The Supply Chain Matters blog provides our August 24 update and insights commentary on the pace and impact of global trade and tariff events impacting global and industry supply chains.
As noted in our prior updates, events continue to move rather quickly, and we will continue to provide updates and insights on a weekly or bi-weekly basis as-needed. 
Readers can review any of a prior updates by clicking on either of the below web links:
August 10 Update
July 27 Update
July 20 Update
July 13 Update
Trade Tensions Among China and the United States
Clearly, since our last update two weeks ago, businesses, economists, media, and industry associations have been riveted on the ongoing trade tensions among China and the United States.
Yesterday, The U.S. went ahead with the imposition of 25 percent tariffs on an estimated $16 billion of imported goods from China. The new round consists of 279 imported product categories including certain chemicals, electric scooters, motorbikes, plastics, and semiconductors. This week’s actions were on top of the 25 percent import tariffs imposed on $34 billion worth of goods in July involving machinery and electronic components.
China immediately retaliated with the imposition of tariffs on $16 billion of valued imports which included autos, fish, fuel, select steel products and medical equipment. The Chinese Commerce Ministry indicted an online statement that the government plans to file a formal compliant to the World Trade Organization against the U.S.
As noted in our prior update, President Trump decided to double-down on the U.S. trade tensions with China, pushing a plan to increase the former 10 percent tariffs on $200 billion of select imported goods, to an escalated rate of 25 percent. Hearings have been underway for the past week focused on taking testimony from businesses arguing why they would be substantially harmed by such tariffs. This next round, planned to be imposed sometime in September, will involve far more consumer-focused products.  That has raised a groundswell of concerns related to potential impacts for U.S. based retailers, manufacturers, and services providers. This week, The Chairman of the U.S. Federal Reserve provided highlights from the Fed’s latest assessment of the economy. While noting that U.S. economic growth and activity levels remain rather robust, concerns related to the potential harm of building trade tensions were again noted. Reports indicated that the Fed made mention of tariffs in 22 instances in its latest economic assessment.
Speculation is widening that the Trump Administration feels that added pressure will bring China to the negotiating table. The timetable, however, remains rather muddy, with the new round of tariffs scheduled to go into effect in late August. Voices of reason call for involving more international partners in attempting to quell China’s ambitions in global trade dominance.
Political Backdrop
Over the past two weeks concerning talks among these two countries have once again vacillated from increased optimism to pessimism. Last week, there were reports that China ruling leader Xi Jinping had indicated to China’s trade ministers to step-up efforts to resolve the trade dispute with the U.S. The Wall Street Journal reported that the goal was to end the ongoing trade standoff ahead of two planned meetings between President Trump and the Chinese leader scheduled in the November time period.
At the beginning of this week, trade talks resumed among lower-level finance and trade ministers only to complete yesterday with little sign of progress. A White House statement indicated that both sides: “exchanged views on how to achieve fairness, balance, and reciprocity in the economic relationship, including by addressing structural issues in China.” A statement from China’s Commerce Ministry indicated that the two sides had: “constructive and frank talks and will stay in contact about the next step.” Reportedly there are no formal indications of what next steps are.
The political reporting continues to highlight a contrasting approach from key Trump Administration officials. Trade hardliners continue to call for increased pressure on China with subsequent rounds of tariffs and a no-compromise negotiating stance. U.S. Treasury officials reportedly have argued for a more moderate stance, seeking points of compromise and interim steps of negotiations. The appearance remains that the hardliners continue to have influence. President Trump told Reuters earlier this week that he has little optimism concerning this week’s talks, and in a political rally held in West Virginia, made direct and tough statements concerning China.
Commentaries that we have reviewed this week now indicate that optimism for a meeting of the minds among the two nations remains rather difficult and entrenched. More than likely, the logjam may extend until after the November Congressional election.
