On December 5, 2019, we held a panel discussion that focused on different perspectives related to global trade. As the global environment is shifting based on political debates, EU/British negotiations, tariffs driven by the Trump administration, as well as the sudden shifts in country-level policies, supply chain executives and planners are working to plan for future uncertainties. Our panel represented a diversity of views on these issues that shed a lot of light into these problems.
Chris Hagestad from Advance Auto Parts noted that many of their parts come from overseas locations including China. To deal with uncertainty, the team has mapped out their supply base to mitigate risk. The goal is to create redundant sources based on supplier-specific and country-of-origin, to ensure that each product category has redundancy as a form of insurance on the supply chain. However, some categories are capacity constrained. As an example, there are tariffs on the automotive rotors that go into a brake system, and over the last ten years, the vast majority of these are produced in northern China. Even if AAP or other auto part companies wanted to move production, there is no manufacturing capacity in the US or anywhere else, so creating redundancy in this case is very difficult.
Andrew Partis shared his views from the Pharma Services Business of Thermo Fisher Scientific, a global contract manufacturer for the pharmaceutical industry. The industry is very much affected by Brexit, and Andrew has worked on creating strategies to deal with this. His primary role is to make the supply chain fit for purpose, and this includes how Thermo Fisher should mitigate the impact of Brexit. It is not so much like the application of a tariff, or even leaving a body like NAFTA, but more like “North Carolina leaving the United States!” We have to consider how we will be buying or selling products globally, and despite the amount of work ahead, we believe there are opportunities on how we can support our customers during this period of uncertainty.
Lisa McAuley is the CEO of the Global Trade Professionals Alliance, which is headquartered n Australia but has offices in the UK, the US, and the Asia Pacific region. GTPA is focused on developing international trade standards for business, government, and international supply chain trade networks, building competencies to conduct international trade, and facilitation of global business networks through ISO standards. She notes that “my job was easier 3 years ago.”
Paul Branch is the Chief Operating Officer in the International Association for Contract and Commercial Management. He spent 34 years of his career in the IT services industry, where technology has revolutionized the commercial framework. Today he is focused on improving contracting practices and relationships, and developing agile contracting approaches to help pay back into the industry his experiences in this area. IACCM’s vision is to move towards a world where all commercial relationships deliver social and economic value. Paul is focused on improving the quality and integrity of commercial relationships, driving international practices and successful commercial relationships, and developing tools, techniques, and practices to enable economic growth and success.
Bill Heckencamp is a Materials Manager at Cheniere Energy, and runs much of the international trade relationships for the company’s major projects. Cheniere imports huge amounts of steel for their LNG processing facilities in the Gulf of Mexico, and are the second largest exporter of LNG in the world. Tariffs have had a major impact on the company’s capital costs, as the ‘trains’ are primarily constructed of erected steel. Cheniere is the “smallest” of the Fortune 500 companies. In February 2016, Cheniere became the first company to ship LNG from a commercial facility in the contiguous United States. Since startup, more than 850 cumulative cargoes of LNG originating from Cheniere have been delivered to 32 countries and regions worldwide. In support of that global reach, Cheniere has additional offices in London, Singapore, Washington, Beijing, and Tokyo.
- What are the activities that you are undertaking to deal with these challenges in the short-term? (Example might include free trade zones, mapping of supplier material flows, multi-sourcing, business continuity planning, etc.)
Bill H: “We have two trade zones in Oklahoma and Houston, and are under construction to produce one in Corpus Christi. This requires a great deal of planning, to understand first what will we construct, where do we import it from, and how do we get it here? One of our plays is to defer duties and fees using the free trade zones. We source 250 miles of tubular steel out of Canada, but were hit with a 232 tariff, and every piece of pipe suddenly was assigned a 25% penalty. Given that we had a tight economic structure, and not a lot of people to work on this issue, we had to come up with a solution and be nimble about it. We decided to work with outside resources (Ernst & Young), and told them that we need two foreign trade zones in the next 60 days! They said “Let’s do it!”, and we set up a meeting with Customs and Border Protection arguing that this was needed to create industrial. We told them we have miles of pipe sitting in a free trade zone, and we were able to divert the 25% tariff. Next, the company was hit with countervailing duties, imposing 55% on our imports. We were also able to defer this by working with the Department of Commerce, telling them that we had bought it before the duties were imposed, and they gave us relief. Currently, we are working on a global import strategy, knowing that we are going to do more business with foreign supplier. At any moment, the government can tweet something, and the market will react. We have to be able to execute on our capital plans to build out infrastructure in the face of these disruptions.
