Anti-globalisation and its effect on supply chains
Following the 2008 crash, the world has seen a steady rise in anti-globalisation and populist sentiment, with free trade being blamed for everything from rising unemployment and decreased wage growth to rising immigration and forced technology transfer. This has led to a rise in protectionist measures in economies across the globe with Global Trade Alert finding that since 2008 there have been in excess of 1,000 protectionist measures implemented globally. These range from increased tariffs, subsidies and non-tariff barriers to export bans.
The uncertainty created by the growth of protectionism and anti-globalisation is also having an adverse impact on investment decisions, with potential investors either diverting investments to other countries or reducing foreign investments altogether.
However, the most striking impacts are likely to be in the adjustment of supply chains in response to growing mercantilism. This article will focus on the two mercantilist developments that are likely to have the largest impact: the US-China trade war, and Brexit.
China and the US
In recent months, global supply chains from Asia to the US have seen significant disruption due to the ongoing trade war between the US and China. Whilst the two global economies are in discussions to resolve the dispute this has provided no comfort to US importers who have been front-loading imports in a bid to avoid the next round of tariff hikes due on 1 March 2019. If the threatened tariffs are implemented, US importers will be facing tariffs of 25% on $200 billion worth of Chinese goods including various food products, minerals, ores, chemicals, paper, textiles, machinery and electronics, metals and metal products.
The front loading has led to significant congestion at US ports which are struggling to deal with the surge in imports ahead of the March deadline. A further concern is that if the increased tariffs are introduced, container volumes to the US from China will drop significantly, ultimately affecting the financial viability of US ports which had rapidly expanded to accommodate an influx of Chinese goods following China’s accession to the WTO in 2001.
The effects of the trade war are not limited to China and the USA. Firms further down the supply chain will also take a hit as the US and Chinese companies to which they supply components reduce production. However, third party countries may also benefit from significant opportunities. With firms from both China and the USA facing punitive tariffs, the relative competitiveness of firms in other countries is boosted, leaving them free to step in to replace the now less competitive US and Chinese firms. A recent study by the United Nations Conference on Trade and Development finds that the European Union is likely to benefit the most, with firms there capturing about US$70 billion of US-China bilateral trade, but with other Asian countries such as Japan, the Philippines, Vietnam and Australia capturing significant shares of trade relative to the size of their exports. Whilst low cost manufacturing was already shifting from China to South East Asian nations, this has accelerated in light of the ongoing uncertainties about China’s trading relationship with the US. The effect of this trade diversion is to create new trade routes with new and novel demand for logistics support. Shipping lines have already begun removing capacity on Trans-Pacific trades and have recently made announcements regarding their renewed commitment to growing intra-Asian trade.
The UK and Europe
In Europe, the Brexit deadline of 29 March looms large with the UK seemingly on a course to exit the European Union with “no deal”, leaving both the customs union and single market and leaving the UK to trade with the rest of the world on the minimum terms of the WTO agreements. This has already had a significant impact on UK businesses with companies such as Sony and Panasonic having already made the decision to relocate their operations to countries within the EU.
The companies that remain in the UK, particularly those whose main import or export market is the EU, will now face a completely new regulatory regime of customs checks and associated bureaucracy that many will never have had to deal with before. There is considerable concern that the UK simply does not have the resources to deal with such demand and delays in processing times are likely to be significant. This in turn will have a significant adverse impact on companies with a “just-in-time” logistics model and will require supply chains to be remodelled.
Some estimates suggest that the UK will need 3-5 years to develop the necessary infrastructure and expertise to deal with the necessary customs checks for EU trade so a high level of disruption is expected to continue in the short-medium term.
The liberalising approach of the rest of the World
With the world’s two largest economies at loggerheads and the European Union facing its first ever defection, one might be tempted to assume that the golden age of globalised free trade is over. However, the rhetoric from President Trump and other anti-globalists has seemingly spurred on a spate trade liberalising initiatives, such as:
- The Comprehensive and Progressive Agreement for Trans-Pacific Partnership, revised following the withdrawal of the US in 2017, which entered into force on 30 December 2018; and
- The EU’s continued push to expand its programme of bilateral trade agreements. The EU recently concluded free trade agreements with Japan (which came into force on 1 February 2019), Singapore and Vietnam.
These large deals suggest that there remains a strong appetite for free trade and further liberalisation in the majority pf the world’s economies.
As the success of the logistics industry is premised on the maintenance and growth of international trade, any increase in trade protectionism is a cause for concern. However, with large economies such as the EU seeking further trade liberalisation measures as a counterpoint to the protectionist moves of the US, it is by no means certain that the current high level of protectionism will become the “new normal”.
The volatility in international trade may even create opportunities for logistics companies to enter new markets as trade is diverted and demand for new trade routes grows. Logistics operators will also have the opportunity to market themselves as an essential resource in an environment of increased trading uncertainty as they can support importers and exporters in becoming as agile as possible, allowing their customers to access diversified sources of supply as a means of mitigating trade risks.
Technology is also likely to become a growing asset, particularly technology that allows visibility along the supply chain, enabling suppliers to see problems as early as possible and to take the necessary steps to remedy that problem. Logistics operators with strong technology offerings are therefore likely to be well-placed to benefit from the current volatile trading environment.
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