The Supply Chain Matters blog provides our August 10 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: 
July 27 Update
July 20 Update
July 13 Update
July 6 Update
European Trade Front
In our prior July 27th update, we mentioned that President Trump met personally with European Commission President Jean-Claude Junker at the White House. Mr. Junker travelled to the U.S. Capital to try to dissuade the President from further escalation of tariff threats and actions. At the conclusion of that meeting, both indicated an agreement to attempt to iron-out differences among these two major trading blocks. Both sides suggested they would hold-off on further tariffs for the time being, contingent on negotiating in good faith.
Business media has been quick to note that whether a zero-tariff deal comes to fruition is very much an open question because of the political minefields that continue to exist among the two trading blocks. Indeed, such realities came to forefront just a day later, as European trade officials were forced to clarify that the conversation among the two leaders was limited to just soybeans, and that broader aspects of free trade related to agriculture goods are: “off the table.” That did not preclude President Trump from visiting two Midwest states that same day and declare that the European market was now open to U.S. farmers.
NAFTA
Noted in our prior update was that senior U.S. and Mexico government officials agreed to resume NAFTA negotiations with Mexico taking on a more proactive stance towards coming to resolution of the ongoing trade talks. Last week, U.S. Commerce Secretary Wilbur Ross indicated that President-elect Andres Manual Lopez has been very proactive in appointing a new trade team and that prospects for a U.S.-Mexico agreement were looking to be very optimistic. That statement was interpreted to indicate upending of the prior tri-lateral agreement. and could likely stretch out negotiations with Canada beyond the prior stated proposed goal of reaching a preliminary agreement by August 25. since the U.S. Congress requires a 90-day approval cycle and the new Mexican Presidential Administration assumes power on December 1.
Meanwhile, a report this week from The Washington Post indicates that since automotive industry supply networks are so deeply invested in Mexico’s lower direct labor rates, that not much is expected to change in sourcing patterns other than an agreement for gradual lifting of labor rates in the country. The U.S. main gain additional overall automotive content but that likely will apply to future sourcing decisions.
Still unclear are what negotiating points that Canada will continue to push forward in these talks, or whether talks related to Canada can resolve by August 25.
Trade Tensions Among China and the United States
President Trump elected to double-down on the U.S. trade tensions with China, threatening to increase the former plan of 10 percent tariffs on $200 billion of select imported goods, to an escalated rate of 25 percent. The Chinese Ministry of Commerce immediately fired back indicating that: “The carrot and stick tactic won’t work” and that China must retaliate: “to defend the nation’s dignity.”
The move came after Trump’s declaration to the European Commission that the United States seeks fair and open trade with all nations. Business and industry media interpreted this move as an effort by the Trump Administration to again rachet-up the pressure to come to a meeting of the minds.
A final decision on the proposed bumped-up 25 percent tariffs is not expected until September. Needless to state, such an increase will have major impacts for multi-industry supply chains.
Yesterday, business network CNBC , citing sources close to the government of China, noted that the growing trade war with the U.S. was causing some rifts within China’s Communist Party, fearing that the country’s overly nationalistic stance may have hardened the U.S. position. According to the report, the cracks within the internal ruling party come as China’s stock markets and currency are slumping, and while overall debt levels are rising. The Chinese government has struggled to shore-up the economy to cushion any impact from a trade war.
As a result, 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.
Added Blowback- South Korea
The Wall Street Journal reported this week that South Korea is threatening to block a former revised trade agreement with the U.S. unless its produced automobiles are exempted from the Trump Administration’s threatened tariffs on all imported autos.
A little over four months ago, the Administration had renegotiated a new trade agreement with South Korea that included a quota cap on that country’s export of steel into the U.S. while allowing the U.S. to have more open access to the country’s domestic auto market. The WSJ report indicated that the trade deal, the first negotiated by the Trump Administration, could now be in jeopardy if the U.S. were to move forward with threatened tariffs on imported autos, and not exempt South Korea.
Individual Business Impacts
As we indicated in previous update, the implications of nonstop trade and tariff developments will continue to be evident as companies report their quarterly financial and business performance, and as business media profiles individual industry or corporate impacts.
Earlier this week, The Wall Street Journal featured a report indicating that U.S. small businesses have reached a limit with the economic impacts of tariffs now negatively impacting their supply network costs. Noted was that smaller firms are less able to shift production to other locations and have smaller reserves to draw on when times get tough. As a result, the report noted that such firms are re-thinking their production and sourcing strategies, as well as product pricing.
