This Supply Chain Matters blog is a side panel follow-up to our two previous blog commentaries highlighting the ever-escalating trade war between the United States and China, and the consequential political dimensions and industry forces that will either shorten or elongate the current tariff actions and their impacts.
With each cycle of escalation, the ongoing trade war affects broader businesses, industries, consumer and services companies on both sides. Such effects cascade across adjacent and dependent supply and customer demand networks, with broader economic and other harmful implications.
There have been a number of added reports and editorials that are honing-in on these themes which we wanted to highlight for our Supply Chain Matters readership audience.
U.S. Agricultural Impacts
This week, a published Wall Street Journal Heard on the Street Editorial commentary titled: Get Used to Trade-War Stalemate, columnist Nathaniel Taplin makes a case that China will ride out the Trump Administration and the current trade conflict because of three stated reasons, one of which is the 2020 Presidential election. The premise is a perception by the Chinese delegation that President Trump is not a reliable negotiating partner. A similar premise is evident in other business focused media including business broadcast network CNBC.
That theme is present in two recent published reports, one from the New York Times and the other from the Washington Post. Both focus on U.S. farmers and other agricultural industry interests, and the growing frustrations being manifested. The Times report cites U.S. Secretary of Agriculture Sonny Purdue being booed at an annual Farmfest gathering in southern Minnesota. What prompted the response was a joke reflecting on “whining” farmers. Both reports reinforce a growing perception that U.S. farmers are becoming collateral damage in this trade war, with farm bankruptcy filings up 13 percent year-to-date and farm related loan delinquencies on the rise. The President’s “tweets” indicating that farmers are starting do great again have further perturbed farmer groups as-well.
Commenting on this weekend’s series of escalating actions, the Times report cites the president of the Minnesota Corn Growers Association telling the Agriculture Secretary: “At some point we have to quit playing games and get back to the table and figure this out. There is no certainty in any of this.”
Both publications point to the cascading effects of declining U.S. agricultural exports to China and its effects up and down supply and demand networks. Farm equipment manufacturer Deere & Co.’s profits were recently reported down 24 percent from a year ago — yet mentioned increased sales volumes from farmers in Argentina and Brazil needing added equipment. The export of U.S. lobsters to China was recently reported as down over 80 percent, and the effects of that market are felt across the State of Maine and other seacoast regions. Meanwhile, sales of Canadian lobsters are on the rise. Up and down agriculture demand and supply networks, wholesalers, grain exporters, railroads, are all dealing with the effects and the consequences.
Efforts to provide farmers more direct aide or subsidies can only go so far, not to mention that they invoke other political dimensions of tribute money. Both editorials conclude that in spite of this building economic harm, it remains unclear if U.S. farmers will ultimately abandon Trump.
Negotiating Strategies and Tactics
Editorials we have reviewed and remarks we have received dwell deeper on the overall dynamics of negotiating strategies, positioning and tactics among these two nations.
In an Editorial published this week by The Washington Post: A year into the trade war, China learns to ride out Trump’s turbulence, penned in Beijing by Anna Fifield and David J. Lynch, opens with the statement: “President Trump may think he’s keeping Chinese negotiators guessing with his whiplash-inducing remarks about the U.S.-China trade war, but he’s not fooling anyone here.” The editorial goes on to note that: “Chinese officials were initially mystified by Trump’s unconventional style and (President) Xi is said to have faced criticism for underestimating Trump’s resolve to tackle China’s trading practices.”
The summary takeaway of this WaPo editorial was that while China is experiencing a marked economic slowdown as a result of the ongoing trade war, lack of trust with Trump, coupled with other domestic political challenges confronting Chinese leaders, including the tense situation in Hong Kong, are motivating that side to wait out the process.
We received perceptive background comments from Nelson Dong, a senior partner at the international law firm Dorsey & Whitney, and current member of the Board of Directors of the National Committee on US-China Relations (NCUSCR). Commenting on negotiating tactics and targeted outcomes, Mr. Dong indicated:
“If these were only short-term difficulties and one could see some kind of an “off-ramp” for both sides to settle their differences, there would be more hope, but nobody in authority has thus been able to present a credible picture of what such a resolution would be that could be domestically acceptable in political terms in both countries. If China were to respond to the list of open structural issues that led to the Administration’s imposition of Section 301 tariffs in the first place, that would implicate massive revisions to the Chinese economic and even political system that could not be acceptable to the Chinese leadership. Conversely, if China were only to offer what the Administration views as cosmetic fixes and to renew purchasing large quantities of American goods without making those fundamental changes, it is hard to see how that result would be acceptable to the U.S. leadership, especially after so much public stress on what the Administration has been trying to achieve in terms of structural change within China. Just in terms of the tariffs and counter-tariffs that have now been erected in both countries, a great deal of time and energy of the negotiators will now have to be diverted just to timing and sequencing the withdrawal of such tariffs to avoid the domestic political cost of being seen publicly as the side that “blinked first.”
We have great respect for the writings and views of author Thomas L. Freidman. In a New York Times Editorial column published this week: How Trump and XI Can Both Win Their Trade War, the author begins: “It is impossible to exaggerate what a dangerous cliff the U.S. and China are perched on today.” Freidman goes on to define the sobering global implications if both countries cannot come to terms soon. He similarly describes that state as follows:
“This has become a really bad play. We have a juvenile, unstable U.S. president actually enacting trade policy via Twitter — ignoring the advice of his experts — and we have a pressured Chinese president who is afraid to appear to be kowtowing to any trade demands from the U.S. for fear that his domestic rivals will denounce him as weak and that pro-democracy demonstrators in Hong Kong will be emboldened by his weakness.”
Friedman calls for an immediate six-month cease fire and outlines the specific terms, which from our lens, provides a crystal-clear explanation of how important it is for both parties to be able to build mutual trust, save face and claim some form of victory. He opines:
“So for all of these reasons it’s best to go right now for a truce and a period of confidence-building, during which China proves that it really will open up — if it can do so in its own way without embarrassment — and Trump proves to China that all he wants are results he can brag about — not a revolution in Beijing.”
Readers at this point, should be able to sense very common themes and messages, that there comes a point in tense negotiations when both sides lose all trust, begin to dig in, and not give the other side the perception of a win. If is often termed win-lose vs. win-win negotiations.
Supply chain management executives and teams that often deal with various domestic and internal contract negotiations, including labor contracts, can well attest to the above themes.
This supply chain industry analyst can vividly recall my interviews with companies that were just entering early business relationships across China several years ago. One of the most consistent themes that I heard regarding contract negotiations was the importance of understanding the notions of saving face in Asian business culture and relationships. Person after person noted, confrontation and accusation does not work well, while establishing relationships and trust results in far better mutual outcomes. These remain tenets of international business relationships.
Thomas Freidman’s observations are spot on- both nations are perched on a dangerous cliff, and the consequent short and longer-term business, industry and supply and customer demand structural implications are indeed consequential for many.
The short-term wheels are already in-motion, and the longer term may not be far behind without some means to walk both parties away from the precipice.
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