Optimism has been building that U.S. and Mexico trade negotiators can come to a handshake agreement on bi-lateral trade agreements this week. The incoming trade negotiator for Mexico’s newly elected President indicated optimism on Wednesday for reaching a deal was reluctant to specify timing. Politico indicated yesterday that a handshake deal with Mexico would be announced by the White House sometime today. Citing informed sources, the WSJ reported that both sides were close on auto manufacturing rules of origins provisions, particularly concerning manufacturing content within Mexico.
If the bilateral deal is reached, NAFTA tri-lateral talks would then resume involving Canada. Canada’s foreign minister indicated that that country’s trade delegation has been in close contact with Mexico and the U.S. and has been encouraged in the feedback, to include rules of origin for autos.
What remains unclear at this point is a firm timetable for final resolution of these NAFTA talks. The prior stated goal for having these talks wrapped-up and ready by the end of August for the 90-day legislative ratification phase is looking to be rather challenged at this point, barring another week of accelerated talks.
Individual Business Impacts
As indicated in prior updates, with each passing week and month, the implications of nonstop trade and tariff developments continue to be evident as companies either report their quarterly financial and business performance, as businesses argue for exceptions or for added tariff protections, and as business and industry media profiles individual industry or corporate impacts. Small and medium sized businesses are especially feeling the effects and the consequences.
With current and planned future actions, there are estimates that by the all-important last quarter of the current year, the imposition of the ongoing U.S. tariff and consequent retaliatory tariff actions would imply that 85 percent of value of exported goods to China would be subject to added price burdens. Similarly, U.S. based manufacturers and consumers will be dealing with significantly higher inbound materials and retail prices, each impacting product margins.
Thoughts and Insights for The Week
By now, many teams in multiple industry supply chain settings have likely had conversations and/or various forms of actions occurring that are directly related to these ongoing trade and tariff developments.
With each passing week, we all can collectively read or experience the statements from senior business and supply chain leaders indicating various impacts, how difficult and challenging it is to have to evaluate or execute either temporary alternative routing of inbound or outbound materials or begin to initiate permanent planning for alternative sourcing of materials. The reality remains that with each passing week, options become more difficult and challenging.
One positive that has come from the current environment is that businesses have made concerted decisions to take on additional inventory risk in order to buffer the impacts of expected tariffs on specific goods. We suspect that such decisions came with an assumption that the current tariff war would eventually come to reason by the end of this year. With major U.S. Congressional elections occurring in November, somehow the political climate will change, and cooler heads will prevail. Republican legislators seem reluctant to openly push back on the Trump Administration’s unbridled trade and tariff actions.
More importantly, we remain of the belief that the stage is already set for subsequent structural changes in global supply chain sourcing and customer fulfillment strategies. The initial actions are already underway with more painful decision-making yet to be made.
U.S. transportation cost inflation remains a significant challenge, and the ongoing efforts by many retailers and manufacturers to push-up inventory purchases from China, Asia, and European sources to support Q4 surge business expectations have spiked ocean container and air freight costs as-well. Original transportation budgets are now meaningless, the question is how much more can it go.
In the coming weeks, many manufacturers and retailers will begin the process for 2019 business and financial planning, while at the same time, managing the day-to-day operational needs for the year’s most important customer fulfillment quarter. C-Level executives will be tackling tough decisions relative to product pricing and market assumptions, supported by sales and operations planning teams that will be continuing to evaluate various cost and service scenarios.
Whereas many senior executives have had to explain away the exploding 2018 cost factors directly related to existing supply and demand networks, they will look for more accurate assessments of regional revenue, cost, and budgetary factors for 2019. Shareholders and customers will demand this.
Now more than ever, supply chain leaders will be tested in their ability to understand all aspects of global supply chain movements and their impact to cost and service needs. For some, all of those prior investments in augmented technology tools will be put to the test. For others, teams will be tested in long hours of multitasking in operational, analytical, and planning assignments.
All will have to place stakes in the ground related to interim or permanent supply chain plans related to supporting the business, supply chain risk mitigation while maintaining agility. Teams, business process and decision-making capabilities will be tested
Bob Ferrari
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