The Supply Chain Matters blog provides our July 13 weekly update and insights commentary on the pace and impact of global trade and tariff events impacting global supply chains. Events continue to move rather quickly, and we will provide updates and insights on a weekly or bi-weekly basis.

As we hinted in last week’s update, China indeed retaliated to the Trump Administration’s imposed tariffs as high as 25 percent on $34 billion of components produced in China and exported to the U.S. And, as President Trump threatened, the U.S. Commerce Department is preparing an additional round of planned 10 percent tariffs on an estimated $200 billion of imported goods. Global Trade

According to many published reports, this latest round of threatened tariffs will spill over to consumer product areas that include imported furniture, food, and various consumer goods sectors. Also, as The Wall Street Journal has pointed out, the proposed new round directly targets inbound high-tech and consumer electronics supply networks. The WSJ cites data from global trade organization International Trade Centre indicating upwards of $23 billion in tariffs related to imported switches, routers and other components utilized in data transmission devices. An additional $11.6 billion in tariffs related to printed circuit assemblies used in computers, servers, consumer electronics and other data processing devices is further noted.

As in earlier rounds, China is again expected to retaliate once again, and many economists and industry experts are speculating that China’s next round will be targeted for far more disruptive and economically damaging aspects for U.S. based businesses exporting products to China or actually conducting existing business or supply chain related activities within that country.

Eurozone Developments

In other trade fronts, President Trump, attending a NATO summit meeting this week, continued threats of imposing 10 percent tariffs on all imported automobiles and related components.

Foreign automotive manufacturers BMW, Daimler and Volvo continued to voice public concerns related to their U.S. based manufacturing facilities that export vehicles to other global markets such as China. With the Trump Administration continuing to threaten broader automotive tariffs, some decisions will need to be made regarding domestic and global market support supply chain strategies.

On the Brexit front, Prime Minister Theresa May’s government faced a renewed crisis this week as the country’s Brexit and foreign ministers tendered their resignations just prior to the publishing of the British government’s long-awaited plans related to Brexit. Some are attributing the minister resignations as yet another political showdown among those favoring a hard exit from the EU and those seeking a continuance of customs and trade policies and practices. Yesterday’s so-termed white-paper proposes what is being described as “facilitated customs arrangement” calling for the U.K. to set its own tariffs on goods destined for its domestic markets, while preserving cross-border industry supply chain flows with EU countries. Reports indicated the proposed arrangement is complex and untested and drives speculation as to whether Parliament will support such a measure, or whether hard-liners will attempt to bring-down the current government or force more delays.

With less than nine months to go before Britain’s planned exit, and ss this blog has highlighted, major manufacturers such as Airbus continue to warn that time is running out in the need for more specific information related to Brexit trade and customs flows and supply chain movements. This week, automotive manufacturer Jaguar Land Rover (JLR) threatened to pull out its investment in its U.K. manufacturing facilities if a “badBrexit outcome were to occur, disrupting a frictionless just-in-time material flow system across various borders. Thus, the political pressures related to the U.K. specific plans related to Brexit are quickly reaching a crisis level.

One specific example of ongoing concerns: According to the WSJ, the Port of Dover has calculated that a two-minute delay to traffic flows among its gates could quickly lead to a 17-mile backup on nearby roads while also cascading such disruption to EU port facilities as-well.

Broader Global Supply Chain Implications

If the U.S. continues to escalate subsequent rounds of added tariffs, the realities of globally interconnected supply chains will become ever more evident.  This will especially apply to high-tech and consumer electronics supply chains, as our readers in this sector can will attest.

China serves as the final assembly hub for many electronic devices, with a wide variety of inbound components such as semiconductor devices, LCD displays, memory and electronic sub-assemblies emanating from other Asia based countries such as Japan, Malaysia, South Korea, Taiwan and other countries.

An International Business Times report points out that China’s direct value-add related to the total export cost of an iPhone 7 is estimated to be $8.46, the cost of the battery and its assembly. That number may well be a misnomer, but it does point to how global trade values are calculated, and often misrepresent the actual manufacturing value-added within a specific country such as China.  Trade flow values often mask tax-avoidance practices among receiving businesses. Thus, the IBD example of an iPhone 7 having a factory cost of an estimated $240 reflects the interconnected supply network that converges with China’s large contract manufacturers such as Foxconn who perform final assembly of electronic devices. Apple negotiates its own inbound material and component contracts and routes such components to accommodate both product value-chain flow needs as-well as taxing strategies.

The takeaway insight is that with each escalating round of tariffs, the economic impacts resonate across various global based suppliers. In the specific case of high-tech and consumer electronic supply chains, many suppliers operate on very lean product margins, with a reliance of high component shipment volumes, for example those generated by Apple, as a basis for generating profitability. A 10 percent cost increase cascading globally can have specific impacts for supplier profitability and with their ability to invest in new process and product technologies. The impacts extend beyond just China and involve the inter-connected regional suppliers and their host countries.

The other argument is whether these tariff rounds will motivate U.S. electronics manufacturers to source more inbound supply within the U.S. From our lens, that remains a very uncertain and company-specific set of sourcing decisions. However, Foxconn’s planned Wisconsin LCD manufacturing facility may be the political pearl for the current Trump Administration tariff actions, making that facility a potential anchor for added high-tech component supply chain needs. But, Foxconn walks a perilous tightrope in having to appease both China and U.S. governmental leaders, as well as individual China, broader Asia and U.S. based manufacturers.

If the $200 billion round does occur, businesses will likely face direct consequences, and will have to make tough decisions relative to either having to hike pricing for end-products or absorb added inbound material costs.

From an outbound supply chain perspective, manufacturers, retailers and services providers are advised to be prepared for heightened risks for potential supply chain movement disruptions related to increased border crossing inspection checks, or crackdowns on business activities in affected global regions, especially China.

 

Bob Ferrari

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