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 and draws from global shipping and freight data.
Fighting on several fronts: Supply chain strategies in 2020
Corporate supply chain managers have had to make strategic decision making in the face of the uncertainty generated by the U.S.-China trade war in the past two years.
Looking ahead, they face a widening number of challenges including: the implementation of the "phase one" U.S.-China trade deal; a potential trade conflict between the U.S. and EU; as well as trade liberalization elsewhere in the world.
Businesses generally now see trade policy volatility as business-as-usual, with just 20.9% of firms discussing tariffs or Brexit in conference calls during the fourth quarter of 2019. That was the lowest since the second quarter of 2018.
There are at least five main corporate strategies for dealing with tariffs.
Lobbying and appeals for exemptions from tariffs will remain vital, though only 3.1% of appeals against U.S. list 3 tariffs on Chinese exports have been accepted. Those that have been successful have had strong political positioning.
Inventory building ahead of new tariffs is largely a spent force, with U.S. inventory growth of 2.8% year over year in November being the slowest since July 2017. Inventory growth may fall given U.S. seaborne imports dropped 8.5% year over year in December 2019. That said, companies such as Pernod Ricard SA are still using inventory management as tariffs spread as a result of deteriorating U.S.-EU relations.
Tariffs are paid by importers but the economic burden is shifting. U.S. import prices from China fell 1.8% in December 2019, though producer and consumer price inflation are increasing, suggesting that some of the tariffs are being paid for by consumers. Consumer firms including Best Buy Co. Inc., Wolverine World Wide Inc. and Costco Wholesale Corp. put prices up.
Supply chain restructuring can take years rather than months to apply. However, there is a continuation of an apparent "anything-but-China" shift that has also been driven by cost cutting and market localization and has simply been accelerated by tariffs.
Some companies have moved rapidly. The share of Giant Manufacturing Co. Ltd.s bicycle shipments to the U.S. from China fell to 43.9% in 2019 from 89.1% in 2016, while retailers like Costco have moved more slowly. Reacting to a U.S.-EU trade war may be more complex.
Over the longer term, supply chain flexibility is key to dealing with uncertain trade policy. That said, risk managing diversity in supply needs to be offset against unnecessary costs. U.S. supply chains may already have passed peak complexity.
The number of shippers and consignees using seaborne trade rose by 9.0% in 2018 versus 2009 but has since fallen by 4.0% in 2019 versus 2018. Similarly, the average number of shippers per consignee increased to a peak in 2015 but has since fallen by 3.5%.
First shots or fast friends: What to expect from Davos
The World Economic Forum event at Davos from Jan. 21 to Jan. 24 could be pivotal for U.S.-EU relations. U.S. President Donald Trump's keynote on Jan. 21 will likely focus on recent deals with China, Japan and South Korea, as well as the signing of the U.S.-Mexico-Canada Agreement, but could also set the tone for dealings with the EU.
A meeting between EU Commissioner Phil Hogan and U.S. Trade Representative Robert Lighthizer last week did not appear to have provided a reboot to relations, while meetings between Treasury Secretary Steven Mnuchin and Finance Minister Bruno Le Maire this week will show whether the digital services tax issue will become a running sore between the U.S. and EU. The U.S. remains focused on the trade deficit with the EU — particularly the $177.7 billion goods deficit in the 12 months to Nov. 30, rather than the $54.1 billion services surplus.
While attention has focused on autos and agricultural issues in EU-U.S. talks, healthcare products will be vital to future dealings. Pharmaceuticals and medical devices or equipment accounted for 19.5% of U.S. imports from the EU after 11.5% year-over-year growth. Leading EU exporters including GlaxoSmithKline PLC, Novartis AG and Koninklijke Philips NV will presumably be hoping for improved relations and export opportunities.
Outside U.S.-EU relations, the future of the World Trade Organization, the greening of trade deals exemplified by the EU's carbon border tax and ways to reflate global trade — which likely fell 2.3% year over year in the 12 months to Nov. 30 — may be matters for trade policy discussion by World Economic Forum attendees.
After the dust settles: Views on the "phase one" trade deal
Panjiva Research took part in a Reuters Global Markets online forum on Jan. 17 which discussed the phase one trade deal between the U.S. and China. This report includes the Q&A from the online event.
China's decision to sign what appears to be a one-sided deal seems driven by a desire to stop the incremental damage caused by continual tariff increases.
Tracking implementation of phase one in terms of purchasing commitments and policy reform is simple enough given the data available, but the enforcement terms remain far from clear, leaving significant uncertainties for business investment and planning.
Investments in other countries such as Vietnam may not slow — tariffs have just accelerated previous supply chain realignment strategies. The forthcoming U.S. elections are unlikely to change the country's tough-on-China stance given recent comments from Democratic Party primary candidates.
China's energy purchases from the U.S. should not disrupt global markets outside of shipping, assuming total demand does not change.
The prospects for further U.S.-China negotiations are far from certain. China's government is unlikely to change its entire economic model while long-term rivalry between the two countries is more about technological progress. With four U.S. government departments already looking to restrict China's access to high technology, an unwinding of the trade war looks unlikely for now.
Burden sharing shifts as US import price deflation slows
U.S. trade prices staged a rally in December 2019 with import prices rising 0.5% year over year, the first increase since March last year. Yet, that's been largely down to food and fuel price volatility with underlying import prices down 1.3%. The falling prices have largely been driven by imports from Asia, including China where deflation has remained constant at 1.8% throughout the fourth quarter.
The composition of deflation — in part reflecting burden sharing of tariffs between Chinese exporters and U.S. importers — has shifted somewhat. Import prices for footwear, where 15% tariffs were applied in September 2019 but will be cut to 7.5% in February this year, fell by 1.4% year over year versus a 0.6% slide in November.
For furniture meanwhile — where tariffs were increased to 25% in May 2019 and won't be cut under the phase one trade deal — prices fell by 2.6% from 2.2% a month earlier. That's been offset in the aggregate by slowing price declines in industrial supplies — chemicals price deflation contracted to 5.5% in December from 6.6% in November.
Christopher Rogers is a senior researcher at Panjiva, which is a business line of S&P Global Market Intelligence, a division of S&P Global Inc. 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.
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