Trade Wars, Not So Easy?

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!” – President Donald Trump on Twitter, March 9, 2019.

From the point of view of the White House, trade wars might still generate a big win, but in the meantime, it has been very hard on companies with long supply chains that run through China or depend on aluminum and steel. The moves and countermoves by the U.S. and China, in particular, have rattled investors and in the worst case, could tip the global economy toward a recession. The research firm IHS Markit surveys procurement managers around the world and its index for the United States is still positive, yet at its lowest point since the end of the last recession.

How are companies responding? Let’s break the responses into two categories – short and long term.

Short-term Tactics

In preparation for a hard Brexit, many companies in the UK are stockpiling inventory on whichever side of the border it will be needed on as of November 1, 2019. The Trump administration delayed the start of tariffs on popular consumer goods until December 15 to accommodate holiday shopping demand. Other delays may occur, so there are opportunities for U.S. companies to emulate British companies by “buying forward.”

The key to that tactic is identifying your exact exposure. When you can’t stop a trade restriction or tariff, the question to ask is, “Can I work around it?” Scrutinize the details of the tariff and other import restrictions and you might find ways to mitigate your exposure. I once worked for a company that was suffering from government price controls on sugar that made U.S. sugar quite expensive compared to Canadian sugar. By mixing sugar with flavorings in Canada we were able to get a permit to import “pudding mix” and keep our sugar costs in line.

A very good working knowledge of customs rules paid off for us in that case, and according to the Associated Press, at least 370 companies have won 14,000 exemptions from the steel and aluminum tariffs imposed last year by President Trump. Another 27,000 exemptions are pending. Exemptions and delays may only be temporary reprieves, but they could be important ones.

Long-term Strategies

The Trump tariffs did not launch a trend away from sourcing in China, they simply highlighted it. Companies that have watched the Chinese economy grow, and labor cost differentials tighten, have been slowly moving away from China. Or, like auto companies, have built Chinese factory capacity primarily to serve the local market.

Long supply chains increase logistical risks, and now political and economic uncertainties are complicating the calculations necessary to build a smart sourcing strategy. As an example of the new math, The New York Times reports that Samsung has moved a significant amount of its smartphone manufacturing from China to Vietnam, and Apple is considering a move there as well. Migrations from China are difficult for technology companies that require huge investments in production facilities and a highly skilled workforce. Industries such as fashion that can move without huge investments have been moving from China into Malaysia, Indonesia, and Central and South America for years.

Companies that did not do the deep analysis or that found the numbers still worked for China are rethinking their strategies now. For instance, Stanley Black & Decker is building production capacity for Craftsman tools in Texas. A highly automated facility will minimize the cost-differential of sourcing from a low-cost country while earning the company “Made in America” goodwill.

Trade wars are not the only surprises that are certain to lie ahead. Natural disasters, political unrest, innovations and changing market conditions are other factors bringing uncertainty into supply chains. Smart companies are doing now what they have always done --- regularly taking all those uncertainties into account as they build sourcing strategies that look at the overall value of each link in their supply chain.