of Excellence at LogicSource. “But from November to early December, it wasn’t clear what the administration was planning and what we should expect relative to product-specific and country-specific tariffs.”
To prepare, LogicSource began laying the foundation for a reporting structure. It started with preliminary information provided by the Trump administration on country-specific tariffs for Mexico, Canada and China.
Then, LogicSource conducted an internal deep dive into the products its customers bought that were either directly imported from those countries or made up of raw materials imported from them. LogicSource also pooled information from external sources, including media outlets and government websites. The team created a tariff forecast, predicting impacts and price increases if the tariffs took effect as the administration was proposing.
“That is how we came up with an initial list of products that we expect to be impacted by these tariffs if they came into play,” Bouchard said.
In an interview with Repertoire Magazine, Bouchard shared some initial insights into how the tariffs already affected markets this spring – including healthcare – and potential long-term implications.
Repertoire: From your research, what do you see as the rationale behind the tariff policy? Where is the administration trying to steer economic policy?
Bouchard: If you were to ask me that in February, I might have had a different perspective. Initially, I thought the Mexico and Canada tariffs were a policy-driven ploy to curb illegal immigration and drug trafficking. And when Mexico and Canada made concerted efforts to mitigate that from happening, I did not expect the tariffs to take effect in March. They were postponed a month because Mexico and Canada worked to address these challenges and appease the administration. So, I thought they would continue to be postponed because I had expected that the goal was to drive policy. I always expected China tariffs to take effect because of the focus on bringing domestic manufacturing back into the U.S. It was not policy-driven; it was more economic-driven.
If you ask me a month later, I still have the same point of view on China. The goal is to bring back more domestic manufacturing. However, with the initial Canada and Mexico tariffs, the administration achieved what they were trying to, at least on paper, regarding the policy changes from both countries.
Now that the tariffs are in effect, I would argue that the U.S. government wants to mitigate what we buy from Canada and Mexico to reduce reliance there. And this is all becoming an objective of bringing more ownership of these goods and services and manufacturing back into the country.
Repertoire: What do you think will be the long-term implications? Will this move the needle on domestic manufacturing?
Bouchard: It takes a long time to do that. We are hearing right now that there are many domestic manufacturers already for the products we typically import. For example, people can buy steel and aluminum from the U.S.
We just did a cost analysis where (as of press time) it was still 30% to 60% higher to buy steel and aluminum from a U.S. manufacturer than if you were to import it from China with the compounded tariffs on top. And when those tariffs were made known and started to take effect, U.S. Steel started raising their prices, essentially keeping the same margin and delta they had before the tariffs. They raised their prices, assuming that current U.S. Steel buyers will continue purchasing domestically for convenience, lower transportation costs, and reduced risk of shipping delays.
I have not seen many new companies trying to strengthen domestic manufacturing operations yet. Part of it is that a lot of planning and investment goes into making a change like that. My guess is that most of the companies considering it are doing that cost-benefit analysis now, and they haven’t announced anything.
Repertoire: You mentioned steel and aluminum. What are some other areas where healthcare could be affected?
Bouchard: The pharmaceutical industry will be impacted, and we’re already seeing it. When you think specifically about China, it’s important to note that many active pharmaceutical ingredients (APIs) are sourced there – not only by pharmaceutical companies but also increasingly by large health systems, as specialty pharmacy becomes a major revenue opportunity for them. We import 30% of the raw ingredients that go into creating those specialty drugs from China. So those costs are increasing immediately now that the China tariffs have taken effect, and those tariffs have doubled since the initial announcement. They started at 10% in February. We had another 10% added in March.
The other big area will be large clinical capital equipment and big medical devices such as X-rays, MRIs, CTs and other imaging diagnostic equipment. The parts, supplies and components that make those products often come from Mexico and China. The expectation is that the total cost will increase as component costs increase. We have not seen a ton ourselves yet from our healthcare customers who are buying a new piece of equipment, and the costs have skyrocketed, but we’re expecting that to be a trend that occurs very shortly.
Repertoire: What are you hearing from healthcare customers on how they are adapting?
Bouchard: Step one is understanding where the impacts will come from. And understanding that is not always easy because you don’t always know where or what you’re buying, where it originates from, how these tariffs will impact it, and whether your suppliers will pass through the entirety of that tariff. Our healthcare customers are getting their arms around the biggest spend buckets likely to be impacted by these tariffs, and then they’re taking a two-pronged approach to mitigate them. The first is focused on directly negotiating with their current suppliers and getting them to absorb part or all of the tariff increase or extend existing pricing for a set period of time until the tariff implications actually start applying to the price of the product.
There are many direct negotiations happening right now with suppliers that already supply these goods. They’re dealing with the tariff impact directly, and it’s about how much leverage the healthcare system has in pushing those increases off for a period of time.
The second strategy is looking at alternative sourcing. Gloves are an example of a product that frequently comes from China, but there are many U.S. exam and surgical gloves manufacturers. The U.S.-based companies are now being evaluated more seriously than they have been in the past because those usually come with a cost premium. You pay extra to buy from the U.S. in those categories, but now those tariffs make their pricing model more attractive. So alternative sourcing, looking at domestic manufacturers of those goods, is a big play in healthcare.
Repertoire: How is the vendor community responding?
Bouchard: One of the vendors’ biggest issues is the added distribution costs. Ocean freight is skyrocketing, similar to what happened in 2018. When all those tariffs took effect last time, ocean freight costs increased by about 70%, and they stayed there for a year. They eventually settled down, but they went up as an indirect impact from the tariffs because you have all these carriers who are used to running very specific routes. Now, they must send ships to different places without cargo to pick up something to distribute to a customer. So, they’re essentially spending all this extra money trying to ship because these companies are now trying to buy elsewhere and diversify their sourcing. So scheduled routes no longer are scheduled; they’re these ad hoc needs.
We’ve run multiple ocean freight projects for customers in the last few weeks. Currently, costs have increased 15%, so the suppliers are dealing with that. That’s one of their biggest issues because it’s now costing so much more, not just buying the product but bringing it in. And they’re trying to find ways to mitigate that. That’s one of the reasons why we’re seeing a lot of ocean freight RFPs across our space and hearing from a lot of ocean freight carriers that they’re dealing with a tremendous amount of potential new business because everybody’s trying to find a different way to bring supply into the U.S. That’s probably the biggest thing I see suppliers dealing with right now.
The second biggest is deciding how to pass these tariffs through to their customers. Looking at the IT space, which will also indirectly impact healthcare, you will see that HP, Dell and Lenovo each say something very different about addressing tariff pass-through costs to their customers. One of those three had essentially raised their pricing equal to tariffs the day they took effect. Another offered orders for the next two to three weeks with pre-tariff pricing, and then the third held pricing until the summer. They were not passing through tariffs at all. So, there’s a lot of internal assessment being done at the supplier level to determine how they will treat their customers regarding these excess tariff costs.
Repertoire: It sounds like each company is handling it differently. There are going to be a lot of conversations in the supply chain.
Bouchard: There are, and what makes it harder for everybody is that half of these tariffs could be gone in two months, or there could be a whole new bunch of tariffs that pop up that nobody considered in the past. There’s talk now of a U.S.-EU. trade war coming off the back of conversations around the U.S. and NATO and other foreign policy decisions that will bubble up into additional tariffs. It’s very hard to predict right now. There are talks around more focused tariffs on the auto and pharmaceutical industries, but you don’t know what will happen until the day of. It’s hard to plan.