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Global supply chains in 2018: What happened and why

The Supply Chain Daily provides a curated overview of Panjiva's research and insights covering global trade policy, the logistics sector and industrial supply chains.

Do tariffs work? Trump has planted seeds but has yet to harvest success
If the Trump administration's trade policy in 2017 was about making threats, then 2018 was about delivering on them. While the renegotiation of the United States-Korea Free Trade Agreement and the North American Free Trade Agreement, now the United States-Mexico-Canada Agreement, and the launch of tariffs were designed to cut the U.S. trade deficit, these programs have increased it by 18.0% in the 12 months to Oct. 31 compared to calendar 2016, reaching a record $869 billion in the 12 months to end-October.

The imposition of tariff rate quotas on washing machines and solar panels have cut imports in the three months to Nov. 30 by 50.7% and 10.7% year over year, respectively, while tariffs on steel and aluminum have only trimmed imports, by 6.5% over the same period.

The most pivotal event for the year, however, involved the duties applied to $360 billion of bilateral trade between the U.S. and China. The U.S.' 25% duties in July and August have cut imports of certain products from China 21.7% year over year in the three months to Oct. 31. But those applied by China cut U.S. exports 78.2%. The 10% duty round applied in September was followed by a rise in imports to the U.S. as a 25% tariff hike was anticipated, but then since delayed.

Taken together, U.S. imports of products on which tariffs were applied in 2018 have fallen by just 2.2% compared to a year earlier in the three months to Oct. 31. The success, or otherwise, of tariffs may only emerge in 2019. One winner in the meantime has been the U.S. Treasury as customs duties in November reached $6.29 billion, up 102.7% year over year.

(Panjiva Research - Policy)

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5 themes that shaped global supply chains in 2018
Amid turmoil in global trade policy, the logistics sector and industrial supply chains provided fodder for more than 1,600 Panjiva research articles in 2018. Distilling those, based on readership, revealed 12 significant events in five broad themes.

First, the U.S.-China trade war, whose initial details appeared in March but were not launched until September, have yet to be fully settled following the December agreement reached by President Xi and President Trump.

Second, U.S. tariffs on steel and aluminum raised challenges from March onward, while a lack of exemptions by the U.S. for the European Union, Canada and Mexico led to retaliatory duties against $23 billion of products from June.

Third, corporate reactions to tariffs focused initially on price increases rather than supply chain retooling, a trend that started to emerge July.

Fourth, a renegotiation of the USMCA was completed in October, but the phase-in of legislation and rules, particularly for the auto industry, will take years.

Finally, the logistics industry mostly avoided the temptation of costly M&A deals early in the year and laid to rest the specter of higher fuel costs with new fuel surcharges that started in May but have yet to be reflected in quarterly profitability.

(Panjiva Research - Industries)

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Deals done and not done: 2018's supply chain surprises
Global supply chains bring surprises every year, confounding even the hardest-working prognosticators. Panjiva research got (at least) five things wrong. First, the regional comprehensive economic partnership, or RCEP, trade deal in Southeast Asia was not passed, largely due to "Make in India" tariffs and may progress very little in 2019 unless such tariffs are removed.

Second, NAFTA overcame a January deadline to become the USMCA in October, but U.S. congressional politics and Canadian elections in 2019 may cause ratification challenges.

Third, the Trump administration did not use as many self-initiated anti-dumping cases as expected. However, the automotive Section 232 review proved sufficient to bring the EU and Japan to agree to hold trade talks during the coming year.

Fourth, consolidation among the freight forwarders was put on hold as volumes boomed but profitability fell. The key now may be integration with container lines, rather than mergers among forwarders.

Finally, none of Panjiva's expected "black swan" risks — ranging from conflict in the South China Sea to peak season strikes in the U.S. — came to pass, fortunately. The biggest risk in 2019 may be the least exciting: a global recession.

(Panjiva Research - Policy)

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Herman Miller will err on the side of caution and raise prices
Herman Miller Inc. is the latest furniture-maker to flag U.S. tariffs as a cost to its business in the coming year. CFO Jeffrey Stutz has said the company will "offset [higher tariffs] with the planned pricing" increases in January. Stutz also stated that tariffs on Chinese furniture exports of 10% will cut earnings by $2 million in the coming quarter, or 4.4% of consensus analysts' forecasts. Herman Miller relied on China for 57.0% of its seaborne imports in the 12 months to Nov. 30. An 87.5% year-over-year rise in imports in the three months to end-November reflects an expectation of — now delayed tariff increases. Should the higher tariffs remain in place, it may struggle to rearrange its supply chain, though leather-component and wooden-furniture supplies could be switched to the U.K. and Italy.

(Panjiva Research - Furniture)

Shiloh Industries makes a virtue of US tariff policies
Auto-component maker Shiloh Industries Inc. could be a net beneficiary of U.S. duties on steel and aluminum imports as well as potential tariffs on the automotive industry supply. CEO Ramzi Hermiz has said the company's laser-welded products can offset up to 60% of the steel and aluminum tariff impact on components made for Shiloh's customers. The U.S. automakers have been increasing their U.S. steel and aluminum imports despite tariffs, so may welcome Shiloh's services. The sector has increased seaborne imports 3.4% year over year in the 12 months to Nov. 30, led by Daimler, which rose 34.1%, and Volkswagen 12.7%.

(Panjiva Research - Capital Goods)

Programming note: The Supply Chain Daily will return in January with an outlook for 2019 along with the usual coverage of trade policy, the logistics sector and industrial supply chains.

Christopher Rogers is a senior researcher at Panjiva, which is part of S&P Global Market Intelligence. This content does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.

The Supply Chain Daily has an editorial deadline of 7:30 a.m. ET. Some external links may require a subscription. Links are current at the time of publication time. S&P Global Market Intelligence is not responsible if those links are unavailable later.