Global trade is becoming more and more confusing, given the vast array of different tariffs, trade wars, 301’s, customs duties, and other shifts in global trade. I had the opportunity to speak with a few different industry experts this week, and sought their insights into how to manage the confusing array of shifts going on when products cross two borders anywhere in the world. While many people think there are “free trade” for agreements like NAFTA that make it easy to ship across borders, think again! There really is no such thing as “free trade”.
In fact, most companies have sophisticated systems that track shifts and changes in trade laws, harmonized trade tariffs (section 301), anti-dumping (section 232) and countervailing duties that require constant vigilance to minimize impact yet remain in compliance. These companies are also evaluating strategic responses, to think through how to establish approaches to maximize or minimize the impact of regulations, and how to minimize duty liabilities – which by many accounts, globally speaking, is higher than the normal tax dollar obligations for most companies! Strategic global trade decisions take on a variety of postures, including defensive, offensive, informing sourcing strategy when it comes to trade agreements, duty positioning, country pairings, and and sourcing shifts to reach some sort of global optimization, which must also consider supplier capability, capacity, and duty.
One common approach that many companies are using is foreign trade zones. The use of Foreign Trade Zones can be helpful in managing section 301 duties, which are tariffs imposed by the Trump administration. FTZ’s allow product to be imported and stored in a large DC, with yet to be custom cleared inventory sitting there. Most of this inventory is designated as “non-privileged”, which means they are subject to higher tariffs. However, once they are in the trade zone, there can be negotiations with the Department of Commerce to reassign the zone to “privileged”, which means that the DOC has permitted a “locked duty rate”, which is hopefully lower than the usual tariff rate. However, because of the volatility around tariffs, it is always a good idea to bring material in as non-privileged, with the hope that tariff rates may fall. The inventory must then go through a variety of transactions to re-designate it, or there may be cases where it may be liquidated. The company may elect to pay the duty on the inventory, and clear it through customs while it is sitting in the DC. It all depends!
This complicated circus of how to handle in-bound material continues on an on-going basis, supported by sophisticated analyses of shifts tariffs, countervailing duties, and anti-dumping legislation. Companies may perform “what-if” scenarios to come up with creative solutions, which also extends to thinking about where to locate supply. Several executives I spoke with were fairly adamant that the products they were buying, whether it was manufactured products or apparel, would never move back to the United States, and nor should it, given the low wages associated with these production settings. China is in the same boat as the U.S. in many respects, as they are also seeing how many of their low-cost labor industries are moving to Vietnam and other countries. (Trump’s address to the UN last week that China is no longer a developing country was, in my opinion, a valid point!) But to manage the complicated dance of global trade, organizations are recognizing that they need good systems, good visibility and transparency into the supply chain. Once you layer on the need to monitor and comply with regulations, understanding where your raw materials are grown, mined, or assembled, to comply with conflict mineral laws, environmental requirements, labor laws, product safety requirements, etc. becomes very complicated indeed. It is now becoming IMPERATIVE that organizations seek to have visibility beyond the first tier of their suppliers, to understand the country of origin of their materials, and how to generate options for navigating a slew of different tariffs, countervailing charges, and anti-dumping fees.
The theme of the global chessboard and how to navigate it will be the theme of our upcoming Supply Chain Resource Cooperative meeting on December 5. We plan on having a number of excellent speakers from different industries and backgrounds, speaking on a variety of themes include localization, regionally oriented sourcing models, analytics for managing complexity in global trade, working capital impacts of lead-times, and the net impact of this evolving trade scape. Although this may seem like a threat, for those who embrace this complexity and think differently, it may actually be eye-opening to discover that there are many interesting opportunities starting to emerge…