With a looming trade war between the US and China and the potential for increased trade friction as the UK leaves the EU, the world is approaching a new era of protectionist trade policies – and the subsequent impact on global supply chains is a significant risk.
In particular, ntermediate goods – the materials or services that make up a final product – are the bedrock of world trade, meaning internationally connected supply chains are essential when it comes to ensuring maximum competitiveness.
Trade war fallout
The Trump administration is showing no signs of blinking first when it comes to a potential trade war with China, introducing tariffs of $60bn on Chinese products, restrictions on investment and a list of 1,333 categories that could face further sanctions. In return, the Chinese have already imposed tariffs on several US food and drink exports and threatened further retaliation against products such as aircraft, soybeans and cars.
While these policies are likely to dampen demand and increase prices for businesses and consumers in both the US and China, their impact will not be restricted to the two superpowers. Analysts believe that countries around the world will also suffer. US and Chinese companies will be forced to opt for a more expensive, or lower quality, domestic supplier, or find a new overseas competitor. With tariffs limiting access to foreign markets, this arduous task becomes even more difficult, requiring new logistics agreements, price renegotiations and relationships built from scratch. Any resulting price increases must then be passed on to the customer or absorbed in lower profits.
Brexit trade friction
With Brexit now less than a year away, the lack of any future trade arrangements between the UK and EU represents another problem for global supply chains. Intermediate goods and services make up 69 per cent of the UK’s exports to the EU and 56 per cent of its EU imports, and with half of UK companies less confident of a beneficial trade deal, World Trade Organization (WTO) tariffs are becoming a very real possibility for businesses and suppliers.
In November 2017, a report by the Chartered Institute of Procurement & Supply (CIPS)found that almost two-thirds of EU businesses expected to remove their supply chain from Britain and 40 per cent of UK companies predicted that they would replace their EU suppliers.
Despite 26 per cent of British companies saying that they’re investing time in strengthening relationships in Europe, uncertainty around potential tariffs has meant that one in five businesses with EU suppliers have found it difficult to secure contracts that run after March 2019. For small-to-medium-sized enterprises (SMEs), which are less likely to be able to compete in a tariffed marketplace, trade barriers are an especially large threat.
Naturally, cost is an overriding factor. A report by the Environment, Food and Rural Affairs Committeeinto food trade highlighted a scenario where WTO tariffs are applied to food imports, estimating that some products could see price increases of up to 30 per cent.
Supply chain lessons from the present
In a report on the impact of the recent US steel and aluminium tariffs on supply chains, Alvarez and Marsalrecommends that companies should be reassessing their sourcing, procurement and manufacturing strategies to identify and mitigate their exposure to tariffs. This includes assessing exposure to the timing of any price changes, engaging with domestic suppliers with a longer-term outlook, evaluating the forecast for any expected demand increases and shifting production of finished goods to low-cost countries.
However, in an interview with The Innovation Enterprise, Steve Bowen, Maine Pointe chairman and CEO and author of Total value optimization: transforming your global supply chain into a competitive weapon, said that even with a risk-managed, partnership-driven supply base, it will be difficult to alleviate the costs of new trade barriers: “Tariffs can affect the cost structure of companies, especially companies who have shifted their mode of sourcing … heavily to foreign entities. That’s a shift that will be very difficult to unwind, and it will be difficult to mitigate the immediate cost impact from the tariffs.”
Taking steps now
Hopefully most organisations have already begun evaluating their supply chain’s exposure to risk, checking whether their products or services relate to any of the categories likely to be affected by US-China trade barriers or EU/UK tariffs and closely monitoring supplier demand signals. Equally important is analysing any new customs requirements and processes that may affect their business.
It’s up to every organisation with an international supply chain to innovate strategies to deal with the new landscape of global trade, because while world trade will not become any less connected, it is likely to become more complex.