The Supply Chain Matters blog provides our readers with yet another supply chain management focused update on the now heightened implications of ongoing trade tensions among two of the globe’s three largest economies. We pose the question and the response as to whether tensions are now at the tipping point.
United States and China Trade Talks Sour
Since our May 10 update indicating that trade talks among the U.S. and China broke-off at its presumed final stage, a lot of consequent actions are now occurring.
China indeed retaliated to U.S. actions by announcing 25 percent import tariffs on an additional $60 billion in U.S. imports. Equity markets immediately responded by wiping away upwards if $1 trillion in global share values. Concerns remain that China will attempt to further weaken its own currency or trigger additional financial shock.
This week, the Organization for Economic Cooperation and Development (OECD) warned that the ongoing uncertainty about the extent and duration of ongoing trade conflict has weakened business investment across the globe threatening to further hamper longer-term growth prospects. The OECD now estimates that business investment will grow globally at a rate of 1.75 percent in 2019, compared to 3.5 percent in 2018. That figure has significant implications for future trade and economic growth. In a scenario where both countries impose 25 percent tariffs on all goods jointly traded, the agency estimates that U.S. economic output would ne negatively impacted by 0.6 percentage points, and China’s output would be negatively impacted by 0.8 percentage points.
Reuters reported last week that global equity markets are signaling that the ongoing trade war has “blundered into a minefield” and that the danger is that a more prolonged conflict could place a serious dent in the economies of both nations, and further reverberate through a global picture that looks tenuous.
Bloomberg opined that investors seem inclined to believe that Trump’s trade war is a short-term fuss, and in the end, will step away from an all-out fight. Yet, the report indicates that the Trump Administration may be overestimating the willingness of China’s leaders to hold their course and not lose face.
Last week, business network CNBC calculated that the Trump Administration’s ongoing enacted tariffs, the equivalent of $72 billion in tariffs, is equivalent to one of the largest tax increases to U.S. taxpayers and businesses in more than a decade. The Chief Economist of the non-partisan Tax Foundation indicated that while not the largest tax increase in history, the current actions represent one of the bigger tax proposals over the last 20 years.
CNBC’s on-air market sleuth Jim Cramer indicated on Friday that reaction from U.S. CEO’s ranges from a belief that President Trump is “stupid” for taking such a hard line in negotiations, and it will go away with the upcoming elections, to thinking they can actually stop the President in this current course. He also acknowledged that some CEO’s, wanting to get into China for years, could benefit from the trade tensions. The prior week, commentator Cramer reinforced what others were stating, including this blog, namely that U.S. companies that did not reduce their China exposure have only themselves to blame at this point.
On Saturday, the South China Morning Post reported that Beijing is in “no rush” to resume trade talks among the two nations, suggesting that a prolonged cooling-off period may be in the cards.
Other reports indicate the risk of a global recession are growing, at the earliest, late in 2019, or more-likely, sometime next year.
All of the above highly charged news and political developments have only heightened tensions and concerns as to where this is all headed and what will be the industry and global economic implications.
More Specific Actions
Business media such as The Wall Street Journal have once again profiled reports of companies that are now acting to mitigate the effects of what now increasingly appears to be prolonged trade tensions among these two nations.
In the high tech and consumer electronics supply network sector, new U.S. moves to curb Chinese telecom producer Huawei Technologies access to U.S. technologies is quickly reverberating across U.S. high tech supply networks. This week, Google’s decision to restrict Huawei’s access to certain proprietary features of the Andriod operating system as a result of the U.S. requirement may well do serious damage to the telecom provider. In a similar move, Qualcomm suspended chip shipments to Huawei while German based Infineon Technologies indicated it will terminate the delivery of components originating in U.S. plants.
Such direct moves imply potential retaliation on U.S. high tech and consumer electronic providers doing business across China. Least we once again raise the specter of Apple’s iPhone, iPads and Apple Watch supply or customer demand networks being at-risk of retaliation, depending on that company’s political influence on leaders of both countries. A 25 percent tariff would represent quite a sting. Morgan Stanley estimates that a 25 percent tariff would add $160 of added cost for each iPhone. Last week, shares of Apple declined 7 percent on mounting trade concerns.
Copier manufacturer Ricoh indicated plans to shift sourcing of some of its high-speed copiers intended for U.S. markets to Thailand. The WSJ report goes on to state that while many copier brands are Japanese, the copers themselves are produced in China. A BNP Paribas economist is quoted as indicating that production shifts to places outside of China are “ accelerating and unavoidable” and that companies would remain cautious even if Washington and Beijing reach some form of trade truce.
Likewise, intermediate supply network components such as semiconductors and memory chips ship from South Korea or Taiwan to China for end-item manufacturing thus extending the economic impact of heightened tariffs to other countries and regions.
Business media further reminds readers that foreign auto manufacturers BMW and Mercedes export luxury automobiles to China directly from U.S. based factories, which will be impacted by double-digit tariff levels.
Footwear manufacturers such as Adidas, Nike, Skechers, and Wolverine are currently lobbying the Trump Administration to be exempted from the proposed next round of import tariffs affecting an additional $300 billion in products. Meanwhile, in January, producer New Balance along with two companies based in Texas and Missouri, announced plans for producing made-in-the-USA running shoes for U.S. military recruits — bolstering domestic production at a time when nearly all footwear purchased in the U.S. are produced overseas
The WSJ reports that container shipping lines are becoming increasingly concerned that an escalating trade war would curtail trans-Pacific sea trade. One quoted analyst expects demand growth in the sector to decline around 2 percent this year, from 4.5 percent in 2018., while immediately creating another condition of industry overcapacity of container vessels.
Growing trade tensions have raised concerns for rare earth minerals supply, production of which is completely dominated by China. Currently, one U.S. based active mine, located in Mountain Pass California, ships rare earth ore to China for processing. That ore is now subject to a 25 percent tariff as of June 1st. A U.S. chemicals company and an Australian mining company are now proposing to build a rare-earth minerals separation plant in the U.S. to shore-up supplies, but sourcing of the minerals themselves will remain an ongoing challenge.
What This All Means
Global markets and multi-industry supply networks always adapt to changing economics and geo-political risks. The question is always timing.
The 2008 global recession provided a stark reminder that global supply networks can and will change at an accelerated pace when threats appear to be imminent, and uncertainty too much to warrant added investment. The notion of 25 percent tariffs on significant amounts of goods implies that businesses and their supply networks can no longer absorb such burdens. That is especially the case for smaller, up and coming businesses. That implies added price increases, the threat of further cascading supply network prices and the consequent acceleration of inflationary forces.
The cascading developments concerning U.S. and China escalating trade tensions provides significant downside risks and continuing uncertainties, and likely at the tipping point to motivate additional structural changes in the weeks and months to come.
From our lens, regardless of the outcome of ongoing trade talks, shareholders and C-Suite executives, domestic and international, will demand industry supply chain management teams take appropriate actions to mitigate supply and demand network business and product technology risk factors.
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