For many years, various US administrations of whatever political background have forged deals with markets and trading blocs around the world. Trade disputes have usually been short lived and resolved effectively through the World Trade Organization. On the whole, it seemed that the world, led by the US, was moving inexorably towards a regime of free and open trade, a situation which seemed to benefit not least its giant manufacturers.
This is no longer the case. One of President Trump’s first acts was to withdraw from the Trans Pacific Partnership (TPP) as well as undertake an existential review of NAFTA. He has now levied tariffs on steel imports targeting China in particular.
It is not only the Trump administration which holds this antithetical view towards free trade. For example, the US International Trade Commission (ITC) has passed judgement on a case involving solar panels, saying that cheap imports have harmed domestic manufacturers. A report will now be sent to President Trump which may include recommendations for tariffs.
The ITC is now also being asked to adjudicate on alleged unfair competition in the washing machine sector prompted by a complaint from big US manufacturer Whirlpool Corp involving South Korean rivals Samsung and LG Electronics. This comes at a time when Trump is looking to renegotiate (or even exit) the US-South Korean trade deal, Korus.
Although these cases (and others such as Canadian lumber) involve trade dispute mechanisms which have been in place for many years, there is a perception worldwide that, backed by a president sceptical of free trade, protectionist powers hold sway in Washington.
Therefore, a survey undertaken by US-based freight forwarder BDP International comes at a very apposite time. The survey involved polling a number of US shippers who attended one of BDP’s recent customer days in Houston, Texas.
The first question asked regarded their opinions of current free trade agreements. An overwhelming majority of attendees (83%) believed that the US needed to be aggressive in their approach to new FTAs. This hawkish view was backed up by their opinions of NAFTA. A similarly large majority (90%) believed that the agreement was ‘old’ and in need of updating. Only 6% thought it should be left alone. Respondents were more split over the benefits of Free Trade Agreements. 46% believed that they kept US manufacturing costs down, although over a third thought that this wasn’t the case. Two thirds of those surveyed also thought that the Government should do a better job of enforcement outside of the US.
There is no doubt that attitudes towards free trade in the US are complex. Although many outside of the country blame President Trump for the increased levels of protectionism this is only part of the story. Many of the cases which were referred to above were brought by US companies using an existing trade dispute structure agreed under international law. Indeed, it remains to be seen whether or not these cases will result in sanctions. However, if the survey conducted by BDP International holds true across US industry as a whole, there is evidently a wider desire for a more robust position on trade relations. This may well mean that politicians and President Trump himself will feel that there is a strong mandate to conduct uncompromising negotiations on future or existing free trade agreements.
The impact of NAFTA re-negotiations
When NAFTA renegotiations commenced in August, those involved in supply chains began to analyse the possible consequences.
It is clear that NAFTA’s sole emerging market is vulnerable. According to the Financial Times, Spanish bank Santander warns that Mexico’s economy could contract by 2.6% if NAFTA unravels. Moody’s Investors Service says the economy could shrink by up to 4%.
Having said that, there is some comfort to be drawn from the fact that even in the event NAFTA dies, about half of what Mexico exports to the US would still cross the border without incurring tariffs. Nevertheless, Santander’s forecasts assert that export and import volumes would fall by 15% and 16% respectively if NAFTA ends and a trade war ensues, implying significant supply chain disruption.
Other trade avenues are already being explored. For instance, Mexico imported more yellow corn from Brazil and Argentina in September than in the whole of 2016. The US is currently its major source. The search for substitute markets does not appear to be extensive yet, but if uncertainty builds or negotiations get ugly, expect the pursuit for alternatives to accelerate.
But even in the event a new accord is reached, there remains plenty of scope for supply chain patterns to shift.
For those hoping for minimal disruption to North American supply chains, the area of renegotiations probably generating the most angst is possible changes to the rules of origin chapter. From a US perspective, these specify that for a good to be imported tariff-free from Canada or Mexico, a certain proportion of its value must be produced within NAFTA. The proportion of regional content required varies by good.
For a car, 62.5% of its value must have been produced within NAFTA to be imported tariff-free to the US from Canada or Mexico.
For firms to prove they have met the necessary share, they are required to document the origin of parts used in production and obtain a certificate of origin. This implies administrative costs and inefficiencies, which increase as the content share rises.
What is the impact of stricter rules of origin on supply chains? The logic goes that as requirements tighten, more trade should take place within NAFTA, given the desire to qualify for free trade. For example, cheaper car parts from Asia or Europe may be rejected in favour of more expensive NAFTA components by a Mexican vehicle manufacturer aiming to meet the 62.5% benchmark. But as the benchmark increases, there comes a point when it becomes cheaper to import parts from outside NAFTA and pay the tariff on the finished vehicle anyway.
What that means is the tariff rate imposed by the US for a vehicle manufactured in Mexico would be the same as for anybody else the US doesn’t have a free trade agreement with. A competitive advantage is lost. At this point, the vehicle manufacturer may start to question whether Mexico is actually the best place for its production.
Toying with rules of origin is therefore a risky business, one which can easily have unintended consequences. All that can be said for sure is that the greater the changes to content shares, the more likely it is that Mexican and NAFTA supply chains will be forced to adjust, one way or the other.
The implications of steel tariffs
When Donald Trump became president, he did so on a protectionist platform, promising voters that he would stop foreign companies from ‘dumping’ their products on US markets and damaging domestic manufacturers.
As discussed above, free trade agreements such as the Trans-Pacific Partnership (TPP) and even NAFTA came into his sights at an early stage. Following this he held good on his promise to protect key US industries, starting with steel and aluminium, by threatening to impose tariffs of 25% and 10% respectively on foreign imports of these commodities.
Originally the tariffs were not targeted at individual markets such as China, whom many consider as the worst offender when it comes to subsidizing the production of steel and dumping it on the world market. Rather, to the concern of even some Trump supporters, the proposed tariffs were designed to affect all imports including those from close partners such as the EU and even neighbouring NAFTA countries, Canada and Mexico. After a political firestorm, the administration backed down, exempting EU and some key trading partners – Canada, Australia, Argentina, Brazil and South Korea – from the decision. Most notably, of course, China was not included.
Trump’s justification for the tariffs was on the grounds of ‘internal or national security’ using a mechanism known as Section 232. However, many believed this to be a smokescreen for an economic safeguard measure, and as such it would be legally possible for the remaining trading partners affected to make use of the World Trade Organisation rules to implement retaliatory and balancing tariffs.
So far China’s response has been muted. Beijing has said it plans tariffs on US steel pipes, fruit, wine, pork and recycled aluminium. Commentators say that what could have turned into a global trade war, has been downgraded into a ‘spat’. Despite this, for the supply chains affected there will be major consequences on a local level.
It is depressing that even after decades of enjoying the benefits of free trade, politicians in countries such as the US still revert to protectionism when it suits their agendas. However, there is no doubt that many parts of society have lost out due to globalization. This is not the fault of the concept or even the practice – more that those employed in the ‘old’ manufacturing sectors in the West, which have been most affected, have not been able to retrain and move to higher value adding jobs. This is perhaps the greater failure for which politicians must also be held responsible.
Source: Transport Intelligence, March 29, 2018
Author: John Manners-Bell
The world's largest collection of global supply chain intelligence