On Wednesday of this week, at a White House ceremony, the termed phase one trade agreement involving China and the United States was signed by designated signatories.
As with many trade agreements, the notions of political influences, compromises and vague wording has implied different meanings to various business, political and other stakeholders. The reactions from Wall Street interests, and from business leaders was mixed.
For multi-industry supply chain teams, there remains little comfort and added uncertainty related to the coming months.
The week finally provided added visibility into the eight-part, 90-page trade agreement. Highlights include:
Tariffs: The U.S. agreed not to impose tariffs of 15 percent on upwards of $156 billion of China imports that were scheduled to take effect in mid-December. Further agreed was the cutting of tariffs on $120 billion in imported goods from 15 percent to 7.5 percent, but according to The Wall Street Journal, the latter commitment is not part of the agreement text.
What remains in place are existing tariffs on upwards of $370 billion of China imports to the U.S., and that remains the existing challenge for multi-industry supply networks to manage or overcome in this new year. These remaining tariffs are the obvious bargaining chips the Trump Administration seeks to leverage in the phase two round of negotiations. However, by most accounts, a subsequent phase two trade agreement is not expected until after the November 2020 U.S. Presidential election. Others are speculating the existing tariffs look unlikely to be scaled back.
Added Purchases: China has agreed to purchase an additional $200 billion in U.S. goods over the next two years, with $77 billion allocated to the year 2020 and the remaining $173 billion in the year 2021. The baseline measurement is pegged as a year 2017 baseline, and apportioned as-follows for both years combined:
Upwards of $78 billion in U.S. manufactured goods.
Upwards of $52 billion of energy related products.
Upwards of $38 billion in services related products.
Upwards of $32 billion in U.S. agricultural products.
Other specific categories and amounts were reportedly not disclosed because of concerns related to distorting open markets. According to The Wall Street Journal, to fulfill all of the added purchasing targets, U.S. exports to China would have to expand to $263 billion this year and $309 billion next year, an increase without precedent.
For U.S. based manufacturers, the $78 billion commitment over two years may appear to be appealing, but initial speculation is that China’s shopping list is likely to include advanced high-tech products destined to supply termed strategic industries. This area of high-tech dominance remains unresolved as well as contentious, hence the speculation that the Trump Administration may ban certain purchases of deemed critical high-tech components. For U.S. based farmers and agricultural supply and trading networks, the above numbers may be somewhat of a disappointment. None the less, they are a means to try to restore lost market opportunities for agricultural products along with providing political U.S. Midwest focused influences entering the U.S. Presidential period.
Intellectual Property Protection: This phase one deal reportedly includes strong language related to preventing IP theft, and allows U.S. businesses to initiate criminal investigations in China. Unclear at this point as resolution mechanisms other than the business dispute clause noted below or existing internal China legal processes.
Business Disputes: The deal reportedly outlines the creation of a dispute resolution office to address longstanding complaints from the U.S. business community as to whether disagreements with China based partners have not been fairly resolved. According to reporting from The Wall Street Journal: “Instead of deferring to arbitrators, disputes under the phase-one deal will be addressed through three rounds of negotiations between the two sides, ultimately giving the U.S. the right to impose tariffs if it isn’t satisfied with the outcomes.” Such a provision is being perceived as the Trump Administration’s continuing desire to circumvent the World Trade Organization (WTO) arbitration process which is likely to wrangle other countries adhering to the WTO trade dispute processes.
Currency: Reportedly, China has committed not to revalue its currency, and provide regular disclosures regarding foreign exchange holdings. In turn, the U.S. agreed this week to remove the designation of China as a currency manipulator.
It was pretty clear that U.S. equity markets were pleased with the initial agreement, pushing the Dow Jones Industrial Average and S&P 500 Index to new highs. That stated, there is an underlying tone that while a full-scale trade war may have a cease-fire, the longer-term implications are worrisome.
A WSJ Heard on the Street opinion column this week cautioned, in-part:
“Investors will be dealing with the consequences for years to come as economic “decoupling” raises costs, cooperation on issues like carbon emissions becomes harder, the risk of military conflict in Asia rises and technology buyers increasingly need to choose between competing U.S. and Chinese systems and standards.”
The Business Network CNBC headline on the phase one trade deal was that U.S. business leaders and industry trade associations do not view the deal as a huge breakthrough. The expressed consensus of business executives reflects the deal hardly being a success but rather a “cease-fire” of hostilities. The all-important phase two round is where the most contentious issues related to IP protection, state-owned industry subsidies.
The takeaway for our readers is that multi-industry supply chain and product management teams remain tasked with ongoing challenges for buffering the impacts of tariffs and heightened trade tensions on lines-of-businesses, key customers and suppliers. As Supply Chain Matters opined in an August 2019 commentary:
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.
We further observed: Political processes (trade disputes) 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.
These observations and insights remain prevalent at the beginning of the year 2020 and will likely remain as this upcoming year winds down.
The bottom-line takeaway remains that in the end, supply chains do matter, and so are the senior management expectations.
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