At the G-20 Economic Summit held late last week, the anticipated summit meeting among U.S. President Donald Trump and Chinese President Xi Jinping resulted in essentially a temporary cease fire in additional tariff actions from both countries. The operative word is temporary.  U.S. and China Trade War

Bowing to one of China’s stated pre-conditions before resuming any further formal trade talks, President Trump agreed to remove some of the previously imposed restrictions on the ability of Huawei Technologies to buy high-tech components from U.S. suppliers. That concession was later clarified to be components not deemed to affect U.S. security needs.

China reportedly agreed to begin procuring additional amounts of U.S. agricultural products. The Wall Street Journal reported that China procured 544,000 metric tons of U.S. grown soybeans just prior to the Saturday meeting of the two leaders. The U.S. will further refrain from threatened additional tariffs on $300 billion in Chinese imports that were threatened with 25 percent tariffs.

Current reporting reflected by national and business media now indicates that with each passing week, building political tensions and hardline interests on both sides are playing a more influential factor in whether further concessions can be gained in the ongoing dispute. Both leaders have planted themselves in political posturing. Heading into an election year, President Trump now walks a tightrope for both maintaining the Administration’s hard line on trade with China while having to appease growing concerns from U.S. industry and businesses that are being financially impacted by current tariff levels. Already, critics complain that the U.S. made a significant concession in the Huawei matter. Chinese hardliners are rallying to not give any ground to U.S. demands.

 

Global Supply Chain Implications

For multi-industry supply chain management teams, the implications of this latest trade development are threefold.

One is that existing import and export tariff levels, along with their financial impacts, will remain as the global economy transitions into the second half of 2019. The current truce is yet another pathway to further negotiations with an uncertain time line. While that may be welcomed news for some businesses, it presents more supply chain strategy challenges. Goldman Sachs economists have warned that despite the pause in tariff actions, there could still be additional actions later this year.

Late last week, business network CNBC reported that more than 300 companies were ringing alarm bells and were collectively speaking to U.S. government officials about how detrimental the trade war has been for their businesses.

There is also growing evidence that supply chain management teams are practicing transshipment as a  means to circumvent existing tariffs. Late last week, The Wall Street Journal reported that: “Billions of dollars’ worth of China-made goods subject to tariffs by the Trump Administration in its trade fight with Beijing are dodging the levies by entering the U.S. via other countries in Asia, especially Vietnam, according to trade data and overseas officials.”  The report cites economic data indicating that Vietnam’s exports of computers and electronics increased 71.6 percent in the first five months of this year, while in the same period, the country’s imports from China in the same category have risen 80.8 percent. President Trump indicated to one news outlet that Vietnam is an abuser and the U.S. is in discussions with the Asian nation. If such practices continue, businesses run the risk of additional fines and legal actions.

The other implication, from our Supply Chain Matters lens, is that the ongoing trade conflict has now reached a stage where political forces rather than economic will determine the scope of any trade agreement among these two economic and supply chain superpowers that can or will be accomplished this year. What is becoming clearer are that such factions are directly swaying each of the senior leaders. In the case of the Trump Administration, prior to the G-20 Summit, a faction argued for continued stern actions against Chinese high-tech companies deemed a threat to U.S. competitiveness, only to be countered by another faction directly arguing for a pathway to completing a deal. U.S. Treasury Secretary Steven Mnuchin told business network CNBC late last week that both sides were 90 percent of the way to securing a trade deal, yet other Trump advisors were continuing to argue for a hard line. Similar dynamics are likely occurring on the Chinese side as well.

Finally, as the Economist has acutely pointed out, the ongoing conflict may well be transitioning from one of trade to that of an advanced technology war, that will invariably impact high tech supply and multi-industry customer demand networks. The Huawei sanctions are one of many that could follow, along with corresponding reprisals and actions incurred on U.S. companies currently doing business in China.

For multi-industry supply chains, the challenges for managing supply and customer demand impacts are going to continue. Options are becoming more limited and the impacts to business bottom lines are more visible.

Structural global supply chain changes indeed take a lot of time to implement and there are now more definitive signs that businesses are now actively evaluating supply chain risk mitigation. However, trying to circumvent tariffs with the use of transshipments or altered routings are risk laden strategies that will bring other negative implications.

There is a need for a steady leadership presence aided by a lot of analytical-driven decision-making that weighs different scenarios of added tariffs with alternative sourcing. Now is not the time for long-term contractual commitments but rather a collection of contingency plans that weigh likely options.

 

 

Bob Ferrari

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