In our recent Virtual Panel: Geopolitics, Trade Wars, and the Pandemic, we put together a panel of top geopolitical and foreign affairs experts as well as procurement and supply chain leaders to address the top questions in the minds of supply chain leaders. Moderated by Resilinc’s CEO, Bindiya Vakil, the panel discussed what the future holds for manufacturing firms and their supply chains.
Among the experts’ consensus forecasts:
- Conflict with China will continue and may increase under the Biden Administration, as the new president will likely seek to build coalitions with other Western democracies to confront China on trade and geopolitical issues;
- China’s domestic market will continue to draw greater investment from large foreign firms, especially automakers;
- Diversification of China-centric supply chains will continue, with Mexico being one of the more favorable locations for U.S. manufacturers;
- Nations will continue to use tariff increases and other trade policies as weapons in larger political disputes.
The panelists agreed – with some nuanced differences – that contemporary trends in trade relations represent a significant shift from the liberalization that characterized most of the last 25 years. “Brexit has to be understood as a consequence of a pattern,” of citizens and leaders seeking to reclaim sovereignty, said Tom Derry, CEO of the Institute for Supply Management. “A lot of barriers to global commerce were eradicated [in the 90s and early ‘00s], but that was sort of an aberrant period in history. We’re going back to an environment where … geopolitics will be a factor in how you manage your business.”
Ari Fridman, senior associate with Hogan Lovells and a former congressional investigator, pointed to a “proliferation of reciprocal tariff actions” between countries, especially Japan and Korea, which are in conflict over the sufficiency of Japan’s apologies for forcing Korean women into prostitution during World War II. In this and other cases, “geopolitical issues are being mixed with trade actions and it’s hard to separate the two,” said Fridman.
Robert Kyle, also with Hogan Lovells and a former senior staffer in the Clinton White House and Congress, averred that it’s still an open question whether the recent backtracking on trade liberalization represents “a speed bump on the way to greater multilateralism … or an inflection point” in a long-term movement.
“There’s no question that multilateral trade policies in many countries have taken a hit,” said Kyle. To rebuild a pro-trade consensus, “governments will need to demonstrate to citizens that a more open multilateral trading system does benefit them.”
Kyle posited that President-elect Biden will make “rebuilding American competitiveness and the American economy,” his top priority, with trade policies taking longer to solidify. But he advised importers not to expect Biden to lift Trump’s 25 percent tariffs on Chinese goods. “I don’t see the new administration lifting those anytime soon, nor unwinding the phase one deal in which China is going to buy $200 billion worth of goods and services from the U.S.”
To this, Fridman added that geopolitical crises could well prove disruptive as Biden’s team develops its China policies. “Like every new U.S. administration that wants to be deliberative with China, there will probably be external events that shake up the status quo and force the administration’s hand with respect to China,” he said.
Panelist and supply chain thought leader, Tom Linton (previously CPO of Flex and a current adviser to Resilinc), emphasized the economics behind the shift away from China-centric supply chains. “Since the Great Recession of 2008-2009, we’ve seen what I call a post-global shift, not so much because of politics or tariffs but because costs have been rising in places like China,” said Linton. He and Derry highlighted Mexico as a favorable country for U.S. manufacturers to develop near-shore suppliers.
“The direct labor costs there are not far off from what they used to be in China,” said Linton. Closer proximity can reduce logistics costs and improve fulfillment, especially for heavy items, according to Linton. Derry emphasized the technical capabilities of Mexican manufacturers. “Mexico has become an advanced manufacturing destination, particularly in automotive, aerospace and defense,” he said.
“Regionalization of supply chains is a strategy that more and more U.S. supply chain managers will consider,” said Derry. While China’s manufacturing capabilities and its enormous domestic market will make “China plus 1” a principal strategy for many firms, other economic drivers will incentivize more regional supply chains, according to Derry.
To facilitate U.S. companies investing in domestic manufacturing, Derry hopes Congress will retain the 2017 tax cuts. “As corporate taxes were reduced, the U.S. became more tax-competitive relative to many other jurisdictions. It’s important that it stay that way. … Taxes are a huge driver of supply chain locations.”
Linton reflected that while the pandemic was a huge disrupter of supply chains, this business will “always have a crisis de jour.”
“Because there are so many layers in supply chains, multi-tier visibility is table stakes for supply chain managers today,” said Linton. For those lacking such visibility, “you’re driving your car at night at high speed, with no dashboard lights and no headlights.”
Linton concluded by recommending the book NonZero: The Logic of Human Destiny by Robert Wright, which argues that human morality and collaboration have consistently improved over time. “I don’t believe there will be major conflicts on the near horizon,” said Linton. “There will be incidents and accidents that cause problems, but I believe there’s a general will for co-prosperity between the U.S. and Asian countries.”