The Supply Chain Matters blog provides our September 20, 2018 update and insights commentary on the pace and impact of trade and tariff events impacting global and industry supply chains.

As noted in all 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 31, Update

August 24 Update

August 10 Update

Global Trade

In addition, we published a supplemental September 8 insights commentary: Example of Misguided Trade Policy and the Realities of Global Supply Chain Response to Business Needs

 

United States and China Talks and Actions

This week principle tariff news was the Trump Administration’s decision to move forward and enact a 10 percent tariff on $200 billion in China based imports effective September 24. The action comes with a threatened hike to 25 percent by the end of this year if China elects to retaliate with another corresponding  round of tariffs on U.S. exports to that country. This round would apply to more than 1000 products.

Indeed, China has immediately retaliated with a reported $60 billion in proposed new import tariffs involving U.S. products.

This brings the total amount of U.S. tariffs on products and components imported from China to now $250 billion with the Trump Administration threatening another subsequent round of an incremental $267 billion.

Initially, it was believed that certain Apple smartwatch and earbud products, excluding the iPhone, would have been included in this latest import tariff action. An obvious last-minute plea and influence of Apple CEO Tim Cook dodged the inclusion in this round. Unclear at this point is whether China’s expected retaliatory action will target Apple’s U.S. component export supply chain into China.

This $200 billion round will involve products such as auto parts, air conditioners, furniture, network routers, computer servers, high-tech equipment, refrigerators, and others. Products reportedly taken out of this round in the final review were bike helmets, child safety furniture and certain chemical compounds.

If the U.S. does elect to follow-through on its next threat for an added $267 billion in imports, many consumer products will be impacted including the iPhone and other Apple products. Once more, this will likely imply a significant impact for multi-industry supply chains to manage or mediate the cost implications.

Another China trade talk outreach was initiated by U.S. Treasury Secretary Steven Mnuchin reportedly supported by U.S. financial and business interests and directed at easing trade tensions among the two nations. An obvious split in Administration strategy and tactics remains apparent, somewhat to a good guy-bad guy tack. China’s trade minister has warned that if the U.S. did go forward in this latest round, then the Mnuchin-led talks would be sidelined.

 

NAFTA Talks

Since our last August 31 update, there has been little added significant news regarding NAFTA trade talks since the announced bi-lateral agreement reached between the United States and Mexico.

As noted in our prior full update, Trump Administration officials have been coy on whether the U.S, would proceed with a renewed NAFTA without securing Canada’s agreement, either leaving the door open for cutting just the bi-lateral deal with Mexico, or moving forward with a new re-negotiated tri-lateral agreement.

During this week, general and business media have reported on tense ongoing negotiations with increased lobbying from industry associations and individual businesses to retain the existing tri-lateral structure. Industry groups include the U.S. Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers penning a direct letter to U.S. Trade Representative Robert Lighthizer.

Canadian Foreign Minister Chrystia Freeland was scheduled to meet with Mr. Lighthizer on Wednesday.

Canadian Prime Minister Justin Trudeau indicated earlier this week that reaching agreement might be days or weeks away. Outstanding issues reportedly focus on keeping the Chapter 19 dispute resolution system, and in U.S. demands that protections on the Canada’s dairy industry be lifted.

 

European Union and Brexit

Ongoing talks among trade officials from the European Union and the U.S. continue but without significant development.

With six months remaining before Great Britain plans to leave the European Union, talks are ongoing and without signs of any meaningful specifics as to trade and tariff implications. Prime Minister Theresa May remains under significant political pressures  ahead of a planned Conservative Party annual conference at the end of this month.

Reports that we have read indicate that Brexit negotiations on either side remain tense concerning Britain’s role as a trade partner to the EU with a desire to maintain frictionless commerce, and the avoidance of a physical border between Ireland, an EU member, and Northern Ireland, a British province.

The reality for industry supply chains is that the six-month window to exit allows little time for actual supply chain adjustments related to transport flows and access to labor resources. Thus, businesses on either side of trade movements will have to make assumptions and painful decisions in the coming weeks.

 

Ramped-up U.S. Lobbying Efforts

Last week, organizations reportedly representing thousands of companies announced a lobbying effort that was termed Tariffs Hurt the Heartland designed to oppose import tariffs.

Industry Associations are now actively engaged in rallying actions, media placements and lobbying activities with respective U.S. lawmakers.

In one example, John D. Porcari, former deputy secretary of transportation in the Obama Administration, and Emil Frankel, assistant secretary for transportation policy in the Administration of George W, Bush, jointly penned an Op-ed column in the Financial Times titled: Trump puts U.S. leadership of auto industry at risk. A particular statement of interest to are readership reads:

The reckless imposition of tariffs and wobbly, inconsistent bilateral negotiations by an administration willfully ignorant of global supply chain realities was the first shot at the auto industry. When more BMW’s are produced in South Carolina than any other factory in the world, and manufacturers increasingly reserve their U.S. production capacity for higher-margin vehicles, policies designed around yesterday’s trade assumptions are like driving through your rear-view mirror.

All of these actions are obviously timed to influence the U.S. Congressional elections that occur in early November.

 

Thoughts for the Week

Supply Chain Matters has increasingly dwelled on the political backdrop of global trade and tariff actions because the politics continue to out distance considerations for global supply chain business, product, and process capability realities.

Many editorials have suddenly keenly observed why supply chains have turned global, namely because of years of investment and experience in industry or specific product value-chain realities process needs and production capabilities. That is why regions such as China, Europe and other parts of Asia are the backbone realities that are today’s global supply networks.

We recommend a read of today’s Capital Account Editorial from The Wall Street Journal, Bringing iPhone Assembly to the U.S. Would be a Hollow Victory for Trump. (Paid subscription or complimentary metered view)  The commentary provides a cogent snapshot of global and U.S. based supply chain realities. The argument is that for certain products and capabilities, its too late for the U.S. to bring back all required supply chain capability and instead, the objective is to ensure that the value of technology prowess and capability will not flee the U.S. to China or other nations. Free and fair trade does have certain merits if governed under consistent and enforceable trade laws and practices.

The implication is that any effort directed at enhancing U.S. manufacturing capabilities needs to be full faceted, in that it has to factor the realities of existing supply chain ecosystem capabilities. Where the U.S. lacks such capabilities, government efforts should be directed at means to incent industries and businesses to invest in needed domestic capabilities and to partner with other nations and global trade bodies in a coalition to insure a level trade playing field.

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.

Our gut perspective at this point is that political forces will continue to dominate through the end of this year without any certainties as to the end-point. Industry supply chains will little choice but to respond to the consequences of increasing tensions, tariff actions and their consequences to business and supply networks. Agility and resiliency of U.S. based supply chains will be put to the ultimate test.

Beliefs from U.S. executives, labor groups and industry associations that all of this will blow over by the end of the year may indeed be shortsighted.

The increasing reality is that with each passing round of tariffs, global businesses and regional supply networks are making their own decisions regarding maintaining global business and product value-chain competitiveness. While the U.S. now has the most robust economy, that can quickly change when the realities of global trade wars come home to roost.

Retailers and businesses have bulked-up on inventories to avoid tariffs. In the coming months, a more expensive and costlier product value and supply chain will paint a different landscape in 2019 and beyond, requiring difficult options and decisions.

 

Bob Ferrari

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