Trade War is Bad News for Global Supply Chains

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When it comes to fending off foreign competitors, be careful what you wish for. It can come back to bite you in nasty and sometimes unexpected ways.

In January, U.S. appliance maker Whirlpool celebrated the decision to slap import duties of up to 50% on washing machines manufactured by its Chinese and South Korean rivals. But last month the Michigan-based firm reported that higher raw material costs — driven in large part by the Trump administration’s 25% tariff on imported steel and 10% on aluminium — had contributed to a second-quarter loss of $657 million.

U.S. consumers have been asked to pick up the bill, with prices rising by as much as 20%. As a result, Whirlpool’s sales in North America have fallen by 2.2% and its share price is down 25% since the initial salvo was fired in what is looking like a global trade war.

Protectionist policies can surprise those who instigate them too. Harley-Davidson’s announcement in June that it would move some production from the U.S. to Europe — as a result of the European Union’s retaliation against the steel and aluminium tariffs — ran directly counter to President Trump’s assertion that he was taking the action to protect U.S. jobs.

Disrupting the Dynamics

Commodity price volatility, of course, has been with us for much of the past decade. And Harley-Davidson’s move is in line with a broader trend to establish manufacturing plants closer to customers. But this shouldn’t detract from the fact that the current trade environment is bad news for global supply chains.

On the one hand, tariffs inflict pain on cost bases and customer budgets. On the other, uncertainty about the future of major free-trade agreements like the North American Free Trade Agreement makes it more difficult to take network design decisions with a high degree of confidence.

Both disrupt the economic framework and other assumptions upon which global supply chains are built, and cause companies to hold off their investment in new capital assets and jobs.

Trade Trepidation

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The Brexit Fiasco

A live case in point is Britain’s imminent departure from the EU. Slow progress in the Brexit negotiations and a lack of detail on future trading relationships has prompted a growing list of companies, including Airbus, BMW, Nissan, Siemens and Jaguar Land Rover (JLR), to go public with their concerns.

The prospect of 10% tariffs under World Trade Organization rules in the event of no deal is one concern. JLR calculates this could add £1.2 billion ($1.54 billion) to its purchasing costs.

Divergence away from common product and regulatory standards is another. Then there’s the threat posed to the frictionless movement of materials, components and products across borders.

Finely-tuned supply chains could grind to a halt if shipments are held up in customs or tailbacks at ports. Just-in-time production cannot function with still-in-transit parts.

In a published Brexit assessment, Airbus estimated it would need to spend up to €1 billion ($1.16 billion) on buffer stocks, with a similar hit to revenue for every week of lost production on its A320 and A350 planes. Such an outcome would “force Airbus to reconsider its footprint” and its investments in the U.K., the company declared.

In the pharmaceutical industry, meanwhile, big players like Sanofi, Novartis and AstraZeneca are stockpiling supplies of vital drugs in the U.K. in anticipation of a chaotic transition next March when Britain is due to leave the EU.

From Words to Action

Supply chain leaders I talked to for a report on globalization back in January, before the first tariffs were introduced, expressed concern about the potential effects of a trade war. But there was a feeling that threats by politicians might not translate into action.

That hope has been dashed. Escalating hostilities between the U.S. and China, in particular, threaten not only to extend tariffs to more products and at potentially higher rates, but also to undermine the scale logic of making products such as cars in either country for sale to the other.

Recent weeks have seen a slew of public companies joining Whirlpool in blaming tariffs for a rise in both input costs and prices for finished goods.

The assault on free trade may have thrust supply chain strategy into the spotlight to an almost unprecedented extent. But with it comes challenges and complexity that many organizations are only just beginning to comprehend.

Special attention is not always a good thing.

 

 

Author Geraint John

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