The world is witnessing its first global trade war in decades. Every industry sector is scrambling to cope with a trade landscape of the unknown. Digital supply chain management platforms can help.
Last May, the U.S. Government retaliated against what the Trump administration characterizes as a global trade war against countries it says are deploying unfair trade practices. The U.S. has levied or plans to levy a series of tariffs on imports from the European Union, Mexico, Canada and, most significantly, China.
China, in fact, is the subject of multiple rounds of U.S.-imposed tariffs thus far. In September, for example, the United States imposed a 10 percent tariff increase on $200bn in Chinese goods imported into the United States, adding to the $50bn in goods slapped with higher tariffs earlier in the year.
The Trump administration says that the 10 percent increase on Chinese imports will jump to 25 percent in 2019.
China retaliated by imposing new tariffs on $60bn in U.S. exports.
The rapidly escalating trade war has businesses around the world worried. “Supply chain uncertainty, including trade wars/tariffs is one of the key issues keeping electronics industry executives up at night right now,” reports Maryliz Burns, senior director of SaaS enterprise solutions for Supplyframe.
Tariffs and Counter Tariffs
The China tariffs come as a result of an investigation by the U.S. Trade Representative (USTR), which found that China’s “acts, policies and practices related to technology transfer, intellectual property, and innovation are unreasonable and discriminatory, and burden U.S. commerce.”
In announcing the initial round of China tariffs last May, United States Trade Representative Robert Lighthizer said, “We must take strong defensive actions to protect America’s leadership in technology and innovation against the unprecedented threat posed by China’s theft of our intellectual property, the forced transfer of American technology, and its cyberattacks on our computer networks. China’s government is aggressively working to undermine America’s high-tech industries and our economic leadership through unfair trade practices and industrial policies like ‘Made in China 2025.”
The “Made in China 2025” plan, according to a brief published by the Council on Foreign Relations, is a state-led industrial policy that seeks to make China dominant in global high-tech manufacturing. The program proposes to use government subsidies, mobilize state-owned enterprises, and pursue intellectual property acquisition to catch up with — and then surpass — Western technological prowess in advanced industries such as electric cars and other new energy vehicles, next-generation information technology and telecommunications, aerospace, electrical equipment and advanced robotics and artificial intelligence.
For companies and entire industry sectors — especially electronics, automotive and any other manufacturing sector dependent on high-tech components — dealing with the uncertainty that tariff wars engender is difficult. “No one has visibility into how the escalating trade war between the United States and other countries — especially China — will play out,” Burns says. “What will the tariffs be and how long will they be in effect? No one knows.”
Higher Costs, Reduced Demand?
For the U.S., higher tariffs will eventually undo the positive effects of tax cuts, according to a report by Morgan Stanley. “In the short run,” the report says, “consumers will bear the cost because it takes time for firms to adjust their supply chains, and even if the firms could do so, such revised supply chains will be less than optimal.”
Longer term, however, Morgan Stanley predicts the tariffs will have far greater negative economic impact than just a dollar-to-dollar cost pass-through. The reason: because domestic and global supply chains are now completely intertwined and symbiotic. This means that any trade measures implemented by or to a single country or sector likely will ripple outward to other regions and sectors.
All told, supply chain disruptions could account for about 80 percent of the trade war’s eventual predicted negative impact on global growth, according to Morgan Stanley analysis. In all cases, the direct effects of tariffs were just one component of hampered growth, the investment firm explains.
In a full-blown scenario in which the U.S. imposes a broad-based 25 percent tariff, for example, Morgan Stanley estimates that 23 percent of the total growth impact would come from the initial tariff, while the domestic and international supply chain effects would account for 35 percent and 42 percent, respectively — stemming from the combined impact of higher costs and lower demand.
