Events on the global trade and tariff front are moving at such a rapid rate, that the Supply Chain Matters blog has elected to provide a weekly update commentary. We suppose we should label such commentary with an appealing header, and we solicit reader feedback as to a title or caption. Perhaps: News from the Trade War FrontGlobal Trade

This week’s most prominent development was a disclosure from iconic U.S. motorcycle manufacturer Harley Davidson that given the European Union’s declaration of a 31 percent tariff on imported motorcycles from the U.S.,  the company had no choice but to make plans for a new manufacturing facility on the European continent to serve that market. That announcement prompted a Twitter tirade from President Trump, accusing Harley of whimping out, and threatening added tax burdens. As business media was quick to point out, Harley was facing a similar reality from many U.S. manufacturers, that more and more of total revenues stem from foreign markets such as Asia and the EU.

Yes, ladies and gentlemen, global markets are a reality and so are globally extended and interdependent supply chains. Such realities do not seem to make an impression on policy makers of the Trump Administration.

U.S. based manufacturing plants of BMW and Mercedes Benz reminded lawmakers that they each export to foreign markets in Asia, as well as import supply components from the EU and Asia. And yes, both provide a good amount of U.S. manufacturing jobs.

The Wall Street Journal profiled the challenge of General Electric and its healthcare business, where rather large and expensive MRI machines are assembled in plants in South Carolina and Wisconsin. Noted was three dozen components deemed to be critical because of specialized sourcing, which happens to be outside of the U.S. Note was that 20 percent of circuit boards and other components that make-up scanners are imported from China. Changing sourcing is deemed to take months to arrange. Regulatory requirements associated with medical equipment imply that new factory sourcing can take a year or more to complete.

Engine manufacturer Cummins imports small diesel engines and engine components from China for inbound use of its U.S. manufacturing plants. The President of Cummins distribution business indicated to The Wall Street Journal this week, “Making changes in your supply chain is not a three-week process.

And yet, new tariff announcements are now coming at bi-weekly intervals.

President Trump has threatened new tariffs on European autos and China on U.S. technology products. Apple’s supply chain, perceived as protected, could be in the crosshairs of subsequent rounds as could other U.S. automakers.

This Editor attended a recent networking event where one supply chain executive indicated that all of this has to do with posturing, and that President Trump will eventually reign-in his aggressive stance and compromise with major trade nations. Business network CNBC today reported that the U.S. stock market is waiting who might blink first in the weeks ahead, Beijing or Washington.

As of today, there were no reports of any official talks with Beijing planned ahead of the July 6 deadline where additional U.S. tariffs take effect. As we noted in our prior commentary, Chinese President Xi Jinping told a meeting of invited U.S. and European chief executives this week that China will strike back assertively to the current Trump Administration’s trade and IP actions. He explained that in Asian culture, one does not back down from aggression, but rather must punch back. That implies a potential response beyond import tariffs. Canadian trade officials indicated this week that Canada will not back away from imposing retaliatory tariffs to respond to U.S. imposed tariffs. Ditto for the European Union.

Thus, while many hope that escalating trade tensions will eventually come to reason, the reality is that all are subject to political forces, which are highly uncertain. No country seems to be the first one to blink, and it would appear that many cannot figure out the end-game of the Trump Administration. Meanwhile, Canada, China, the European Union, and Mexico have targeted their corresponding tariffs to key Trump voting constituencies such as Midwest farmers, manufacturers, and other interests.

Industry supply chain teams have to deal with the brute realities of supporting near-term and longer-term business revenue and profitability objectives, including attempting to figure out the next moves in the geo-political climate.

Over the coming weeks, these brute realities of added tariffs and potential disruption in global supply chain material flows will have to managed.  Decisions will have to made as to whether to accelerate alternative sourcing of materials. Meanwhile, transportation and logistics costs in the U.S. continue to explode with more and more CFO’s citing added such added costs as a drag on margins and profitability. It the classic cost squeeze, and supply chain teams are in the cross-hairs. The only relief valve is increasing end-item prices and in many industries, that is becoming a challenge as-well.

The months of July and August are usually a period of downtime, preparing for the second-half of the year peak in customer fulfillment needs. For the summer of 2018, we sense that there will be little downtime for U.S. focused supply chain teams.

 

Bob Ferrari

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