Various news reports and developments over these past two weeks are reinforcing a scenario that the trade war involving the United States and China will likely drag on or escalate for the remainder of 2019. The implication is that multi-industry supply chain management teams will likely have to weight their product supply and customer fulfillment support strategies towards assumptions of escalating tensions, tariffs and other line-of business or product-specific implications.
This week, trade negotiators from both countries held in-person talks in Shanghai with little sign of any progress. The U.S. delegation was led by Treasury Secretary Steven Steven Mnuchin and U.S. Trade Representative Robert Lighthizer. The China delegation was led by Vice Premier Liu He.
Throughout the week, President Trump has “tweeted” his frustration at the lack of progress and suggested that China might delay negotiations until next year’s U.S. Presidential election. Trump is especially frustrated in what he perceives as a lack of follow-through in his talks with China’s President Xi Jinping whom he believes promised to step-up U.S. agricultural purchases. With no signs of any new agreement, both sides agreed to re-convene in September.
The Wall Street Journal reported this week that the slow progress is a purposeful tactic on the part of Beijing to wait out the negotiation process in order to extract a more favorable trade agreement. Further noted is that economists and analysts have been analyzing local, regional and country-wide economic data to assess how long China’s economy can withstand punitive tariffs. A further reported item being examined are potential impacts of U.S. companies moving their supply chains out of China,
The new salvo that occurred today was an announcement by Trump that the U.S. would impose 10 percent tariffs on an additional $300 billion in Chinese goods and products beginning September 1st, after this week’s trade talks failed to yield any significant results. The President continues to threaten that he will win re-election, and in going so, terms will be far more onerous for China.
Today’s tariff announcement precipitated yet another negative response for U.S. stock and bond markets, plummeting the stocks of retailers and businesess such as Apple. Once more, the U.S. Federal Reserve elected to drop interest rates, citing the economic drag of a trade war, among other risks.
While business executive may remain of the view that the ongoing trade conflict has to come to some resolution soon, Supply Chain Matters provides a lens reflecting both a supply and product demand network perspective.
The next 3-4 months represent the supply ramp-up for Q4’s holiday fulfillment period.
Recall that last year, with the threat of new tariffs, retailers and businesses accelerated their inventory purchases in order to have non-tariff stocks for holiday sales. That option is no longer viable for 2019 since many intermediate, component or finished products will be subject to some level of tariffs. Neither is the option of re-routing China produced products through third-party countries to circumvent the imposition of tariffs. Sooner or later, Customs authorities will cite such actions with punitive measures and fines.
The reality is that some U.S. businesses have already assessed that trade tensions are likely to continue, regardless of any perceived trade agreement among the two nations. Trade conflict may indeed be a status-quo scenario.
As we have often observed, this remains a politically driven process among two very powerful nations each attempting to curry favor among economic groups, either industry or labor. Political processes are challenging in outcome prediction and generally run in multi-year cycles.
In the light of such circumstances, individual business actions are already being taken to move some portion of supply sourcing to other countries or regions as an element of supply network disruption or risk mitigation. Such moves are reportedly taxing any available production and logistics capacity in countries such as Vietnam and India.
With U.S. businesses and retailers showing added signs of profitability erosion and effects of higher inbound material costs, many can ill afford risking all-important revenue and profit goals for Q4. Neither does that extend to 2020.
Other countries, such as those in Europe or Latin America, not subject to escalating tariffs involving Chinese produced products have an implied cost advantage over U.S. businesses and retailers.
For these reasons, we believe that supply chain and procurement teams will have to take proactive actions now, if they have not done so, in order to be able to support expected business outcomes. Supply and customer fulfillment support strategies will have to be weighted toward assumptions of continued heightened trade tensions involving both countries, that may well extend beyond the U.S. Presidential election cycle.
Political processes indeed run in multi-year cycles, while supply chains have to deal with monthly and daily realities of fulfilling customer demand and competitive product supply needs.
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