Free trade underpins global supply chains. So when it comes under attack in major trading nations like the U.S. and the U.K., as it has in the past couple of years, supply chain leaders have every right to be worried.
President Trump’s March 1 decision to impose tariffs of 25% on steel imports and 10% on aluminium is the most significant protectionist move by the Administration so far, and follows its green light for duties on imported washing machines and solar panels in January.
A survey by SCM World last year found that 81% of practitioners were either “very concerned” or “somewhat concerned” about the potential impact of changes to trade rules, such as a renegotiation of the North American Free Trade Agreement (NAFTA), or Britain’s looming exit from the European Union.Interviews with 30 chief supply chain officers and other senior executives for a new report about globalization and supply network design confirm that global trade issues are weighing more heavily on network design decisions.
One CSCO in the retail sector whose company imports a large percentage of its goods, including domestic appliances from China, said “unnatural barriers” to international trade could push up costs and force it to rethink some aspects of its sourcing strategy.
A logistics VP at a large industrial manufacturer said U.S. tariffs on Canadian softwood lumber of around 20% are already having “a significant impact on our bottom line.”
And the head of global manufacturing at a leading U.S. high-tech firm with sizeable operations in Mexico said the imposition of tariffs, as a result of NAFTA unravelling, could be “very disruptive” to its business model, despite an ongoing cost differential due to lower labor rates in Mexico.
Globalization “Losing its Luster”
President Trump insists that his “America First” policies are simply levelling the playing field. “We cannot have free and open trade if some countries exploit the system at the expense of others,” he told the World Economic Forum’s 2018 annual meeting in Davos.
Other leaders take a different view. India’s Prime Minister, Narendra Modi, argued that backlash against globalization is one of the three biggest threats facing the world (the other two being climate change and terrorism).
“Many societies and countries are becoming more and more focused on themselves,” he told his WEF audience. “Everyone is talking about an interconnected world, but we will have to accept the fact that globalization is slowing losing its luster.”
As I noted in a previous blog, the majority of supply chain professionals don’t believe that globalization, as a defining feature of modern capitalism, is “in retreat.” But there is a recognition that some of its more extreme features may be waning, such as tax “optimization” schemes. Several interviewees expressed that tax schemes have gone too far, including as an influence on network design. As one put it: “You are no longer a hero if you beat the tax authorities… More and more companies will be publicly shamed.”
Another waning globalization trait is offshoring production to the cheapest corners of the globe. While labor arbitrage continues to be a key benefit of setting up shop in countries like India, our survey found that only one-third of supply chain professionals see it as a driver of global supply chain operating models – half the number who say the value is in access to world markets.Indeed, interviewees pointed out that most of their new plants, supply bases and distribution centers in developing countries are designed to serve local or regional, not global customers. “Low-cost factories for the world aren’t sustainable,” argued one.
Moving Toward a Regional and Local Model
Our research shows that companies are moving away from a globalized model because, in many cases, it is simply not fast or flexible enough to meet customer needs. Increasingly, they are segmenting their product portfolios, channels to market and supply chains to find the right balance between scale/cost-efficiency and speed/agility.
Regulations such as local content, manufacturing and packaging rules, and different safety and quality standards are another reason why Western companies in sectors from food to aerospace are moving away from global operations and toward regional or local networks in places like China and the Middle East.
Tax reform (including, most recently, the cut in U.S. corporation tax), currency movements, international sanctions against countries such as Russia, and state incentives to set up manufacturing operations from Chile to Indonesia also strengthen the case for localization.
Despite President Trump’s latest moves, relatively little of the disparaging talk around free trade from either the U.S. or other governments has translated into policies that directly affect supply chain dynamics.
For now, the advice to CSCOs and their teams is to keep a watchful eye on developments and plan ahead around scenarios that could cause the greatest disruption, whether in terms of cost increases from tariffs or the potentially slower movement of goods across borders as a result of non-tariff barriers.