Why Global Trade Agreements must be part of your supply chain planning: Guest Post by Tim Barnes

Today’s guest blog is posted by Timothy Barnes, who I met through the SCRC.  Tim is a global supply chain executive originally from Australia, who has been studying the evolution of the Trans Pacific Partnership closely, and is writing a book on the subject.  He has put together some great advice here about how the TPP is going to dramatically impact the supply chain landscape in the near future….

Supply chain decision makers play a continuous game of identifying what and where to source raw materials, the most cost effective location for assembly, and the most efficient structure of their transportation network, to achieve the ultimate goal of low COGS, good quality and delivery to their customer base in an efficient timeframe. However, as some expert’s estimate, around 2% of supply chain professionals time is spent thinking about account free trade agreements, and how they can utilize the provisions to take full advantage of efficiency and cost reductions, and to identify areas that could result in higher COGS.

In a highly competitive world, where cents on the dollar savings are typically the difference between hitting EBITAR targets and gaining market share, and being left behind, understanding the opportunities and threats that free trade agreements provide to a specific industry or company, are critical.

Let’s look at the Trans-Pacific Partnership (TPP) agreement as an example, where 12 countries around the Pacific Rim have signed an all-inclusive deal that excludes China, Korea and India, and promotes trade between critical nations in South East Asia, North and South America, South Pacific and Japan. This agreement will be a game changer in the way trade is conducted over the next 30 – 40 years, however it amazes me how many of my clients and companies I interviewed for my upcoming book, know very little about the opportunities and challenges the TPP will have on the US economy as a whole, and how critical it will be for supply chains to evolve with the changing landscape.

The most common question I get is “Will the US ratify the agreement? I heard that it’s not going to go ahead.” So let’s look at this question from both angles. Firstly, let’s say that congress does not ratify the TPP. Do things then stay status quo? Absolutely not, and this is where a knowledge of global trade agreements is critical. There are nations in South East Asia that have been asked to join a similar trade agreement called the Regional Comprehensive Economic Partnership (RCEP), which is China led that excludes all nations outside Asia. There is an overlap of countries that are party to both the TPP and RCEP, however for those nations, such as Japan, Vietnam, Malaysia, Australia, New Zealand, Singapore and Brunei, most have gone on the record saying that they see the US led TPP as the most critical and inclusive, and will put the RCEP on hold pending the decision on TPP. If the TPP is not ratified by the US congress, then the entire deal dissolves[2], creating a great opportunity for China to take the lead in Asia trade via the RCEP, and leaving the US on the sidelines. Supply chain leaders then need to re-look at their structure, to understand how the RCEP will further restrict trade with Asia, both in manufacturing product, but also in exporting product from the US into Asia.

So let’s look at it from the other angle, and that is if the US congress does approve the TPP, especially as they are recently obtaining a huge amount of pressure to approve it from a number of US organizations such as the National Council of Farmer Cooperatives (NCFC), as they risk losing not only the benefits of the agreement, but existing access in foreign markets. [3] In addition, a number of key issues such as the exclusion of the finance sector from the ability not requiring companies to hold data in a specific geography, has now been sorted out and has agreement by both regulators and financial sector representatives to move forwards. Having said that, the largest risk to the TPP being signed is the upcoming Presidential election, however as the result will not be known for many months, the only thing supply chain leaders can do is plan and prepare.

So if the TPP is approved, then this creates a different, but equally as critical challenge for supply chain leaders. The total delivered costs of goods will now change, as over 18,000 tariffs are reduced to zero either immediately or over a phase out period. Non-tariff trade barriers will change, the measurement on food safety (sanitary and phytosanitary measures) will be uniform, the Rules of Origin requirements in raw material and final assembly will need to be understood (and in most cases, sourcing from China, India and other non-TPP countries will exclude those products from the benefits of the TPP) and most defiantly, companies will need to adjust their supply chains to comply. These changes are only a few examples of the wide variety of opportunities and threats that the TPP will provide.

So supply chain leaders have two options, they either ignore the fact that trade agreements have a material impact on their supply chains, like 98% of their peers, and react only when it becomes clear that COGS and other critical elements are impacted. Or they prepare themselves with an action plan to capture the benefits and protect themselves from the threats, with an implementation plan ready to go depending on the overall outcome. And that is why global trade agreements should always be a part of supply chain planning.

Timothy Barnes is the President of Asia Pacific Consulting, based in Chapel Hill, NC and author of an upcoming book on TPP.

Email: tbarnes@apac-nc.com

Facebook: https://www.facebook.com/asiapacificnc/

[2] To pass the TPP, either all nations ratify the agreement, or a minimum of six ratify it as long as they make up 85% or more of the combined GDP. The US is 60.3% of the GDP, as such, if the US does not ratify, then the entire deal dissolves.

[3] World Trade Online, June 14, 2016 http://insidetrade.com/daily-news/froman-urges-farm-group-seek-tpp-vote-year-warns-losing-market-access