Loading ...
While a new $20 billion free-trade pact between the U.S. and South Korea got all the press last week, the Bush Administration this week announced plans to levy new duties on imports from China.
The uncharacteristically protectionist move comes just as sourcing from China has reached an all-time high. U.S. trade deficit with China hit a record $233 billion last year. Supply managers elsewhere are not immune from the China-import backlash effect. The European Union has also begun to boost duties on certain goods from China.
The new duties, which are in response to anger over China’s export subsidies, also come as an increasing number of manufacturers are reporting rising supply costs. The added tariffs could eat away at the much ballyhooed “China price,” the 20% to 50% discount that initially prompted supply managers to source from the region.
However, the sky isn’t falling just yet. In the U.S., the new duties will initially apply to imports of coated paper from China. In the EU they apply to certain clothing items. But free-traders fear that the move will set a precedent for steel companies, textile producers, and other manufacturers to apply for the same protection. (In fact, the American Iron and Steel Institute (AISI) and Steel Manufacturers Association (SMA) are already calling for the Administration to extend the same protections to steel products.) And several bills in Congress would requrie the Commerce Department to apply countervailing duties to non-market economies, such as China and Vietnam.
Supply managers should keep a close watch on the major manufacturing associations – including the AISI, SMA, the National Textile Association – and U.S. Commerce Department actions to predict if and when duties may be applied to your own Chinese imports as well as those of your suppliers. Also pay attention to China-U.S. trade talks in Washington next month.
6 responses so far ↓
1 Jeff Wincel // Apr 16, 2007 at 2:17 pm
I’ve never been an advocate of the rush to low cost region sourcing, especially China. The protectionist moves that we are now seeing in Congress are more accurately enforcement of the conditions of China’s entry into the WTO. Part of those conditions was not only the intellectual property protection now being discussed, but also the full funding of the Chinese currency reserve.
Most purchasing professionals will tell you that the cost advantage from China, when viewed from a net perspective (gross savings - support costs) are generally in the 30-40% range. Currently the Yuan is under funded by 30%. Once the Yuan is funded and moves freely against the dollar, the price advantage is likely to disappear. Supply professionals are going to find themselves with an equally “expensive” purchase arrangement with a supplier which is 5,000 miles away.
Purchasing and supply professionals need to be far more creative in managing their material (and service) needs. Chasing low cost regions is always a risky proposition. Early in my career it was Japan, then Mexico, then Brazil, then Eastern Europe, then China and India. I’d guess that at the end of the day, chasing the low cost region didn’t provide the LONG TERM financial advantage that was hoped for. All the resouricng costs, the management costs, etc. eat away at the expected benefit. Maybe the savings come from working a little smarter, and not trying to take the easy way out.
2 Michael Lamoureux // Apr 16, 2007 at 2:28 pm
Actually, the answer is not low-cost country sourcing or right country sourcing, but home country sourcing. Whomever can do that competitively will be the long term winner!
3 Tim Cummins // Apr 17, 2007 at 8:58 am
Your comments regarding overall trends in US policy are interesting. Last week, following the announcement of the deal with South Korea, we made the following observations on the IACCM news site.
Bi-lateral trade agreements threaten competition, prosperity
The announcement this week of a ‘free trade agreement’ between the US and South Korea is just the latest in a growing wave of bi-lateral or regional relationships. The US has been especially keen on this approach in recent years, often perceiving such arrangements as a way to avoid or undermine multi-lateral agreements.
The problem with such arrangements is that they undermine many of the principles of international trade and certainly threaten many of the potential benefits of globalization. They are a departure from the principles set out by a former US Secretary of State, Cordell Hull, in 1933: “I will never falter in my belief that enduring peace and the welfare of nations are indissolubly connected with friendliness, fairness, equality and the maximum practicable degree of freedom in international trade.”
Bi-lateral or regional relationships are by their nature and intent exclusionary. As set out in an article in the Financial Times of April 4th, the economic effects of such araangements are predominantly negative:
They result in ‘trade diversion’ - such arrangements imply conversion to less competitive relationships.
In cases where such arrangements are between leading nations, they become systemic. The US and Korea are both in the top ten nations in terms of international trade. Arrangements like this encourage others to engage in similar behavior as a means of protection - and the result is a loss of markets and a drop in overall trade.
Symptoms of such trends are the ‘rules of origin’ and ‘anti-competitive regulations and procedures’ that organizations like the WTO has worked so hard to eliminate. US corporate leaders have fought long and hard against the discriminatory practices that inhibit their entry to particular markets - yet arrangements like this are exactly the way to increase such practices.
For those in the world of contracting, arrangements like this result in growth of administrative complexity and the battle to overcome preferential (i.e. biased) evaluation in bid and negotiation processes. For existing supply relationships, it creates an air of uncertainty and additional risk as the ground-rules for defining and managing such relationships change.
“If the US, as the dominant economic player, makes discrimination a central principle of its own policy, how can it fail to become a global model, with predictable and disturbing results?” asks Martin Wolf, in the FT article. He points also to comments about the impact of separate, preferential trading blocs by the leading economist John Maynard Keynes:
“The separate blocs and loss of friendship they must bring with them are expedients to which one may be driven in a hostile world where trade has ceased over wide areas to be co-operative and peaceful and where are forgotten the healthy rules of mutual advantage and equal treatment. But it is surely crazy to prefer that.”
Throughout history, the urge to trade has been the single greatest unifying force for mankind. Today, networked technologies offer a great push for increased unity and collaboration. Yet at the same time, such openness introduces understandable fears and drives many to defend their interests, power or assets. In this sense, the struggle now between bi-lateral and multi-lateral actions is a direct reflection of a battle that many in our community fight each day - that is, the contracting dilemma of balancing innovation and trust against risk and control. Both can be justified - but then we shouldn’t complain if we don’t like the consequences of our choice.
4 Supply Excellence » To Share or Not To Share // Apr 24, 2007 at 4:26 pm
[...] You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your ownsite. [...]
5 Supply Excellence » Openness: Good Politics, Good Business // Jun 18, 2007 at 4:51 pm
[...] Powell notes that 46% of all Australian students are foreign citizens — particularly from China. “And Australia puts these students on the fast track for foreign residency and citizenship.Powell’s point on openness applies not only to student and work visas. It is apropos for trade policy. (As well as business methods patent litigation.) In recent weeks, Spend Matters blog master Jason Busch has rightfully raised concern over new policies designed to protect U.S. businesses from foreign competition, particularly from China. (Supply Excellence readers have gotten a fair dose of this rhetoric as well.) [...]
6 Supply Excellence » Price Breaks Gone Wild // Jul 12, 2007 at 8:35 am
[...] Both episodes serve as a warning against knee-jerk reactionary monetary and trade policies. (Such as the White House response to the China trade gap.) As evidenced in Zimbabwe (and with the White House’s protectionist policy), most attempts to control commerce by government regulation backfire. [...]
Leave a Comment