Today is April 1st, what some may humorously declare as April Fool’s Day.

At the end of 2018, Supply Chain Matters would have planned this very date for a major update on significant global trade developments.

For global supply chain management teams, this date previously represented an important milestone for global trade development involving both the United States and China, two of the most influential countries for global supply chain activity, and for what is arguably the most watched development of political brinkmanship, that being Brexit.   Global Trade

Depending a business’s specific strategies related to global supply chain risk mitigation, or on any particular geo-political lens, today could well be an April Fools milestone.

 

What is the Brexit Option?

Today would have been the original date under the Article 50 declaration for the United Kingdom to exit the European Union.

Last week, the British Parliament rejected the ruling government’s proposed Brexit agreement of the unprecedented third time, setting into motion yet another frenzy of political brinkmanship to determine what form of Brexit, or what exact date of Brexit actually occurs. The new deadline reverts to April 12, ten days hence. If an exact agreement cannot be agreed to, the option is either a chaotic exit agreement with no agreement or perhaps a forced extended postponement that extends well beyond EU Parliamentary elections scheduled in late May. Prime Minister Theresa May’s power is now tenuous at best, and there seems to be no end to the political drama being played out.

In our last Brexit update on March 22, we opined that a longer extension that drags on the specifics of trade practice agreements among the UK, the EU, and other nations will invariably lead to the need for added, more definitive decisions related to production supply sourcing and distribution across the continent.

The current temporary measures related to augmented warehousing, transportation, distribution and logistics capacity can only sustain themselves for a finite period. Business have to absorb such added expenses and that can only prevail for a finite period before becoming a significant drag on financial results.

The sheer evidence of the short-term challenge was reflected in this week’s IHS Markit/CIPS Manufacturing PMI report. The headline PMI rose to a 13-month high while UK based businesses stepped-up production to build-up inventories in advance of the deadline.  Capital, intermediate and consumer goods inventories where each reported as increasing at a record pace and at record highs. Vendor performance has deteriorated, and capacity shortages are prevalent. In other words, there is a very strong headwind of built-up inventories and capacity lock-up in preparation for the former April 1st Brexit. Businesses have absorbed a lot of added contingency costs and that will likely be reflected in near-term financial performance.

Thus, for many UK or EU businesses, this may or may not be April Fools. It all depends on what happens next, or what the ultimate trade related end-goal turns out to be.

 

Trade War Conflicts Among the United States and China

At the end of last year, after the U.S. had imposed tariffs on upwards of $250 billion of Chinese produced goods, and China retaliated with tariffs on upwards of $110 billion of import goods, a moratorium was declared.  A plan was established for teams of negotiators to frame-out an entirely new formal trade agreement by March 1st.

In early March, President Trump called on China to immediately remove all tariffs on U.S. agricultural goods, in return for electing to postpone the March 1 deadline. If considerable progress was made, Trump was supposed to meet with Chinese President Xi Jinping at a trade summit at Trump’s Florida estate at the end of March to announce a new trade agreement.

Throughout March, there were numerous reports of either good progress or certain setbacks. Today, The New York Times reports that both sides are now trying to hammer out some form of a final agreement this week, with the goal of a signing ceremony among President Trump and President Xi Jinping at the end of this month.

The Times report does caution that there are still sticking points to be addressed, and the final agreement may well have more to do with increased buying commitments from China in buying U.S. products and components than in addressing major sticking points related to trade balance or more definitive intellectual property protections for U.S. corporations with a presence in China. Another very important open question relates to the degree of enforcement measures.

Earlier this month, Mr. Trump threatened to maintain previously announced U.S. tariffs if an acceptable agreement was not reached.

In early March, this Editor had the opportunity to view a webcast conducted by the Economist Intelligence Business Unit titled: U.S. and China Trade Relations After the Deadline, Where Next?  The webcast outlined six key policy areas that were supposed to be addressed: Agriculture, Currency, Technology Transfer, Intellectual Property, Financial Services and Non-Tariff Barriers. The latter two were an addition inserted by U.S. Treasury officials.

The EIU view was that given this broad agenda, Chinese negotiators were far coyer in sensing the negotiating tradeoffs, and in the political plays regarding each category, and each U.S. political faction. Across the pond, as it were, Europeans are quick to surmise that with the U.S. Presidential election cycle kicking off, influencing U.S. Midwest voter blocks with reductions in tariffs is a likely tradeoff to more complex and far-reaching needs to spur China’s strategic agenda on 2025 global competitiveness. Thus, an agreement may well have more to do with China’s commitments on buying more U.S. goods.

From the EIU lens, regardless of the details of any new formal agreement, economic and geo-political tensions among these two countries are bound to escalate as opposed to moderate.

The reality is that tariffs are weighing on U.S. business and agricultural interests. Restoring more open access to China’s imported agriculture and food needs, and recent severe floods and a Spring forecast for added record flooding, all have U.S. farmers increasingly stressed and concerned. Farm belt bankruptcies are on the rise, as are concerns for long-term export market growth.

The Times report goes even further in the belief that if China agrees to open up more of its markets to U.S. goods in key strategic areas such as agriculture, energy, aviation and semiconductors, purchases would come from state-controlled agencies, increasing the negotiating leverage of China to extract more in technology transfer or buying influence. We recently highlighted a massive reported €30 billion deal between Airbus and a Chinese buying entity that represented multiple Chinese airlines. That was an example of such buying influence.

From the lens of Supply Chain Matters, the takeaway may well be that the panacea of China as being the go-to region manufacturing region now has more discernable risk. Businesses cannot ignore access to Chain’s vast growth markets, but now more than ever, supply chain sourcing strategies need to anchor in regional based capabilities for serving various global markets.

If teams have been in a state of wait and see since last year, we regret to inform that you may have lost several months of execution time.

 

Bob Ferrari

© Copyright 2019, The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.