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Prof. Yulan (Amanda) Wang
Professor and Associate Head
Department of Logistics and Maritime Studies
The Hong Kong Polytechnic University

Supplier diversification is often adopted to mitigate the negative impact of supply uncertainty and increased tariffs in global supply chains. In this study, we consider a decentralized global supply chain that consists of a domestic buyer, a reliable oversea supplier with a high tariff rate (e.g., a supplier located outside the free trade area),  an unreliable oversea supplier with a low tariff rate (e.g., a supplier located in a free trade area), and a logistics service provider (LSP) that transports products from the oversea suppliers to the domestic buyer. We consider different combinations of trade agreements and tariff calculation schemes: First, based on who shall bear the costs of shipping and tariff, the buyer and the supplier can undertake one of the following three trade agreements: Ex Works (EXW), Delivered at Place (DAP), or Delivered Duty Paid (DDP). Second, depending on the basis of the dutiable value on which the tariff is calculated, two tariff calculation schemes, i.e., Free on Board (FOB) and Cost Insurance Freight (CIF), are considered. We fully solve the game of our three-tier decentralized supply chain and characterize each member’s preference about the aforementioned tariff agreements. Among other results, we find that, as the tariff rate increases, counter to our intuition, the buyer is more willing to bear the tariff and shipping cost. Interestingly, we also show that dual sourcing remains the equilibrium for the buyer under FOB, whereas single sourcing from the unreliable supplier located in a free trade area can emerge when CIF is adopted and the tariff rate is relatively high. Based on these findings, our work proposes a short-term strategy associated with tariff adjustment and a long-term strategy with respect to trading term adjustment to help an import market keep business in its own free trade areas. Finally, we further investigate the impacts of introducing competition into the LSP market and show that it benefits both the buyer and the reliable supplier, but may hurt the unreliable supplier when the tariff rate is high.