This is Part 5 of the content series STEEP: Five Drivers of Change in Supply Chain. The series analyzes Social, Technological, Environmental, Economic and Political issues in the supply chain industry to gain a deeper insight. To see an overview of the series, click here. To discover more supply chain content, click here.
President Trump’s promise to put America first could mean widespread ramifications to the global supply chain.
It took all of one week for Trump to get his plans in motion, implementing policies that affect trade and manufacturing. From pulling out of the Trans Pacific Partnership to pressuring major companies such as Ford Motor Co and Apple to reduce their offshore jobs, the early days of his administration gave major companies no shortage of things to think about.
One thing that is unlikely to change is the global nature of business, whether it’s the supply or demand side. Companies around the world are trading services, and many are concerned that Trump’s trade policies and withdrawal from the TPP could throw a wrench into plans that promote new ways for firms to work together across borders.
For example, if Trump sticks to his stated intention of renegotiating NAFTA, the foreign content guidelines could become more focused on emphasizing certain levels of local content that support jobs staying in America rather than imposing tariffs.
But tracking local content can be difficult. According to an article from Forbes, manufacturers seek out suppliers of raw material from nations that have a high demand for their product. They can still do the manufacturing in another country, then return products with local content back to the origin nation to get a tax break.
“The campaign promises on tariffs – and on providing incentives to get companies back to the U.S. – have already put global companies into overdrive, examining their options and determining how best to redesign their supply chains,” Brzoznowski told Forbes.
After Ford shuttered plans to open a new plant in Mexico in favor of expanding operations in Michigan, something the company said it planned on doing anyway, Trump ratcheted up the pressure on Ford’s competitor, General Motors Co.
Shortly thereafter, Fiat Chrysler made a similar announcement to Ford’s.
A trade focused agenda was promised and early days of the Trump era showed the intention to deliver just that. The day after inauguration, Trump met with manufacturing leaders about increasing U.S. production and the implementation of a border tax affecting any company that moves its operations overseas.
The president’s promises to put tariffs on goods imported from Mexico could have a big impact on nearshoring, while his promises to tax goods made in China could change the way many supply chains operate due to what happens to their costs. The cost of sourcing goods from either location is likely going to rise.
U.S. suppliers may face less competition and could potentially receive government incentives to increase operations and exports, according to an article from Supply Chain World. But by the same token, the U.S. is the biggest importer of goods in the world. Upsetting the trade relationship between U.S. and China could have far reaching effects on demand and the outlook for the fading container shipping industry.
As international trade with U.S. firms becomes riskier for global partners, questions that loom now include whether or not China will take on more of a leadership role in global trade as the U.S. refocuses on itself.
The Chinese have been pushing to do just that and are subtly stepping into fill a market access gap left by the U.S. withdrawal from the TPP according to an article from Supply Chain Dive. The Trump administration intends to pursue bilateral agreements with partners the U.S. was going to work with through the TPP, creating a race between the U.S. and China for market access to the rest of Asia.
Both China and India have been implementing their own plans to bolster their domestic tech and service industries. Will Trump’s America First policies be able to keep pace with them? Can America compete with these nations that have fewer regulations on pollution and labor?
In manufacturing terms, an increase in local manufacturing is likely, but the volume of long-term jobs many believe will accompany it seems less likely to come to fruition as a larger number of plants producing small yields while using automated labor is the most likely outcome for many industries, according to an article from Industry Week.
While supply networks will have to account for a greater amount of financial risk associated with globally sourced bills of material, any incentives intended to bring American businesses back to domestic shores will have to be significant enough to offset the operational cost of doing so.
As noted in The Economist, the era of multinational firms appears to be in decline, as multinational companies across industries have seen declining profits from overseas markets in recent years. Technology firms have been the exception rather than the rule.
If Trump is successful in bringing jobs back to the U.S., global firms’ tax and wage bills will likely rise, decreasing profits further. The Economist article goes on to say “if American multinationals shifted a quarter of their foreign jobs home, at American wage rates, and paid the same tax rate abroad as they did at home, their profits would fall by another 12%. This excludes the cost of building the new plants in America.”
For the nation’s thriving tech industry, the media has focused on concerns surrounding the immigration status of workers on H-1B visas. In reality, it doesn’t matter. The globalization of tech jobs is not something that can be stopped, as a large number of jobs in the sector can be performed remotely, rendering offices somewhat meaningless for who employees can do the same work from a loft in Mumbai as they can from a Silicon Valley Headquarters.
The larger concern for tech lies with their product supply chains.
China has been focused on increasing its role in the global supply of semiconductors and is expected to continue its efforts in 2017. Tech companies with large portions of their supply chains based overseas, such as Apple, would see a substantial increase in costs if protectionist policies are implemented. According to The Street, Goldman Sachs estimates that the cost of imports represents 59% of Apple’s total sales and 64% of Hewlett Packard’s. These firms would see a dramatic increase in taxation under Trump’s plan.
While there is plenty of support for Trump’s policies, the fact is, the actual task of reversing practices born out of the era of globalization may be impossible without starting trade wars. Criticism of globalization is valid. It has been an era largely defined by a tremendous amount of wealth for a handful of oligarchs while destroying blue collar jobs in manufacturing and a number of other industries. But the interconnected nature of the modern world requires a certain level of global cooperation.
Trump’s early days saw him reach out to United Kingdom Prime Minister Teresa May in the hopes of starting post-Brexit trade talks. He also moved ahead with plans to renegotiate NAFTA with Mexico and Canada.
In the end, even Trump believes that doing business across borders is a good thing, but doing it sensibly and to the advantage of American businesses is where priorities lie. It’s a safe bet then to say that the politics of today are going to drastically affect the way supply chains operate tomorrow.