This Supply Chain Matters blog is to provide an update to Friday afternoon’s breaking news blog highlighting the announcement from China’s Trade Ministry indicating that added retaliatory tariffs will go into effect on December 15th. In our blog, we further highlighted President Trump’s declaration via Twitter ordering U.S. manufacture’s and retailers start seeking alternative sourcing of products and components outside of China, and preferably in the United States. At the time, we committed to our Supply Chain Matters readers that we would provide later updates.

This particular blog, being published Sunday afternoon, attempts to provide some added updates that should be of concern to our reading audience.  Global Trade

 

Trump Responds Yet Again

Late Friday afternoon, President Trump responded to China’s actions, indicating that he would raise the rate of existing and planned tariffs scheduled to go into effect on China imports on either September 1st and December 15th by 5 percentage points, while existing punitive tariffs on upwards of $250 billion in Chinese goods are be raised to 30 percent from 25 percent on October 1st.

That announcement brought immediate reaction from industry trade groups along with China, each voicing strong concerns on an escalating out of control trade war.

With China representing a significant export market for both U.S. and foreign automakers producing vehicles in the U.S. for export, China’s announcement of added auto import tariffs provides significant concerns. With the time span of these added tariffs spanning the holiday fulfillment quarter, many retailers had already undertaken measures to import products prior to the imposition of the added tariffs.

 

A Lot of Contradicting Information

President Trump is attending the G7 Summit in Biarritz France this weekend, and there has been a lot of contradictory information stemming from the President and the White House.

On Saturday, Trump indicated to reporters that he indeed had the authority to force U.S. businesses to leave China under the provisions of the Emergency Economic Powers Act of 1977, a law enacted to allow U.S. Presidents to isolate criminal regimes.  The notions of in-essence, declaring China to be a criminal regime is provocative, as well as inflammatory, to state the obvious. On this morning’s Sunday forum news programs, select members of the Trump Administration, in particular. U.S. Treasury Secretary Steven Mnuchin, were quick to tone down the President’s decree, indicating that the Administration has no plans to invoke emergency powers to force U.S. companies to relocate production and sourcing operations. Mnuchin indicated to Fox News: “I think what he was saying is he’s ordering companies to start looking.”

As Supply Chain Matters has previously noted, U.S. manufacturers and retailers were already taking prudent action to begin some transition of sourcing away from China. The reality, however, is that such efforts take considerable time, and as many manufacturers are already realizing, many developing Asian nations such as India and Vietnam do not have the built-out manufacturing, supply and logistics network maturities that exist across China.

A further development came this morning as President Trump was having a breakfast meeting with British Prime Minister Boris Johnson. Asked by reporters as to if the President had any second thoughts about ramping-up a trade war, the President responded: Yeah, sure. Why not,” That statement prompted the White House to issue a follow-on statement that indicated that the President’s answer was “greatly misinterpreted.” White House Press Secretary Stephanie Grisham stated to reporters: “President Trump responded in the affirmative-because he regrets not raising the tariffs higher.”

Also, during this week’s G-7 Summit meeting, European Council President Donald Tusk indicated: “Trade wars will lead to recession, while trade deals will boost the economy, not to mention that trade wars among G-7 members will lead to eroding the already weakened trust among us.”

With two economic superpowers digging in, the signs point to a longer period of trade turbulence with far reaching implications.

 

Current Situation

For multi-industry supply chain management teams and executives with business and supply chain interests that include the U.S. and China, these past few days of escalated trade developments are, with little doubt, surely concerning and troublesome.

Concerning, in the notions that with each passing week and month, the trade war involving two very significant economies and domestic markets might be escalating beyond points of compromise, and more to tenets of protected nationalism. Troublesome, in the inconsistencies and current rash actions and contradictions by the Trump Administration not helping to find areas of compromise or build any form of multi-lateral support from other nations or global trade bodies to move toward a settlement of tariff hostilities.

We each escalation of added tariffs, companies are faced with even more difficult decisions relative to overall sourcing. The fact is that other Asian nations do not currently have the built-up supply chain maturity or competitive cost levels of China, and in some industry sectors such as high technology, apparel and general consumer goods, neither does the United States. At least not in 2019.

Added tariffs bring added costs, and there is a limit to what customers and end consumers are willing to pay for. Gross margins are going to pressured.

The very thought that the Trump Administration is contemplating ordering companies to consider altering current sourcing moves beyond a state of joking, to that of, can they really think they can do that.

This is a very difficult and challenging period, and it does not appear that politicians are willing to serve as the adults in the room. Added to the above are the growing discernable signs of pending recession, which for could occur in a six quarter tactical window for sales and operations planning (S&OP) or integrated business planning (IBP) processes.

Be prepared and watchful of continuing developments and its goes without stating that now is the time for insuring agility, supply chain risk mitigation and added flexibility of supply chain practices across customer demand and supply network dimensions.

 

Bob Ferrari

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