By Chris Sevcik
The question on everyone’s mind is: when will the current US-China trade dispute end? The answer is no one knows for sure, but many scholars believe that a broad trade agreement is not likely before the 2020 US presidential election. China experts believe that China feels that President Trump is not a reliable trade partner, and President Trump will want to look tough on China while campaigning. The United States does not want to allow more technology to be transferred to China to fuel its economic and geo-political rise. China will be meeting with the US in early October to talk; however should no deal be accomplished and the dispute continues forward, it is likely that more tariffs will ensue. This will impact companies regardless if tariffs are targeted towards their industry.
Without a firm trade agreement in sight, understanding how the situation started, what has transpired since and how this has shifted global supply chains is crucial for every business. While some companies may have been impacted by this shift already, it is vital to understand how it is unfolding to ensure that your company will prosper in years to come.
The current trade dispute has been going on for well over a year, but one of its core issues has been impacting business for decades. With a population of over one billion and an expanding economy, China has been an attractive area for business expansion for many US firms. In order to enter into the Chinese market, some international companies have been willing to make sacrifices including transferring technology to Chinese partners or disclosing confidential information for product approval needed to sell within China.
One of the original core issues of the current US-China trade dispute is safeguarding US intellectual property in future years. While most individuals in the US may not feel the impact of the loss of intellectual property, it has impacted business. According to a CNBC Global CFO survey, 22% of respondents indicated that their company has been a victim of IP theft from China within the past year.
It is hard to determine if intellectual property will be concluded with the current trade dispute; however, for some companies this may not be an issue as they explore different markets. The length and severity of the trade dispute is altering supply chains. From manufacturing to agriculture, global supply chains are adapting to the current situation.
Companies should understand how global supply chains have been altered to best determine their future path. No matter if an organization is supplying to farmers in the US or manufacturers in China, global supply chains are changing and understanding where your future customers are located will ensure your success.
Agriculture in the United States has been impacted by the current trade dispute. When one source is closed off, or becomes too costly, another source will rise. In the case of soybeans, this new source is located in Brazil. Companies that supply to soybean farmers may find it useful to look at expanding to Brazil. Further growth for these companies may be found in diversifying product lines. As more US soybean farmers shift to producing corn, increasing products designed for corn production will be advantageous for sales to the domestic market.
Rare earth is used in countless products from iPhones to wind turbines. The main producer of rare earth in recent years has been China. Many companies have worried that if the trade war continues, rare earth could be restricted and impact numerous industries. This situation has played out in the past when China restricted the export of rare earth in 2010. It was not as problematic as many had feared. Today it would have an impact in the short term; however, there has been a recent surge in stockpiling that would mitigate the issue. In the long term, other countries have rare earth and the ability to extract the resource. The issue has been that it is a labor intensive and toxic process; therefore, the United States and other countries have closed down many of their mines and allowed for production to move to China. If China bans rare earth exports, and there are no other solutions, mines will reopen and production will be relocated to other countries including the United States, Australia, and Brazil.
China has long been a global manufacturing hub. Manufacturing has been slowly moving out of China to countries like Vietnam and Bangladesh for the past several years as wages have increased and the Chinese currency, RMB, has become stronger. With the current trade dispute, low, mid and high-value manufacturing is shifting faster to Southeast Asia and India. Companies who sourced components manufactured in China, used contract manufacturers based in China, or supplied to these companies will find it advantageous to look at entering markets in Southeast Asia and India. Understanding those markets will ensure suppliers future success irrespective of the duration or final result of the current trade dispute.
As the global supply chain shifts, new issues will arise from the lack of qualified manufacturing facilities or skilled labor to logistical challenges and inadequate infrastructure. These are concerns that many companies will face; however, they are also opportunities. Infrastructure will have to be improved in multiple countries and those countries will be looking for partners to help them design and construct their new power plants, roads and ports. New manufacturing facilities will have to be designed and constructed. These new facilities will utilize components sourced from across the world. People will have to be trained to work in these new industries, some through remote training and others with online seminars. As people are hired in these new fields, their disposable income will raise and they will purchase more goods and better quality products. There are multiple new areas of growth for companies with the shift in global supply chains.
Regardless of a company’s product or service, knowing how global supply chains are changing and understanding the new markets where they must conduct business ensures that companies will continue to thrive.
(Below is a timeline showing global supply chain and manufacturing shifts and its impact on specific industries and companies)