Summary: How issues directly related to procurement have contributed to growing international trade tensions
Over the past 20 years, multilateral trade has hit a wall. In an attempt to address this impasse, the United States has changed its approach from multilateral engagement to tariffs, effectively strong-arming countries into addressing the larger issues at play. The underlying issues that have caused a breakdown in multilateral agreements, other than trade deficits and agricultural disagreements, are actually problems that procurement professionals consider daily.
The real issues behind the trade war
Trade issues leading up to the current tariffs have been licensing, labeling and packaging standards, quality assurance standards, intellectual property rights, government subsidies, nationalized enterprises, labor rights, environmental standards, local content requirements and antidumping laws. These issues, directly related to procurement, are referred to as Non-Tariff Barriers (NTBs). They are called NTBs because they are factors, besides tariffs, that act as barriers to international trade.
It is factors like these that have made it impossible for multilateral trade negotiations to create agreements, rules and norms surrounding these procurement-related trade barriers. Until these underlying problems are addressed, tariffs won’t be going anywhere anytime soon.
Yes, agricultural subsidies and trade deficits are major factors driving the Trump administration’s decision to levy tariffs. But striking a deal with China to end the trade war without addressing intellectual property theft, licensing standards, government subsidized manufacturing or antidumping laws isn’t realistic.
Tariffs are not just a short-term problem. They are the result of a failure to create consensus on issues directly related to procurement over the past 20 years.
Where we are now
Companies and procurement professionals planning premature retaliatory measures or basing decisions on the threats of new tariffs are at greater risk of making irrational and unnecessary calls that may uproot supply chains or disrupt operations. It’s important for procurement professionals to understand what is going on in the big picture to avoid getting caught up in the volatility of uncertain regulatory change.
Although companies should consider threats of new tariffs seriously, the current tariffs were proposed in the context of a spike in illegal border crossings and are completely unrelated to the issues regarding larger non-tariff barriers that lie at the heart of the current impasse in global trade. When companies are exposed to a potential tariff threat, should they seriously consider developing contingency plans? Absolutely. But should American companies begin making overhauls to their supply chain? Well, not necessarily.
Companies and professionals that take a step back to look at the big picture will understand how we got to this point and, as a result, can quantify direct and indirect risk exposure.
Most importantly, staying informed will help companies and professionals develop the most appropriate strategy to mitigate negative implications of tariffs.
What’s the bigger picture?
Although multilateral trade agreements (defined as treaties to reduce trade barriers between three or more nations) made considerable headway in expanding global trade in the 1990s, they have largely been unsuccessful in achieving their goals since the start of the Doha Round of Development in 2001.
To try and put it simply, we have reached this point because multilateral trade negotiations have failed over the past two decades and have forced a return to regional and bilateral trade agreements.
These now threaten to segregate global trade into competing frameworks with different rules. Taken in this context and according to the current administration, tariffs are our best chance at arriving at fairer trade, something multilateral negotiations couldn’t achieve. Check out this handy timeline to easily see the successes and failures of recent decades.
It is also important to understand that there’s more at stake with China, specifically. Underneath all the rhetoric and economic strong-arming, China and the United States are competing to establish the principles, rules and norms of the international economy. Whichever country controls the terms and rules around non-tariff barriers effectively has the power to determine the future path of the international economy. There’s a lot on the line here.
Where do we go from here, then?
Don’t get caught up in the day-to-day volatility of tariff news and keep an eye on the big picture. Ask yourself these questions:
- How do we, as a company, quantify our direct and indirect risk exposure to tariffs?
- What tariff measures currently in place are affecting my supply chain/company?
- With regards to my risk exposure to tariffs currently in place, what are the best short and long-term strategies to reduce any harm to our business?
- What new potential tariffs may impact our operations and also have the highest probability of being implemented? What are the best short and long-term strategies to reduce any harm to our business?
Companies must begin deploying both short-term and long-term strategies. Below are some examples:
Short-term tariff strategies
- Reexamine classification codes of goods or inputs, if applicable, but do not falsely classify inputs or goods.
- Share the tariff burden with suppliers. Leverage large purchasing contracts and established relationships with suppliers to share the cost of tariffs or negotiate lower prices per unit to offset additional tariff costs.
- Explore temporary product exclusion requests. Although rare, the Office of the United States Trade Representative offers some companies situational exclusions on defined product categories.
- Explore duty drawback exemptions. The federal government will provide a refund, reduction or waiver for customs duties and tariffs paid on some product or input categories if the finished goods are being exported.
- Increase retail prices. Pass the tariff burden and higher prices on to consumers and potentially suffer a lower volume of sales. If products are inelastic, meaning unable to be substituted (e.g. pharmaceuticals), buyers will be forced to pay higher prices as there are no alternative options.
- Eat the tariff. The company would take the hit, pay the tariff duties and suffer lower profit margins. If products are elastic, meaning easily substitutable (e.g. consumer durables or packaging), businesses won’t have the pricing power to maintain sales or control market share and should consider absorbing the tariffs.
- At worst, diversify origins of materials and overhaul supply chains. Find alternative suppliers in the short term to avoid costly tariff duties.
Potential long-term tariff strategies
- Buy ahead of time. Procurement professionals should consider securing long-term contracts to lock in rates for vital inputs before tariffs go into effect.
- Increase purchase visibility with suppliers. A company should break down what inputs are core to their business and also have a high-risk exposure to tariffs. A company should then forecast foreseeable increases in demand for vital inputs. If tariffs are implemented and demand for the input is particularly high, domestic markets will tighten wherever the supply of local inputs exists. Procurement professionals can stay one step ahead by leveraging large purchase contracts, before the domestic supply of inputs is depleted, to lock in favorable rates from local suppliers and avoid or reduce the impact tariffs altogether.
- Insource. Some companies with higher levels of vertical integration may consider insourcing manufacturing/production or building domestic infrastructure to avoid tariffs.
- Reroute goods and take advantage of transshipment. Ship unfinished goods to a country that does not have tariffs in place. There must be a substantive change to the product in this new country, including final assembly or addition of a crucial part, to legally circumvent tariffs. A company cannot simply ship a product to an alternative country and remove the “made in China” status.
- Utilize substitutes. Companies may consider making engineering or structural changes to products that allow them to avoid tariffs by using alternative inputs.
- At worst, diversify sourcing and overhaul supply chains. Consider alternative sourcing countries and regions. Specifically, companies should consider sourcing from countries with which the United States has an equitable trade balance and have predetermined agreements regarding contentious NTB-related issues to avoid future tariffs. Companies should map international trade frameworks and free trade zones that offer vital input material and manufacturing infrastructure and have an adequate labor force.
By Riley Mallon, Research Analyst, ProcurementIQ
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