There is no doubt that certain sectors are more vulnerable to tariffs, with electronics and automotive being among the hardest hit. That’s why a group of CEOs of electronics companies, including Cisco Systems, Dell Technologies and Hewlett Packard Enterprises, urged Lighthizer to re-consider the White House's plan to impose the potentially high tariffs on Chinese imports. Such high tariffs would "cause broad, disproportionate economic harm to U.S. interests, including our companies and U.S. workers, our customers, U.S. consumers, and broader U.S. economic and strategic priorities," the CEOs warned.
In addition, it would slow investment in the rollout of 5G telecommunications networks and advances in cloud computing — putting the U.S. at a disadvantage, particularly in light of the “Made in China 2025” initiative. The tariffs, the CEOs said, “[leave] us with less capital to invest in research and development, … and could lead to hiring freezes, stagnant wages, and even job losses.”
One final point from the Morgan Stanley report: U.S. multinational companies like Cisco, Dell, HP, Apple and many others will feel the brunt of the new tariffs both at home and in China. Apple, for example, sold more iPhones in China than it has in the United States for the past three years and generated 20 percent of its nearly $200bn in annual revenues there, according to the Wall Street Journal. The company manufactures in China and Taiwan, so the tariffs would impact its sales within China and around the world.
How Supply-Chain Digitalization Can Help
From all indications, the current tariff battles could continue throughout 2019 and beyond. “This uncertainty makes supply chain planning a very difficult task,” Burns says. So how do OEMs and component manufacturers manage the risks that trade wars pose to their businesses? How do they develop and execute a more risk-tolerant supply chain?
The wrong answer is to continue what many organizations still do today — attempting to make strategic decisions with limited visibility from fractured and disparate information systems and use of spreadsheets and email to manage.
This is true in many areas of supply chain operations. Take the request for quote (RFQ) process. “You simply cannot make strategic and informed decisions in today’s complex environment, or use spreadsheets and email for RFQ management,” Burns says. “There are too many black holes, opportunities for human error, and the new tariff compliance requirements will be yet another complexity. The cost associated with not having visibility across your enterprise is very, very high.”
The right answer, at least in part, is to move toward and invest in supply chain digitalization.
The fact is, supply chain digitalization holds great promise as a means for companies to handle such wild card developments as trade wars. In particular, as Sean Monahan and Michael Hu of A.T. Kearney explained in an article in CIO Review, supply chain platforms and other cloud-based collaboration, analytics and visibility tools “allow users to create value by managing products and processes in mutually synergistic ways.” They allow integrated, coordinated and validated information management throughout the supply chain, enabling data to accumulate from each step of the chain, to be analyzed and effectively used in supply chain decision-making.
For example, take sourcing a bill of material for a product.
“On a digital platform, I can load a bill of materials [BOM] and have visibility into total price for the BOM, on a part number level,” Burns explains. “I can see each part number's price history, negotiated pricing, market pricing, internal demand history, manufacturing site(s), where used, and their pricing — I can manage an entire BOM in one application without having to go from system to system. All of the enterprise information is integrated and aggregated into one solution.
“I can load current and potential tariff information into the system, so I can analyze the cost impact of sourcing from one vendor or country to another,” she continues. “Armed with this information, I can decide on my immediate and projected needs, select the optimal suppliers and prices, and generally make better sourcing decisions. I can perform what-if scenarios planning based on the prospect of new or increased tariffs, and I can play those scenarios out across my supply chain.”
Part of an Arsenal
Digital supply chain platforms don’t eliminate supply chain volatility, of course. But they do help companies manage it more intelligently. They offer a powerful tool in the arsenal of tools companies can use to manage trade wars and other sources of supply chain volatility.
“In a way, the tariff wars are a wake-up call for all supply chains,” Burns says. “They demonstrate that we still need to do a better job managing our supply chain visibility, analytics, coordination and risk. The new tariffs, and the need to not only track and comply with them, but to know where and how it’s possible to offset them, make this fact clear. Thankfully, we now have the technology platforms to do this.”
Timely, incisive articles delivered directly to your inbox.