Trade wars will mean supply chain pain

In its attempt to bring China to heel, the administration could do great harm to U.S. importers and their supply chain partners.

Abraham lincoln once said, “Give me six hours to chop down a tree, and I will spend the first four sharpening the ax.”

Honest Abe understood the importance of preparation. If you want good results, you must take the time to prepare properly before acting.

The current administration should heed this advice, as it certainly has failed to prepare for the possible ramifications of its ongoing trade wars, particularly those with China.

Most would agree that China has not always played fair when it comes to trade, and the president wants to force China to do so or face consequences. That’s why in late September he imposed the infamous 10-percent tariff on some US$200 billion worth of Chinese goods. But in its attempt to punish China, the administration is harming U.S. importers and their supply chain partners.

Anticipating such a move, many importers have been stockpiling inventory. But once those stocks are depleted, the new tariffs will cut drastically into margins, forcing importers to raise prices or make aggressive cuts throughout their supply chains. Some are looking at alternative markets to supply goods. But moving contract manufacturing to a new country cannot be done overnight.

Trade wars also disrupt transportation. Ocean carriers and ports may suffer if importers cut back on shipments. Railroads and trucking lines that haul those goods cross-continent may also see disruptions, with thousands of jobs at risk.

The president would like to see many of the products currently manufactured overseas return to U.S. factories. Wouldn’t we all? But that’s not a practical plan, considering we don’t currently have the industrial infrastructure to support it. With an unemployment rate of around 4 percent, we also don’t have workers to staff those factories.

While the goal of building up U.S. manufacturing capability at home is laudable, there are better ways to go about it. Rather than punishing companies that do business with China, wouldn’t it be better to provide incentives for firms to build the infrastructure needed to boost U.S.-based manufacturing? With a lack of labor to staff such expansion, automated equipment will have to fill the gap. Government can and should encourage the growth of industries that create new technologies that make it cheaper to produce and distribute products here at home.

Mistakes are made when governments move without proper consideration of their consequences. Abe Lincoln also addressed the need to avoid hasty decisions when he said, “Nothing valuable can be lost by taking time.”

For a president who likes to compare himself with Mr. Lincoln, our current chief executive should take his words to heart.

Source: https://www.supplychainquarterly.com/columns/20181015-commentary-trade-wars-will-mean-supply-chain-pain/

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