Can Trade War Tensions Between the U.S. and China Lead to Changes in the Global Supply Chain?

Changes in the global supply chain?

China’s recent announcement to halt the purchase of U.S. Agriculture products will likely spur a surplus of soybeans and other high-volume exports previously consumed by China.

A surplus of goods will lower the price U.S. producers will be able to get for their products, creating a spiral effect where farmers are unable to meet financial obligations, which is likely to reduce related industry purchases such as equipment and lead to more U.S. government subsidies to keep them afloat.

Higher manufacturing costs due to aluminum and steel tariffs have already impacted American companies, such as Deere & Co, forcing changes to their supply chain. Subsidies to U.S. farmers are not expected to offset the downturn in equipment purchases hitting manufacturers.

Moving production out of China provides risk

As outlined in the recent May/June issue of Insight, The Journal of the American Chamber of Commerce in Shanghai, “Redeploying one’s supply chain away from China is not a ‘one size fits all’ solution.”

China has established the infrastructure and labor expertise to appeal to a vast majority of industries ranging from simple manufacturing to a trusted source for high-end and high-tech products. With heightened tariffs and instability in trade relations with China, many U.S. multinationals are looking to alternative sourcing in countries such as India and Mexico.

While the final negotiation and ratification of the “New NAFTA” have companies hesitating to make any sudden production moves to Mexico, careful consideration of the complex trade environment in India should not be overlooked.  

Indian regulatory regimes levy various duties and taxes on imports as well as offer duty exemption plans which require advance licenses. Navigation of these requirements is essential in determining if a supply chain shift provides a long-term, scalable alternative to the U.S.-China Trade War repercussions.

As of June 16, 2019, India has enacted retaliatory tariffs on some U.S. products, ranging from 10-20 percent, in response to the steel and aluminum tariffs imposed by the U.S. under Section 232. Transparency is critical when performing a risk analysis of your supply chain.

As noted by export.gov:

“India’s customs rates are modified on an ad hoc and arbitrary basis through notifications in the Gazette of India and contain numerous exemptions that vary according to the product, user, or specific export promotion program, rendering India’s customs system complex to administer and open to administrative discretion.”

Such regulatory fluidity makes supply chain predictability an insurmountable task. 

Proceed with caution: Prompt changes in trade patterns lead to increased review

Some companies may be considering alternative methods of production or perceived loopholes to avoid impacts of the trade war on their supply chain. Proceed with caution.

While some of these alternative schemes may seem to be the “magic pill” per se, those responsible for compliance must remember that each country has its own rules and nuances that must be carefully examined to ensure changes to your supply chain sourcing follow all statutory requirements.

Swift changes in trade patterns can cause heightened review by regulating bodies, increasing the likelihood that your imports/exports will be reviewed during its journey. Be prepared by thoroughly documenting your manufacturing and procurement practices and engage expert council should you be unfamiliar with policies and procedures affecting your supply chain.

Lastly, remember that supply chains must be treated as living. Establishing core supply chain KPIs and metrics will help you to determine critical aspects of your supply chain that must be preserved when considering a new trade lane.

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