Tariffs change buyer behavior. What does it cost sellers to change back that buying behavior after tariffs are removed? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Answer by Philip Levy, Chief Economist at Flexport, on Quora:

This raises an important point - there can be lasting effects to tariffs. Consider a U.S. auto parts supplier hit with steel tariffs. The relationship between the parts supplier and the car company it supplies is more than just a simple price comparison. Usually the ultimate buyer will put the parts supplier through a vetting process, for example.

Steel tariffs can make the U.S. auto parts maker uncompetitive, relative to firms in Mexico or Canada that do not pay the tariff on steel. Should the car producer want to try Mexican or Canadian parts instead, it will first want to vet the new suppliers to make sure they can meet quality standards.

Once that vetting has taken place, though, the competitive landscape has changed. Even if steel tariffs are removed, the U.S. parts supplier now has a vetted competitor that they did not previously have to worry about.

Beyond this steel example, companies are often reluctant to switch away from a supplier that has proven reliable. It's difficult to quantify this as a cost, but if tariffs cause a buyer to switch away, it is a real concern that they will stick with the new solution, even after the tariffs go away.

Disclaimer: Provided for informational purposes only. Flexport does not guarantee, represent or warrant any of the statements in this answer because they are based on our current beliefs, expectations and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur.

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Published on: Sep 27, 2019