The effects of the U.S.-China trade war can be felt throughout the supply chain, from raw-material suppliers to manufacturers, wholesalers and retailers.
The gravity of the situation is compelling U.S. companies to shield their supply chains from the ensuing volatility and uncertainty. While many prepare for the impact of China’s isolation from U.S. markets, others fear significant damage to their businesses if they oust themselves from the Chinese market or supply chains.
To ensure that U.S. companies aren’t impacted by trade tensions in the near future, they must act now. Business leaders need to expand their horizons beyond China. Following are a few crucial actions they can take to help mitigate the risks emerging from the current trade conflict.
Monitor U.S.-China developments closely. As the threat deepens, it's imperative for U.S. companies to keep abreast of all developments around the trade war.
Global trade conflicts almost always come along with sanctions, tariff rises, and regulatory burdens imposed by governments on both sides. Since 2018, the U.S. and China have been involved in a war of tariffs and retaliatory tariffs. The situation has recently been fueled by U.S. sanctions on all goods made in whole or in part in the Xinjiang Uyghur Autonomous Region (XUAR) in China under the Uyghur Forced Labor Prevention Act (UFLPA). And we can expect the U.S. to impose more sanctions against China to deter it from any aggressive action against Taiwan.
The brunt of this multifaceted tension is manifesting itself through supply chain inefficiencies, disruptions in transportation routes, and hikes in tariffs and duties. As a result, U.S. companies need to proactively build a dedicated risk mitigation strategy by analyzing these trends and defining possible scenarios and risk indicators.
To stay updated on the trends, begin with monitoring press releases and publications on various government portals like the U.S. Department of Homeland Security, U.S.-China Business Council, U.S. International Trade Commission, and U.S. Customs and Border Protection. While these sources may not be easily navigable for all, U.S. companies can also subscribe to platforms that keep track of any kind of updates on trade compliance and sanctions from different relevant authorities.
Diversify your supply chain. A large part of the American economy is inextricably linked to manufacturers and suppliers in China and its lucrative consumer market. Even though U.S.-China trade has, for the most part, rebounded recently, many concerns remain. As the trajectory of trade between the two nations continues to be patchy, there are several pressing needs that U.S. companies need to address.
The U.S. tariffs on Chinese imports led to rising supply chain costs, decreasing profits for the U.S. industries, and ever-increasing uncertainty. In response to this, the number of U.S. companies sourcing from other countries shot up.
Statistics reveal a significant increase in U.S. imports from countries other than China. Here, Vietnam stands out as a promising exporter, with a cumulative growth of 103.9% in shipments over the last three years. Exports of items such as electronics and furniture grew significantly, with a hike of nearly 276.1% and 205.2% respectively in shipments over the last three years.
A similar trend of diversification can be seen in the case of U.S. exports. While there was an increase in exports to China, something else caught all the attention — a 2x boost in U.S. exports to countries such as Japan and Brazil in the last three years.
It’s time for all companies to start exploring such opportunities. Companies like Apple provide an excellent example of reducing dependence on China by setting up new manufacturing units for the iPhone in India. In addition, U.S. companies are nearshoring or relocating their supply chains closer to home in markets such as Mexico. U.S. imports from Mexico have increased around 25% in the last five years, and we see that trend continuing this year as well.
U.S. companies must no longer be reliant on single sourcing and just-in-time inventory strategies. Instead, they must exploit the available competitive advantage from their technological IP, while maintaining careful inventory management balancing between immediately manufactured and stocked supplies. This strategy can promote localization of production by using tech know-how, thereby reducing technology flow to China.
U.S. companies will likely continue worrying about supply chain disruptions as they reduce their reliance on China. While diversifying out of China might take time, it's a much-needed investment to build resilience in the mid-long term.
Collaborate with suppliers. U.S. companies must understand the crucial need for collaborating with their suppliers for risk mitigation. The scenario is grim for those relying heavily on Chinese suppliers. Acts like the UFLPA have caused many U.S. companies to face higher regulations and loss of suppliers. Sourcing costs are also spiking, as the cost of labor and materials in China is always vulnerable to Chinese government policies.
U.S. companies must start focusing on increasing transparency in their supply chains. Businesses must be able to map all the nodes in their supply chain. Deeper collaboration with existing suppliers and the use of external supply chain intelligence tools can generate real-time insights on suppliers’ suppliers, as well as other risks that are hidden in the deep tiers of supply chains.
Business should be able to identify and assess vulnerabilities and risks with current suppliers, especially those operating in or sourcing from the XUAR, to take proactive measures for risk mitigation. Here, companies may consider setting up a dedicated supplier relationship management team aimed at keeping track of all developments including any new sanctions, tariffs and non-tariff barriers. They might also consider monitoring their competition, to spot new suppliers and promising regions for their supply chains.
Seek support from the government. In a recent bid to fight aggressive Chinese trade advances, the U.S. government put forth a strategic approach that focuses on investing in domestic industry, technology and infrastructure, and aligning with partners and allies to combat China’s actions globally.
There are some great government initiatives such as the National Export Initiative and Trade Americas, and bodies like the Office of the United States Trade Representative, aimed at assisting U.S. exporters with their business expansion.
While the future of U.S.-China trade remains uncertain, companies can do much more to cushion themselves against potential risks. This is the right time to employ technology-powered solutions for gaining agility and crucial insights. Such tools can be of great value in ensuring trade compliance, improving supply chain resilience, and building better risk-mitigation strategies.
Shalabh Singhal is founder and chief executive officer of Trademo.
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