We are currently in a trade war with China. I believe it is justified and I am thankful that the current administration has stepped up to address that country’s unscrupulous trade practices. On the other hand, while I would hope that the U.S. would achieve all of its objectives in this war, in no way do I think we will force China to convert to completely open free market. In my mind this shouldn’t be our goal or expectation. Why?
No country in the world runs their economy as a totally free market, including the United States. For instance, we have tariffs on some metals that the current administration think are strategic to our position in the world. In fact, if you were to look, just about every country has pet industries that it wants to protect. And I think this is OK.
I’m not talking about things like the French government’s subsidies to Airbus. Rather, I’m talking about things such as Canada’s dairy industry. Just as we feel that steel production in this country must be protected, the Canadian government has taken actions to protect its dairy industry. Would we be willing to eliminate tariffs on steel imports? I doubt it. So why should we expect Canada to stop what it is doing to protect the dairy industry?
But, for the most part, tariffs or other subsidies on these pet industries are the exception rather than the rule. The issue, then becomes, whether or not a country relies on such actions as a foundation of its trade practices. This is the sort of thing that if unchecked will cause countries with actual competitive advantages to struggle to compete. For instance, is it fair for a wire harness manufacturer in Monona, Iowa, to have to compete not only against foreign wire harness manufacturers—but also against those foreign manufacturers’ governments, who offer raw materials at sub-market prices and provide export rebates to their domestic manufacturers? I saw that happen and the result was not pretty.
But that being said, I don’t think it a wise strategy to initiate trade wars against a country that is only protecting a pet industry rather than using government intervention in the economy as a competitive strategy. Why? Because like it or not, we are part of a world community. If we elect to operate as a totally independent entity there will be unintended consequences. What do I mean by this? I’ll use a couple of examples.
The first example involves China and North Korea. A few years ago, North Korea hacked Sony because they had produced a movie – a comedy – that they didn’t think was funny. I can understand this a bit since the theme of the movie involved assassination of their leader. But the hacking couldn’t be left unchallenged. At the time, President Obama called the head of the Chinese government and asked for a favor. People may not realize that North Korea internet is supported by a single China ISP. Obama asked for China to shut down North Korea’s access to internet for a period of time to warn them that there will be consequences for such actions. China complied. The North Koreans got the message.
The tariffs on Chinese goods are a necessary step to bring that country into line with international trade standard. On the other hand, I believe it will have a generational impact on the feelings the people of China have towards the United States, and it won’t be favorable. Every day, China is becoming a bigger player on the world stage. At some point going forward they won’t have to unilaterally back down to any country. How likely would you think China would be going forward to help the U.S. teach countries like North Korea a lesson? I wouldn’t hold my breath.
A second example is our former nuclear treaty with Iran. Make no mistake, Iran is a bad player in worldwide affairs. On the other hand, there has always been the threat of their gaining nuclear capability, which would also be a very bad thing. The only two approaches to stopping or delaying this would be acts of war (or even a real war) or negotiating. In good faith, the Obama administration brought a group countries together that had relations with Iran – including Russia – and hammered out an agreement that would put off any Iranian nuclear development for 15 years. Without the involvement of these other countries, it is likely that no agreement could have been reached. The agreement was backed up by a requirement of inspections to confirm whether or not Iran was abiding by their treaty obligations. And they were.
The new administration basically cancelled the treaty, leaving both Iran and our negotiating partners hanging. As part of this, the United States increased the economic pressure on Iran to conform to our expectations. We asked our negotiating partners to align with the same strategy. Can you blame them for not doing so?
Whether or not you agree with the former treaty, unilaterally cancelling it created a chasm between our country and those we would like to consider allies. Allies typically support each other in world affairs. But pulling the rug out from under them is no way to get maintain that type of allegiance. And going forward, they will likely be resistant to participation in negotiations with us on issues like Iran. With negotiation a less likely option, the pressure to take warlike actions will increase. And most of this citizens in this country are generally not in favor of war.
So how does this all related to supply chain management? I have no inside information but there have been indications that once we are done with the trade war with China, we move on to other countries using the same or similar tactics. This will be done with countries that we could formerly rely on as allies.
You may ask, “What are the indications you talk about?” How about the administration’s threats last year to put tariffs on imported cars from Europe, Japan, Korea, etc. I’ve previously written on this and there really is no justifiable basis for taking such an action. Yet I consider a very likely possibility. I also would consider it a very bad mistake.
On the practical side, it would create havoc in the supply chains between the two countries, as is currently happening between the U.S. and China. Why? If tariffs are imposed on foreign automobiles, the effects will significantly negative impact all suppliers to these companies, including suppliers from the United States.
On the more subtle side, there is the question of having allies to support our political goals in the world. The likelihood of gaining such support – as when NATO countries have contributed troops to fight in places like Afghanistan – is less likely. That would be an unintended consequence and bad for this country.
Another less subtle result would be that the world would picture the United States as a bully, rather than the “beacon on the hill” that we have been to some many countries for some many generations. Do we really want to abandon that sort of standing but putting our head in the sand? I hope not.
So let’s be realistic and let countries take care of their pet industries and only threaten trade sanctions if a country – like China – goes too far in bending the free trade rules.
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.