Paul B: Put simply, tariffs disrupt supply chains! But we also have to ask the question, is that uncertainty truly a threat? I don’t think so. The opportunity that these challenges present is a drive for innovation, towards agile opportunity, and there are commercial contracting frameworks that allow corporations to retain the advantage of uncertainty for their business. Some of our research involved looking uncertainty in the contract deliverables, and understanding what is being contracted for and how it will be delivered in the market. We found that the standard “no frills contract” commercial model is useless when you have uncertainty in the deliverable, and that is where the innovation can take place. When we have certainty around delivery AND the deliverable, an agile contracting framework also works well. The issue becomes how do you manage the contract to response to changes that are unpredictable to enable effective change management within the contracting framework. So when you have the next factory fire or disaster, we need to be able to contract for the unknown, and to grow and respond in an environment where deliverables are likely to be more and more uncertain.
Lisa M. It is becoming more apparent that a large number of businesses and a host of political and economic policy and institutional barriers are colliding at once, and that is imposing further challenges on security, trade and investment, and policies. We are witnessing the “weaponization of trade” in global politics, to the point where it impacts security, and trade policy. Whilst this might seem all doom and gloom, I also believe that we have to remain positive and think of the potential opportunities that could spring out from what is happening. We are seeing some countries opening up. Additionally, technology advancements, for example in Blockchain and Industry 4.0 are creating new opportunities. For example Blockchain may open up new possibilities for exploring avenues for digitizing trade facilitation. We have talked a lot about the impact of tariffs today but we must also be conscious of the continued impact of non-tariff barriers, which can often be far more restrictive to some businesses when trading globally in new markets. Non-tariff barriers, of which it has been recorded that over 50,000 barriers, impact global trade around the world, affecting over 90% of trade flows. Non- Tariff Barriers can also be some of the most difficult to address at a policy level. The WTO Trade Facilitation Agreement has the potential to have a huge impact in terms of driving down the costs of trade by addressing by streamlining trade regulation and compliance, including customs processes and procedures.
Andrew P. My immediate issue is that three and a half years after the UK decided they wanted to leave the EU, it hasn’t actually happened! There is political deadlock in the UK, and an election next Thursday. Personally, I think it will be a long haul, and even if the UK is able to pass the baton and get Brexit done, I’m still not convinced it is going to be resolved quickly. In light of all this, we have started with the assumption that the UK will be effectively on WTO terms. We are trying to find a way that allows us to be flexible regardless of what happens. We have also spent a lot of time looking at this problem, and recognize there is not a “right way” to resolve the Brexit issues. Instead, we have gone through the process of updating our understanding about the commodities we work with, and to make sure we understand what will happen in the event of Brexit. It is a two-legged thing, as we also have to consider the case of goods moving in both directions (EU to UK and UK to EU). In both cases, we have worked on risk mitigation scenarios. We have considered how long delays might last, where should we put our materials, how would we move them, and where the political outcomes will leave us. We haven’t relied on the government to “look after our interests” but have taken a position that is neutral to whatever outcome occurs.
Chris H. Inflation and the subsequent impact on the business is our biggest challenge, and we know we will have to increase prices as will the industry. What happens when you create inflation is a potential decrease in selling units and a de-leverage in production and supply chain. So when the supply chain is impacted by tariffs, you end up buying fewer units than years previous and potentially that you agreed to in a contract. Our negotiation strategy is to reduce the impact on the end customer by carefully understanding the components of cost, timing of inventory already produced and potentially a shared role in the cost. There is of course the decision of whether you going to switch manufacturing to another country if that capacity is open or if the duration of the tariff is expected to be long. In making contry of orgin comparisons, there are often a lot of ignored factors in other countries that come into play. For instance, if you look at Mexico, there is union activity in specific portions of the manufacturing locations. A lot of automotive business is going there because of the lack of trade barriers, but it isn’t always easy as it looks. India – it is a great country to manufacture in but the infrastructure is not quite as developed as China. We also look at Turkey, and the problem there is that the currency fluctuations. So you end up having to weigh the 25% tariff with China against the uncertainties of other countries. And the production efficiency in China is in some cases superior than other countries. So then we have to start thinking about the duration of the tariff and weigh the broader country of origin options.
- Do you believe that in the long term, strategic redesign of our supply chains may occur, if we assume that these inter-border trade problems may continue into the future?
