The Supply Chain Matters blog provides our August 31, 2018 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:
Since our last August 24 update, the bulk of global trade and tariff related news focused on new developments in ongoing NAFTA trade agreement renegotiations.
The week began with President Trump gathering reporters in the Oval Office to announce a new trade agreement with Mexico. While indicating to reporters that the agreement should be renamed to the U.S. Mexico Free Trade Agreement, dropping the former NAFTA agreement name because it had “bad connotations” for the United States. That statement raised immediate speculation as to the likelihood of reaching a trilateral trade agreement with Canada. Chrystia Freeland, Canada’s Prime Minister personally joined that talks on Tuesday indicating to the parties that Canada would make a good faith effort to come to resolution regarding today’s-imposed agreement deadline but would continue to represent the business and trade needs of Canadian businesses. As Supply Chain Matters noted in its breaking news update, Trump Administration officials seemed split on whether the U.S, would proceed without securing Canada’s agreement, either leaving the door open for cutting just a bi-lateral deal, or moving forward with a new re-negotiated tri-lateral agreement.
We further echoed individual business and trade association comments that full understanding of what negotiators agreed to was knowing more about the trade agreement details. Clarification details this week continued to point to agreement areas as being:
- That the Mexico bi-lateral agreement will span 16 years, with an option to revisit the agreement in six years, for an extension for a further 16 years.
- Augment content requirements for chemicals, steel-intensive products, and further industrial materials.
- An extension of data protection for biologic drugs to extend to 10 years from the current 5 years.
- Moves to strengthen rules governing textile and apparel supply chains.
- Revised auto manufacturing content, from the prior 62.5 percent to 75 percent content made in North America to qualify for duty-free status. Further, 40 percent of each vehicle’s content must be produced among production workers who earn a minimum of $16 per hour. An economist from the Peterson Institute indicated to the Washington Post that the Mexico deal further calls for 70 percent of the steel. Aluminum and glass in autos coming from North American sources.
One significant revelation of such detail came on Tuesday from a Reuters sourced report featured on business network CNBC indicating that the deal with Mexico opens the door for the United States to impose a 25 percent tariff on Mexican produced imported automobiles and sports-utility vehicles that exceed a cap of 2.4 million vehicles daily. Reuters cited automotive executives as the source of this data which should not be a surprise since such a tenet has major implications for Mexico’s current presence as a significant volume exporter of smaller, low-margin vehicles to global based markets including the U.S. and Canada.
During this week, general and business media continued to dwell on President Trump’s threated tactics to impose 25 percent import tariffs on all Canadian manufactured automobiles if Canada does not come to consensus with the announced bi-lateral deal with Mexico.
As we pen this blog on Friday morning, the latest reports indicate that the tri-lateral talks that now involve Canada have reached a “tense” stage. Canadian Prime Minister Freeland and USTR head Lighthizer reportedly met four times Thursday that included a late-night session of candid discussion.
Thoughts for the Week- The Political Backdrop Trumps Free Market
Our Supply Chain Matters highlights and insights related to ongoing global trade and tariff developments have increasingly dwelled on the political backdrop because with each passing week, because the politics continue to out distance considerations for global supply chain business, product and capability realities.
Such notions continue to be expressed by influential media. A Tuesday editorial by the highly conservative editorial authors of The Wall Street Journal titled Half a Nafta, addressed the automotive industry impacts in-part with the following:
“This auto gambit is part of the Trump-Lighthizer strategy to blow-up global supply chains and is a political strategy to get a revised deal’s new labor provisions that go far to imposing U.S. style labor laws on Mexico.”
In its latest edition, the widely global read Economist Magazine penned its opinion article, America’s deal with Mexico will make NAFTA worse. The editorial began: “The deal looks good for America only through the distorting prism of the president’s mercantilism. And Mr. Trump is pursuing his trade agenda with a reckless bellicosity that makes a chaotic outcome more likely.”
Commenting on automotive revised content and labor content stipulations that are characterized as elevating arbitrary rules above the free market, the editorial comes on to state:
“The intention of his (Mr. Trump) agreement is clear: to shove firms into abandoning cross-border supply chains in favour of the safe-but-costly option of producing in America. Economic might is a weapon to be used in service of that goal.”
Other auto industry media point to increased conclusions that the current Trump Administration NAFTA trade policy stance is to reduce the China sourced leakage of component parts entering North America based supply networks.
This Week’s Reader Takeaways
So, it continues, political motivated actions, efforts to appease individual business, industry or labor groups are all a part of the political backdrop. What tends to be left behind are the realties that global supply chains have shifted their core capabilities and manufacturing efficiencies toward lower-cost regions. People can agree or disagree with the political implications of jobs, personal incomes, business presence or moralities of global-based supply chains.
In the end, everything has an economic and industry competitive consequence in either higher prices for products, muted innovation of products and processes, or overall product quality and durability.
Multi-industry supply chain teams will have to once again manage and respond to business change, regardless of the politics. The real challenge revolves around which supply chains have the agility and process flexibilities to be able to respond faster than the competition, however that is now defined to be.
Within our 2018 predictions regarding the ongoing Make America Great influenced trade agenda, was our belief that such an agenda will provide a challenging tactical and strategic landscape for U.S. manufacturer’s, retailers and supply chain services providers. We are now compelled to broaden our prediction to a global-based scope. Unless or until the political agenda moderates to the realities of what is required for global competitiveness, industry global supply chain impacts seem far more probable.
Final Note- Supply Chain Matters will provide an additional trade and tariff development commentary if the situation warrants in the coming weekend.
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