Trump Tariffs, COVID-19 Convince Retailers to Reassess Supply Chains
Date: Tuesday, July 21, 2020
Source: Sourcing Journal
The globalization of the supply chain has made the production and transportation of products infinitely easier over the past century and driven down costs, but it has essentially forced manufacturers across countries to be interdependent on one another since the materials composing a product often originate in different areas. In the words of Dr. Phil Levy, chief economist at freight forwarding company Flexport, even if you could make an iPhone in a single country, end consumers might be dealing with the costs of a $5,000 product.
But as trade tensions and uncertainty hit the global supply chain in ways that have both tacked on extra prices for goods and created bottlenecks in demand, more retailers are reevaluating how they should approach the chain from end to end, with some alternatives including relocation or diversification.
During a recent webinar presented by Flexport, when asked which instance prompted them to reexamine or revise their global supply chain strategy in the past year, attendees listed the trade war with China (72.8 percent) and the COVID-19 pandemic (64.5 percent) as the top two change agents.
The trade war has been the major backdrop to U.S.-China relations in recent years, contributing to a $1.7 trillion loss in market capitalization across American businesses, according to a report released in May by the Federal Reserve Bank of New York. In just over a year, the average tariff rate for U.S. imports rose from 2.7 percent to 17.5 percent, thanks to new tariffs imposed on $300 billion worth of goods from China, according to the bank. Flexport reported similar numbers, estimating a jump from approximately 3 percent to 14 percent tariffs on the products it tracks.
The continued escalation of the tariffs has built in a skepticism around exactly what the Trump administration is trying to accomplish, according to John G. Murphy, senior vice president for international policy at the U.S. Chamber of Commerce.
“I think the administration’s messages sometimes comes out a little bit differently, but one theme that you’d hear from officials from time to time is that the point of the tariffs was to incentivize companies to move their supply chains out of China,” Murphy said. “Sometimes it comes out though that they want to move those supply chains back to the U.S. I think we’ve seen very little of that. In many cases, we’re talking about classes of manufacturers that can’t easily be produced here in the U.S.”
Additionally, attendees pointed to changes in relative costs such as labor or automation (28.4 percent), other trade measures such as national security tariffs (21.9 percent) and the status of trade deals or trade talks like USMCA or TPP (16 percent) as other catalysts for rethinking the supply chain. In the case of the USMCA, this is another deal where incentives have been laden to ensure companies manufacture more in the U.S.
“To exaggerate the point for simplicity, [U.S. trade representative Robert] Lighthizer’s view has been somewhat more focused on the perceived concern of too many imports, compared to earlier U.S. trade reps who often were focused on finding ways to boost U.S. exports by bringing down foreign trade barriers and getting better access to foreign markets,” Murphy said.
As many as 45.3 percent of attendees said the global events of the past several years have pushed them to either relocate or diversify their production somewhere else outside their home country, while another 43 percent said they are more concerned about their supply chain but haven’t yet made the effort to do anything about it. Nearly 8 percent said they were pushed to reshore production.
Ryan Petersen, CEO of Flexport, predicts that more supply chains will consider a reassessment, whether it’s reshoring or just maintaining more stockpiles, especially since it was apparent during the pandemic that medical PPE distributors began to rely on just-in-time manufacturing and inventory processes.
“They will claim that they had 60 days’ worth of inventory stockpiled, but the reality is you had a 30-day transit time on the ocean and 30 days’ worth of supply,” Petersen said. “Because the vast majority of PPE was made in China, as soon as they had the pandemic, they seized exports and needed all those goods domestically. So boom, your clock starting ticking at 60 days and they weren’t getting any shipments. It’s kind of embarrassing for a country as rich as us not to have any kind of stockpiled inventory for PPE, which is very cheap to manufacture and store.”
Murphy agreed about the need to stockpile goods in advance, but noted that in this instance, being able to produce goods on home soil didn’t give many major U.S. PPE manufacturers added security, mainly due to the demand for these goods rising 40- and even 50-fold.
The future of the supply chain remains uncertain not just due to the pandemic and the tariffs, but because of the upcoming U.S. presidential election, which will dictate supply chain policy going into 2021. On July 7, the campaign for presumptive Democratic presidential nominee Joe Biden published a memorandum detailing how his administration would work to shift production on a range of “critical products”—including energy and grid resilience technologies, semiconductors, electronics, telecommunications infrastructure, and key raw materials—back to the U.S. or its allies from countries like China.
“The Biden supply chain paper that came out is interesting,” Murphy said. “It starts off with some rhetoric which is perhaps not dissimilar to that of President Trump about bringing manufacturing home and so forth, but it really leads off with a call for an ongoing and methodical process of examining vulnerabilities in key products, which I think many of us think is sensible. I’ve actually heard comments out of the White House recently along the same lines. If we could first get good information about what is sensitive and where we are vulnerable, we can act from that.”