Meanwhile, domestic producers of aluminum and steel remained challenged with satisfying increased demand for their products from U.S. based manufacturers. Some U.S. small manufacturers fear that their markets may be lost as Canadian or European based manufacturers continue to reap an advantage in the cost of raw materials, due to added U.S. tariffs.
Further profiled were effects of tariffs on U.S. manufacturers Coca Cola, Boston Beer, Lennox, Polaris Industries, Steelcase, Winnebago Industries, and others. Many have had to raise prices for end products due to the combined added costs of raw materials and components, as well as the ongoing double-digit increases in U.S. trucking costs. In the case of Polaris, the company followed Harley Davidson’s move in accelerating a plan to source manufacturing of motorcycles for supporting the European market to the continent. In the case of Polaris, manufacturing will be shifted to Poland.
Specific Industry Impacts
Almonds
One direct example of targeted tariff impacts is that of U.S. grown almonds. The U.S. is the globe’s largest producer and exporter such almonds, with a reported 80 percent of global supply sourced in the state of California. After suffering through a major draught, California growers have managed to bounce back, expecting a bumper crop this year.
China, which represented the second largest importer of this crop, imposed a targeted tariff that reportedly adds a 50 percent tax on almond prices. It turns out that China previously turned a blind eye to product being shipped to other countries such as Vietnam, and then moved to China to avoid import tax. In addition to the added tariff, China enacted measures to close the existing transhipment loopholes.
Thus, global demand has been significantly impacted, and domestic prices are falling as a result because domestic supply is expected to be much higher than expected. Once more, farmers have to plan for next year’s crop, making bets as to whether the current heightened trade tensions will subside, or whether permanent shifts in markets have already occurred.
Fish Products
The WSJ featured a report exposing that much of the caught fish in the U.S. is shipped to China to be processed as breaded, seasoned, or portioned in specific packaging. This global movement is made to leverage the lower direct labor costs among China’s fish processors. An estimated $900 million in fish and seafood caught in the U.S. is sent to China for processing.
A proposed 10 percent duty tariff on U.S. fish imports from China threatens to upend this supply network arrangement, especially if that tariff is imposed at the 25 percent level. According to the report, some U.S. Gulf Coast seafood producers had lobbied for this specific tariff round to include fish, to fend-off Chinese farmed shrimp and other foreign farmed fish from unfairly competing with Gulf Coast fishing sources.
As a result, added tariffs will ultimately lead to increased domestic prices for fish products that will have to be adsorbed by U .S. consumers.
On the flip side, China imposed a tariff on imported fish and shellfish including lobsters exported from Maine. That industry is now reeling from an upwards of 30 percent reduction in previous export sales. Instead, Chinese importers are turning to Canada for ongoing lobster supply.
Rail and Subway Cars
In a prior blog commentary, Supply Chain Matters highlighted efforts underway by the U.S. Congress to ban the procurement of rail and subway cars produced by a state-owned or subsidized company. The target is China’s state-owned railcar producer CNNR which is establishing two U.S. based manufacturing sites.
Thoughts and Insights for The Week
The Trump Administration may well be responding to the building political and business pushback regarding a global-wide assault of tariffs and trade, particularly the now growing tensions with China. It would seem that U.S. trade officials have urged the President to ratchet-up the ongoing pressures to extract concessions. Meanwhile, trade and treasury officials from multiple nations grow increasingly concerned about the added effects of extended trade tensions and tariffs on existing economies.
While the U.S. Congress remains in summer recess, we suspect that many legislators are hearing an earful of constituent comments regarding the industry, business and consumer effects related to building tariffs and added prices for products, not to mention fear of added job losses.
The reality of many additional weeks of uncertainty leading up to the U.S. Congressional elections in November is real, since legislators seem reluctant to openly push back on the Trump Administration’s unbridled trade and tariff actions.
More importantly, we believe 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-come.
The Make America Great Again political agenda may well have two facets. One is the loss of existing supplier or customer contracts among U.S. manufacturing and services firms because a trade war has the effect of added inbound material costs or making the export of U.S. products far more expensive in foreign markets. That leads to structural changes in supply sourcing. The other is when or if the Trump Administration is successful in its supposed end-game of achieving free and fair trade for U.S. manufactured goods, leading to expanded markets and profits. Both have specific consequences and risks, which are growing with each passing week.
As we have noted, all of the detailed economic and service level analysis that makes-up a global sourcing decisions for industry supply network teams is neutered if global trade decisions become ultimately, politically motivated.
Bob Ferrari
