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Tariffs Are Throwing Punches, But Not Moving the Needle

July 26, 2019
It’s true the Chinese are taking a hit, but will it result in real change?

The current administration invoked tariffs on China with one primary goal in mind: to pressure China to adopt free-market trade practices. The tariffs were meant to be the lever for accomplishing this by negatively impacting that country’s manufacturing economy to that point that China’s government concludes it is better to align with internally accepted trade practices than to operate under ongoing tariffs.

To date, although we and the Chinese are back negotiating, there hasn’t been much indication that we’ve “moved the needle” toward achieving our goal. According to a couple of recent articles, however, China is starting to see a negative impact with Chinese manufacturers’ export sales declining significantly.

The July 10 Bloomberg article Walmart’s Supplier Says China Factories in Desperate State has the CEO of supplier Li & Fung Ltd predicting that more factory shutdowns will occur in China with the trade war.

The article speaks of “growing signs that the global supply chain … is being permanently transformed.”

My perspective on this is that the lever of tariffs will eventually work to a point, but the U.S. will not end up with all that it is asking for. Hopefully the concessions will be more step-function than incremental, but that has yet to be seen.

Incremental would involve agreements regarding tariffs and duties only on a few specific products. For instance, China would agree to start buying U.S. soybeans and apples.

Step function would be more wide-sweeping, such as an agreement that China wouldn't manipulate its currency and the two countries would reach an overall balance of trade agreement. This would of course influence future tariff policies by both governments. Step function would also imply that the agreements are verifiable and provide for some formal construct for monitoring/verifying.

If indeed the changes the Chinese commit to are incremental, I believe the tariffs will be seen as a failed tactic. Let’s hope for the best.

According to a May 2019 survey by the U.S. Chamber of Commerce in China (AmCham), about 41% of member companies surveyed are “considering or have relocated manufacturing facilities outside China.” But less than 6% of members were considering reshoring in the U.S. Southeast Asia and Mexico were the top locations.

In article in USA Today that references the survey, financial reporter Yan Zang wrote that the U.S. gives countries like Cambodia, India, Indonesia and Thailand preferential—meaning tariff-free—treatment “to help them grow their developing economies”. She theorized that U.S. manufacturers are still reluctant to turn their backs on China, however, “because it's the world’s second-largest economy and biggest single market for many businesses.”

Paul Ericksen's columns are part of IndustryWeek's Supply Chain Initiative.

While it makes sense that companies would want to be located “local” to China to try to better service that market as it expands—build where their customers are—it worries me that U.S. corporations are falling into the same old practices that got us into the situation we have with China. Namely, by not developing a business case based on both total cost and potential revenue, they will continue to source in low-wage—not low-cost—countries. I suspect that many of these factories that are relocating primarily service the U.S. market.

Also, continuing to give countries preferential “duty-free” access to our domestic market is just one indication of our government not standing up for American workers.

I heard from readers on my story Boeing’s $9 Workers Don’t Come Cheap, on the hidden costs of white-collar outsourcing.

Jenny in Tulsa, who with her husband owns an engineering & quality services business in Tusla, wrote that, “on a regular basis we actually have to re-work what the Indian companies have done, costing the aerospace companies and suppliers more time and substantially more money. … We actually use rework of Indian programming as a marketing platform.”

She added that she also struggles “with the legality of using this cheap labor when it comes to ITAR and ISO/ASO federal requirements. Where are the FAA and other regulators (such as the Department of Defense) U.S. programming companies like ours must deal with?”

“I could go on and on,” she continues, “but I wanted to acknowledge your article because it is the first article I have read in almost seven years which was accurate and honest. Cheap labor is not the answer but our politicians and expensive CEO’s control the rules which only hurt American employees … People should come first, not revenue.”  

Mike in Massachusetts agreed with my statement that $9-hour workers’ “communication and collaboration is usually inefficient ---- due to the language, culture and a lack of understanding of product function; i.e., they just work to a spec.”

“I managed an offshore/outsourced software project where the requirements were not well-documented and the performance not well specified, so the vendor delivered what they thought we wanted, which was useless in a real-world application,” he commented.

Chuck Trentham, long-time colleague of mine who has passed away, once referenced a quote, attributed to19th-century thinker John Ruskin, that I think goes a long way in summarizing the above:

There is hardly anything in the world that someone cannot make a little worse and sell a little cheaper, and the people who consider price alone are that person’s lawful prey. It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money — that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot — it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.

And I guess, as the old saying goes, “You get what you pay for.”

As I’ve said before, feedback of any kind (positive or negative) generally provides extra insight into current supply management issues. To that point, keep providing your perspectives on the topics I discuss in the weekly recaps and my monthly articles.

Paul Ericksen is IndustryWeek’s supply chain advisor. He has 38 years of experience in industry, primarily in supply management at two large original equipment manufacturers.

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