This week, The Wall Street Journal CFO Journal warns (Paid subscription required) that an approaching World Trade Organization (WTO) deadline could well make European goods made with components or materials imported from China more expensive. We highlight this news item because it may well be a forerunner to efforts undertaken in 2017 by the new Trump Administration in its Make America First set of initiatives related to global trade.

Such pending actions are a result of a building frustration that Chinese manufacturers are dumping products in other global regions to compensate for declining domestic market demands and consequent excess capacity among various industry sectors. The discerning shift towards a nationalist environment driving political actions and/or political candidates in developed economies now makes such actions more likely.

These tariff actions, however, often feature other broader consequences. As an example, raw steel that originates from China because of lower cost factors, becomes subject to higher punitive import tariffs when dumping is claimed, and thus adds to the previous planned construction costs of projects and products in the destination country. While the EU in some cases, imposes lower punitive tariffs than does the U.S., all can change in the coming months.

The CFO Journal report indicates that on December 11, the European Union could opt to grant China “market economy status” or the EU could opt to draft new trade rules that do away with the distinction between market and nonmarket economies. Regarding the former, sources are quoted as indicating that the odds are not leaning towards China achieving such as status because of the existing pressures from southern EU states and industrial sectors with a protectionist agenda. The December 11th date is key because a clause in China’s WTO admission protocol indicates that countries seeking to impose anti-dumping duties against the nation can only use non-Chinese data until Dec. 11, which marks 15 years since China’s admission to the trade organization.

The WSJ report surmises that the European Commission is more likely to “tighten rules against foreign-government subsidies and dumping- or exporting products at below domestic prices”, punishing those firms that benefit from Chinese subsidies. While the December 11 deadline would likely be missed, the revised proposal could be in place by the spring of 2017.

The report cites other sources as indicating that such an effort: “poses risks for companies that have outsourced parts of their supply chain to China.” European industries such as automotive could suffer the effects through higher import duties on China based parts and intermediary products.  Other industries could well be impacted according to this report.

The consequent obvious question is how will the government of China respond to such initiatives and whether more punitive Chinese import tariffs are imposed across various industry product value-chains that spill over to other global trading blocks such as the United States.

For strategic product sourcing and supply chain network planning teams, these potential trade enforcement scenarios that are global in perspective require teams to be prepared for educating senior management on product and business margin impacts. Once more, contingency product sourcing planning will likely be a more important core competency in the months to come.

 

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.