We pen this Supply Chain Matters blog commentary three days before the mid-term elections in the United States, an election that likely has voters contemplating many top-of-mind issues including the impacts of tariffs on individual businesses and industries. Globl trade and tariffs

Thus far the U.S. has imposed three rounds of tariffs affecting upwards of $250 billion in goods. Targeted countries such as China have retaliated with corresponding counter-tariffs. The number could rise significantly higher given the current level of trade tensions among the U.S. and China. An additional round will make a far more significant impact on the landed costs and end-prices for finished products.

The notions of foreign nations such as China and the Eurozone targeting counter tariffs to impact certain electoral regions favorable to the Trump Administration are now more palpable.  Industry media feature reports from manufacturers large and small dealing with higher inbound material for both commodities such as steel and aluminum to intermediate components.

This week’s October 2018 Manufacturing ISM Report On Business had the headline of a one month 2.1 percentage point drop in the PMI with the New Orders Index dropping by 4.4 percentage points. This was on top of an August PMI and New Orders decline. Featured panelist quotes relate to trade induced inflation in chemical, food and plastic supply networks, among others.

In the State of Wisconsin, the governor’s race is a dead heat while the Senate race is within single digits entering the final weekend. Among state focused voter concerns are the impacts of tariffs on the local economy along with the state providing perceived expensive subsidies to bring Foxconn Technology Group to Wisconsin. One poll has 41 percent of likely voters indicating incentives will be worth the cost while 40 percent indicate not worth it.  A further 18 percent did not know or were undecided. We highlight this because the Foxconn decision to manufacture in the U.S. has been touted as one of the benefits of the Trump Administration’s Make America Great strategy.

U.S. farmers exclaim that direct U.S. government subsidies will not cover the market damage done by tariffs, and difficult decisions are being made as to what to plant for the coming season. Inbound and outbound container traffic is experiencing significant declines while the Port of Charleston South Carolina experienced a 35 percent decline in BMW related exports in August.

The current cycle of quarterly financial reporting features many globally-focused companies indicating visible impacts of higher manufacturing and supply chain costs, along with pressures to raise end-product prices as a result of tariffs. The news cycle of anything related to tariff developments precipitates hundred-point swings of the Dow Jones Industrial Average including today’s close.

The Economist Intelligence Unit has just published a report: Asia’s winners in the US-China trade war. The insights are eye-opening and include a belief that the U.S.-China trade war could escalate further in the coming months.  The report points to likely strategic shifts in specific industry supply networks over the coming two years, with Asian countries such as Bangladesh, India, Thailand and Vietnam as the beneficiaries. U.S. farmers could see their soybean and packaged pork export markets assumed by Latin America, European and Canada based farmers.

This week, the U.S. Justice Department initiated a new set of initiatives to combat criminal economic activity and trade-secret theft.  A lawsuit naming China based semiconductor manufacturing company alleges conspiracy to steal trade secrets from U.S. based Micron Technology.  Separate actions are targeting alleged foreign agents believed to be also stealing design trade secrets in strategic products such as aircraft engines and 5G telecommunications networks.

Some argue that this action should have been a more impactful step rather than running the risk of an escalating tariff war.

 

Perspective

In the coming weeks, global supply chains will be assessing the results, takeaways and likely post-election impacts from the U.S. mid-term elections.  As we have opined in prior commentaries related to trade and tariffs tensions, it is the political strategy and lobbying currents that drive the cycle, regardless of existing business and industry supply chain strategies. Multi-industry supply chain teams must then manage the consequences.

The 2019 U.S. Congress will be tasked with ratification of the new trade agreement that replaces NAFTA. A termed “Blue Wave” in overall results could provide added checks and balances to Trump Administration’s aggressive stance on trade and tariff strategies and China specifically.

There are many implications for multi-industry supply networks in 2019 and beyond regarding what ultimately occurs next week.

Bob Ferrari

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