Chris H. All countries have some level of risk, and we have never felt that there is a “slam dunk” country where you can always go. Usually there is a reason why there is open capacity in a country. There are a lot of supply-demand economics that come into play for a low-cost country, and it is important to understand the reasons for those economics. We know that many large companies in China have some government backing. We always seek to understand where they are investing so we can stay ahead of where production and capacity may be growing. We will also benefit in country of origin diversification along with a manufacturer who is our current partner.
Andrew P. We as an industry are not anticipating massive short-term changes in either the EU or the UK. Healthcare is a very inertia driven industry, and takes a long time to change, and in a sector which tends to need a very robust case for changing manufacturing, my view is that we are not likely to see an enormous amount of change in the short term.
Lisa M. – The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which recently came into force was a groundbreaking regional trade agreement. Africa is an emerging powerhouse and we have recently seen the launch of the operational phase of the Africa Continental Free Trade Area (AfCFTA ). We should also note the advancement in digital services and the growing importance of value added services into value chains. Recent commitments by certain members in the WTO will look to create bilateral agreement around e-e-Commerce and digital services. The last two decades have seen the exponential growth of domestic and cross-border electronic commerce. Despite this fast increase in electronic transactions, there are no specific multilateral rules in the WTO regulating this type of trade. Business and consumers instead have to rely on a patchwork of rules agreed by some countries in their bilateral or regional trade agreements.
Paul B. Technology and commercial frameworks that are much more agile will be important in changing the commercial landscape. Adaptive contracting models will become important in light of shifting trade policies.
Bill H. We bring a lot of equipment into the US, and we need to start digitizing our commercial invoices and trade documentation. We know we have to be able to react more quickly and bring velocity to our industry. We know we need to start to break down the prices given by OEM’s, start to do more market research to understand where we are buying our material from, and asking the question of where else can we find this material? Can we push it through another channel? Can we start automating this research, using the harmonized trade schedule, automating calculation of the different tariff rates, and make decisions on the fly based on updated analytics, to find the best deal. We need to begin to understand how to regulations are impacting our normal pathways in our supply chain, and to deconstruct that materials and automate the decision to leverage our market intelligence to make more informed decisions.
- Are we on the cusp of entering a new era of trade, where we are moving from a globalized supply chain pursuing labor arbitrage with long leadtimes, distant suppliers, and low-cost labor, to an era of localized supply chains within trade blocs (e.g. US/Canada/Mexico, EU, Middle East, APAC)? If so – is this an opportunity, or a threat to our organizations?
Chris H. We try to do as much work as we can to predict trade risks, but the best indicator of what is happening happens in the market is to keep track of investments made by businesses and entrepreneurs in these regions. That is the best gauge of where we should be manufacturing. We may try to hedge, but should be watching where these entrepreneurs are putting their money, which countries they are backing. From my standpoint, that is the best indicator of where our production should go, as their understanding is much more acute than anything we can put together, because they are the ones making that capital investment in country.
Andrew P – The issue of trade blocs is an interesting question. In some ways Brexit is the opposite of the creation of a trading bloc, and it could be that Brexit is not the end of that process. Certainly Europe’s negotiating position will be slightly weakened by Brexit, but I can’t draw a conclusion on whether the trade blocs will become the basis for a new trading structure. Nevertheless, like all businesses, we have to make long-term decisions that takes that possibility into account. In Western Europe, it is about being able to cope with any number of different things that may happen.
Lisa M. These are political trade blocs and I believe they will have a short-term impact. But in the long run, technology and innovation will play a role, as well as taking into account the impact of the environment commitments, 3D printing, digital consumption, and many other factors. These will move us away from trade blocs, and driven by those evolution of SCM, they won’t be as important. The economic factors and trade blocs we are seeing are, I believe, a short-term issue for now, that is happening as a result of actions on the part of certain countries.
Paul B. The segmentation is happening in terms of products and services and will ripple down the supply chain opportunistically. But I believe that the decision of where production will occur will be influenced by the physics and philosophy behind supply chains. Technology will be the defining issue, and social behaviors will also come into play and shape what we know.
Bill H. The economics of each industry situation will occur, and technology will change everything as well as social media. IACCM research suggests that 60% of transactions and uncertainty will be managed by machines. You don’t want to be the last one stuck in that space.
We appreciate the insights of these experts, and will await what happens in 2020 and the impact of politics on global relations. However, as these individuals state, organizations need to act ahead of political issues that are trying to weaponize trade…
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