RiskTariffs, trade wars and the impact on the global supply chain

Tariffs, trade wars and the impact on the global supply chain

A recent poll of 100 chief executives and chairs about the potential impacts of tariffs and trade wars offers interesting reading, highlighting organizations' concerns over rising protectionism and the destabilizing implications for the global supply chain.

The trade war between China and the US, like any war, will have winners and losers. Tariffs restrict purchasing power, meaning consumers will face higher prices and slower growth. US Consumers are affected as producers face increased costs of raw materials, like steel and aluminium. The same goes for Chinese soybean producers and importers who are now buying Brazilian soybeans. But Brazil can’t meet demand, so the US is now exporting to Brazil to cater to this backfill. Interesting times!

However, in the short term at least, tariffs and rising protectionism look set to stay. With China and the US caught in a “tit for tat” of protectionist measures and retaliation in the form of further tariffs, industry, agriculture and technology are feeling the pain. The US may benefit from infrastructure, technology and wealth but China has population on its side, making both strong players.

Recently our firm asked 100 chief executives and chairs about the impacts on their companies of tariffs and trade wars. Over three-quarters (77%) expressed concern, with almost one in five “extremely concerned” about the effects on their international business. Those in the financial services and industrial sectors worried most. However, when asked about the impact of the rising strength of China on prospects for UK-based businesses, almost 70% thought this broadly positive. From the boardroom then, protectionism rather than shifting balance of power, is the key issue.

From the boardroom, protectionism rather than shifting balance of power, is the key issue

For the first time in almost a generation, boards of multinational companies are waking up to the fact that effective and strategic management of global supply chain and procurement has become “mission critical” and vital to manage costs. Geopolitical concerns have moved centre stage and heads of supply chain capable of navigating today’s choppy waters are a prime requirement.

Knock-on effects

In our discussions with heads of supply chain at multinationals, many have told us their companies will suffer in the US and China if global supply chains are affected by higher prices and trade disputes. Automotive industries will feel the impact of Trump’s steel and aluminium tariff on raw materials.

Indeed, Ford Motors has already announced an expected $1bn loss by 2019 year end.  MillerCoors expects to lose $40m in profit, and others bottling product are likely to follow suit. The cost of products from companies like Apple may rise. Companies with flexible production systems and a choice of manufacturing sites, especially across US and China, may fare better.

All this is challenging for companies. From a sourcing point of view, some organizations can look elsewhere, but consumers, workers and smaller firms will nonetheless feel disruption – with jobs lost, firms going bust and investment slow. The fact that nearly 40,000 requests have already been placed in the US for tariff exclusions highlights the negative impact. The need for such exemptions is proof that the policy is failing and will only lead to further corruption and market hostility.

Boards need to be politically active and give voice to how policy impacts their company’s financial performance and product

Meantime boards need to re-evaluate their value chain and identify alternative sources. From a talent perspective, in the age of captive markets and trade disputes, leaders need to be sharp, forward thinking, strategic and risk-minded. Contingency and scenario planning must be consistently on the agenda.

Boards need to be politically active and give voice to how policy impacts their company’s financial performance and product – because this may influence wider public opinion and debate. Meantime leaders managing supply chain need antennae attuned to political change, potential for trade wars and be fleet of foot. They may need, for example, to build future supply in “safer” locations.

The world is most economically efficient and profitable operating in free markets and key players at the table should be leading this. The global market cannot operate effectively when two of the most dominant players are head to head – but business must go on. Trade wars have achieved one thing. Strategic and effective management of global supply chains is now mission critical – vital to manage costs – and high on the agenda in the boardroom.

 

About the author

Lucy Harding is head of procurement & supply chain at executive search firm Odgers Berndtson.

 

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