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  First Thoughts

    Dan Gilmore


    Supply Chain Digest

June 7, 2019

Trade Wars and the Supply Chain

Thoughts on the Trade Wars, and a Chronology of Events

I used to primarily think of a "trade deadline" as the date in late July when the ability to trade players in major league baseball without going through the waiver process ends.

It seems to have taken on a whole new meaning now.

We really are at what I would argue are the most interesting times in the history of supply chain. For example, we have ecommerce upending the consumer goods to retail supply chain that has been largely in place for decades, and in fact dramatically altering the fundamentals of both sectors, putting many companies in jeopardy.

Gilmore Says....

Perhaps at the macro level the pain in upstate New York, Ohio, Michigan, etc. from the loss of manufacturing jobs is worth the benefit of low cost goods coming from abroad and keeping interest rates low.

What do you say?

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Add to that rapid advances in robotics and Artificial Intelligence/advanced analytics, and we are clearly in the midst of a game changing inflection point in supply chain.

But there is one more critical dynamic – the trade wars. It started with some campaign rhetoric, but has now transformed into something much more.

Will this also transform our supply chains, perhaps for decades? Or be seen as a minor blip after cooler heads eventually prevail? Hard to say right now. But a couple of weeks ago the New York Times wrote an article titled "Trade War Starts Changing Manufacturers in Hard-to-Reverse Ways."

I try to remain largely apolitical in this column, focusing on reporting and analysis, but it is hard to do that with this inherently political topic.

Of course, nearly all of this action comes from moves made first by the Trump administration. But, agree with the policies or not, the picture does not look pretty for the US trade in goods with China. As shown in the graphic below, that deficit soared again in 2018 to $424.5 billion dollars. Maybe more amazing, the cumulative trade deficit in goods with China since 2000 to nearly $5 trillion. Somehow, economists say, it all works out in the end because China buys lots of US bonds to fund our budget deficit. I guess.


The reality is this switch to Chinese sourcing has in fact been a major contributing factor in what one observer called a "carpet bombing" of US manufacturing areas, notably in the Midwest where I am from and still live. It has very negatively changed the fate of many states, a fact conveniently forgotten by many observers.

Maybe the closing off all those US factories was inevitable. Maybe automation is an even bigger factor than China. Perhaps at the macro level the pain in upstate New York, Ohio, Michigan, etc. from the loss of manufacturing jobs is worth the benefit of low cost goods coming from abroad and keeping interest rates low. But I am not sure of that.

To follow all the action, you almost need a guide. Here is a select history of the current trade wars, assembled in part with help of Reuters.

June 2016: Presidential Donald Trump announces his intention to address what he says are unfair trade practices from China at a campaign rally in Pennsylvania. Trump added that China's entrance into the World Trade Organization enabled the "greatest jobs theft in history."

March 2017: Now President Trump orders a review of US trade deficits and their causes.

Aug. 2017: Trump orders a "Section 301" probe into alleged Chinese intellectual property theft. Section 301 refers to the part of a 1974 trade law that lays out how the United States should enforce its rights under trade agreements.

Jan. 2018: Trump imposes tariffs on all imported washing machines and solar panels - from all countries including China.

March 2018: Trump orders 25% tariffs on steel imports and 10% on aluminum from all suppliers - not just China.

April 2018: Trump unveils plans for 25% tariffs on about $50 billion of Chinese imports. China quickly responds with plans for retaliatory tariffs on about $50 billion of US imports.

June 2018: The US sets effective date of July 6 for 25% levies on $34 billion of Chinese imports. It says 25% tariffs will also kick in on an additional $16 billion of goods after a public comment period. China responds with tariffs on $34 billion of US goods.

July 2018: United States unveils plans for 10% tariffs on $200 billion of new Chinese imports.

Aug. 2018: Trump increases the tariffs on $200 billion of Chinese imports to 25% from the originally proposed 10%.

Sept. 2018: The US implements 10% tariffs on $200 billion of Chinese imports. The administration says the rate will increase to 25% on Jan. 1, 2019. China answers with duties of its own on $60 billion of US goods.

Dec. 2018: The US and China agree on a 90-day halt to new tariffs. Trump agrees to put off the Jan. 1 scheduled increase on tariffs on $200 billion of Chinese goods until early March while talks between the two countries take place. China agrees to buy a "very substantial" amount of US goods.

Feb. 2019: Trump extends the March 1 deadline, leaving the tariffs on $200 billion of Chinese goods at 10% on an open-ended basis.

May 2019: The US does raise the tariffs on billions in Chinese imports to 25%.

June 2019: Trump ups the ante on China again, saying he'll decide by the end of the month whether to impose tariffs on another $300 billion in Chinese imports.

That's not all. Much more quietly, in June the US terminates India's designation as a beneficiary developing nation (preferential trade treatment) due to its failure to assure the US that it will provide "equitable and reasonable access to its markets" for US companies. That will also raise the cost of Indian imports into the US, as the imports will no longer be exempt from certain duties.

And for good measure, also this week the Trump administration warned it would start placing tariffs of 5% on imports from Mexico, rising to much higher levels if Mexico does not stop the flood of Central American refugees trying to enter the US by travelling through Mexico. However, it does appear a deal with Mexico on this topic

So after all of that, it's hard even for me to know what to say.

I will note that some of the predictions on the impact on the economy appear to be overblown, though there are now signs of some cooling. The May Purchasing Manager's Index, for example, fell to not much above the 50 mark the separates US manufacturing expansion from contraction and came in at its lowest level since October 2016.

The Atlanta Federal Reserve bank says its forecast for Q2 GDP growth is just 1.5%, actually up a little bit from an earlier estimate but still well below the 3.1% growth in Q1.

Is this the result of the trade wars? Many think so.

But then there this: Toolmaker Stanley Black & Decker is expanding its US manufacturing operations with a new plant in north Fort Worth, brings back production of its Craftsman brand tools to the US from China. The tariffs on Chinese imports are believed to have been a factor in the decision.

Whatever your opinion on all this, these are interesting times indeed.

I will have more thoughts in a few weeks on all this, but will end it for now by quoting a recent article in the Los Angeles Times that noted that "Officials on both sides of the Pacific have begun to portray the US-China relationship in nationalistic and emotion-charged terms that suggest a much deeper conflict" than one simply about trade and jobs.

And there is the real danger.

What's your opinion on the trade wars? Long term impact or minor blip in the end? What did you think? Let us know your thought at the Feedback section below.

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