Procurement vs. Tariffs: States ‘Wait and See,’ Fearing IT Shortages

The second Trump administration has set a laser focus on shifting international trade dynamics, especially where it views tariffs against U.S. goods as unreasonable or unfair. The back-and-forth with major trade partners like China has roiled markets in recent weeks and forced speculation about long-term global trade stability.

For state government procurement offices, the tumultuous situation has some evaluating their midterm priorities and bracing for potential shortages and even contract cancellations if a prolonged trade war ensues.

As of Thursday morning, trade tensions with China were unimproved, with both countries refusing to back down from steadily escalating import taxes.

The White House announced last week that it would be exempting electronics — smartphones, laptops, etc. — from the current tariff schedule, bolstering short-term confidence on Wall Street but raising questions about what sort of tariffs those items would be subjected to in the coming weeks.

Rebecca Montaño-Smith, deputy chief learning officer for research and innovation with the National Association of State Procurement Officials (NASPO), said the ongoing situation has procurement officials watching closely for updates and preparing for the worst.

The overarching concern is that a prolonged trade war could result in the sort of shortages seen with fleet vehicles during the COVID-19 pandemic. Those levels never fully returned to normal, she said.

“Our advice to our members collectively has been, essentially from within our membership … take a look at your contracts, get ready to negotiate and know where the price increases are coming from,” Montaño-Smith said in an interview with Industry Insider — California.

Some suppliers are likely to raise prices to capitalize on the moment and stay in line with their competition, whether they are feeling a direct pinch from tariffs or not, Montaño-Smith said, adding that knowing exactly where price increases are coming from is essential to contract stability.

“There are some industries, maybe, or particular suppliers where, if there's no price increase allowance, there is some expectation that some suppliers will try to claim force majeure like they did during COVID. So, people are preparing for that, right? They're looking at their terms and conditions. If contracts allow for price increases, the trick is to look and see how they allow for that. Is it pegged to a price index? Is it pegged to a catalog price, a list price?” Montaño-Smith said.

For vendors, the message NASPO wants to send is that states can’t be expected to absorb all the costs brought on by trade instability, just like states can’t expect vendors to eat these costs. Taking a proactive approach could help vendors maintain their credibility and open dialogue about what’s really happening in the space.

“Being able to show your work, show your math. Where did it come from? They understand, right? States are customers, they get it,” Montaño-Smith said. “We understand what's happening. They're just asking not to be gouged, not be taken advantage of.”

In California, the Department of General Services (DGS) is also taking a “wait and see” approach.

“DGS is currently monitoring the situation to see how the federal administration’s policies may impact IT contracting and will make adjustments to the process as deemed necessary,” said DGS Assistant Deputy Director Fallon Okwuosa in an email last week.

Gov. Gavin Newsom continued his campaign against the tariffs, and the Trump administration more broadly, this week, condemning the trade war as “self-destructive” while he and Attorney General Rob Bonta announced a new lawsuit challenging the International Economic Emergency Powers Act — the mechanism behind the administration’s imposition of tariffs without congressional approval.

The evolving situation is testing the resolve of IT suppliers, too. While some vendors that Industry Insider spoke with at the recent California CIO Academy* in Sacramento were cautiously dismissive of the tariff ripple sent out from Washington, D.C., others were more concerned.

One Insider member, who spoke on condition of anonymity, said there is a lot of uncertainty surrounding the trade situation for their company and they are being told that associated cost increases will need to be passed along to customers.

Montaño-Smith said that while some contracts might need to be put on hold in a worst-case scenario, the more likely outcome would be the parties adjusting, absorbing the cost collectively and doing more with less in times of shortage.

“But sales is a relationship, right? So now is the time to say, ‘Hey, you know we're just as confused as you guys. We're going to get through this together,’” she said.

*The California CIO Academy was hosted by Government Technology, part of e.Republic, Industry Insider — California's parent company.