Ongoing trade talks between China and the United States broke-off this afternoon without a basis of agreement. With additional tariffs now imposed by the Trump Administration, businesses and their respective supply and demand networks must now be prepared for additional fallout.  Global trade volumes

In Twitter postings this afternoon, President Trump characterized the talks as: “candid and constructive” but reiterated that tariffs will stay in place, included latest hike to 25 percent, pending the result of future negotiations. In a series of tweets yesterday, the President indicated there is “no need to rush” on the China trade deal, once again attempting to buffer the potential U.S. political fallout from today’s news. The President is also once again pitching a further economic aide package for U.S. farmers to be paid for by some of the proceeds of new tariff revenues.

As has been the case, various voices among the Trump Administration provided mixed messaging. This afternoon, U.S. Treasury Secretary Steven Mnuchin described this week’s talks as “constructive” while U.S. Trade Representative Robert Lighthizer’s office declined to issue any statement. Secretary Mnuchin statement was issued, no doubt, to calm global equity markets regarding news of an impasse. Media reports this week indicated that Lighthizer had taken a firm stance on this week’s negotiations, insisting that China codify into law negotiated changes related to intellectual property protections and other trade related agreements. China’s position is that no nation should dictate a country’s sovereignty.

As Supply Chain Matters indicated in our prior update on Wednesday of this week, multi-industry supply chain management teams face an escalated scenario of cost impacts. Trump indicated yesterday that the U.S. would initiate the process of imposing tariffs on an additional $325 billion in Chinese goods that are not currently subject to tariffs. The scope and level of tariffs now being added by the U.S. will involve the vast majority of Chinese products imported into the United States, including intermediate components and end-item consumer goods.

We anticipate that high tech, consumer electronics and automotive supply networks will be especially impacted.  The magnitude of increases is such that many businesses and industry supply networks will not be able to adsorb such costs which implies the need for added price increases.

Depending on how China elects to once again retaliate, there will likely be addition supply or customer demand impacts. There is some speculation as to whether China elects to devalue its currency even further, making Chinese products more competitive in global markets. According to reporting by The Wall Street Journal, a likely China move would be to raise tariffs on $60 billion in U.S. goods to 25 percent from the current 10 percent level. Other outlets indicate a complete suspension of U.S. soybean purchases could be likely, implying that Chinese agricultural buyers will seek out other global sources.

Foxconn Chairperson Terry Gau, who is now believed to be positioning to be a candidate in next year’s Taiwan Presidential race, indicated in a news conference on Monday that the markets on mainland China and the U.S. would face drastic structural changes if the two superpowers ongoing trade dispute is not resolved. He further declared that: “There will be an avalanche -style of market opening in mainland China and the U.S. will do all it can to establish a supply chain of its own.

Other global observers and pundits indicate that regardless of any new trade agreement, both superpowers are embarking on a longer-term effort to compete for advanced technology and geo=political dominance.

Our recent podcast with Dr. Parag Khanna, author of the book, The Future is Asian would be a timely listen at this juncture. In the podcast, and in his book, Dr. Khanna addresses the specific notions of Southeast Asia taking the mantle of “factory of the world”, how Asia’s influential businesses would likely prioritize advanced technology investments along with thoughts and insights on the evolving Asian geo-political landscapes.

In summary, what many believed was a potential trade settlement by the end of this month has now turned to a far different, and more concerning scenario for global supply chains.

Stay tuned.

 

Bob Ferrari

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