Trump's War On The American Supply Chain
The idea is to reduce the trade gap between the USA and its partners as well as stimulating local production. But in the globalized world, we cannot bisect American industry from the global supply chain. Harming one will invariably impact the other.
The move has been popular among voters in the primaries, rewarding the businessman with big wins across the South and Midwest. However, the policy has been widely panned by economists and experts.
Richard Katz, editor of the Oriental Economist Report, argues that there would be a profound impact upon the American economy should Trump implement his proposals:
Mr. Trump’s tariffs would amount to a tax on American companies and households equal to 1.5% of GDP—1.2 points from his 45% tariff on Chinese products and another 0.3 points from a 35% tariff on goods made in Mexico by American firms.”The presidential candidate has subsequently backpedalled from this commitment, but the New York Times NYT -0.55% published the following excerpt from an interview transcript:
I would tax China coming in—products coming in. I would do a tariff. And they do it to us. We have to be smart. I’m a free trader. I’m a free trader. And some of the people would say, ‘Oh, it’s terrible.’ I’m a free trader. I love free trade. But it’s got to be reasonably fair. I would do a tax, and the tax—let me tell you what the tax should be. The tax should be 45 percent.”Trump, a herald of his own business success, seemed to later sense the damage the proposals might cause other companies. But the above statement looks declarative.
The statement has not been received well by business. For instance, Ford has expressed unease at the Republican lead’s comments. CEO Mark Fields stated that “free and fair trade is really important. We have always supported every free-trade agreement since we’ve been in existence.” Ford’s business model is premised upon open borders, with many manufacturing plants based in Mexico to bring the benefits of low-cost of production to American consumers.
Added to which, its suppliers are sprinkled throughout the world and across many borders.
This is not unusual. Even looking at the supply chain for a simple product, such as pencil, will reveal a complex web of international producers: the wood may come from Brazil, the graphite from India and the paint from China. In between, there may be value-adding nodes spread out throughout the world that convert raw materials into refined goods.
For Ford, at ‘tier one’ (Ford’s direct suppliers) it has over 1,000 productive vendors spread across 4,000 manufacturing sites in over 60 countries. In its ‘non-production’ category it was over 10,000 suppliers. . Simply put, the automotive supply chain is entirely dependent on free trade. Without it, the price of your car will sky-rocket.
The instincts of all businesses are inherently internationalist. They will go where they can produce goods for the cheapest total cost. Good companies are blind to race, religion or creed. Certainly, they are reductive in that they commodify people, but treating the global workforce as equally productive entities is liberating. Allowing businesses to invest into economies that are most profitable creates a system of production which is focused on efficiency and not petty nationalistic demands. It is this which provides the best change of create jobs and cheap goods for the population.
Ignorance of this structure is commonplace. In Procurement Leaders research we found that most consumers distrusted the global supply chain. Within the political space, opposing free trade provides a convenient smokescreen for base xenophobic urges: The Mexicans are ‘stealing’ American jobs when manufacturing plants are based in Monterrey and not Detroit. However, if we were to resite the factories, and, presumably, the entire attendant supply chain, you will pull labor away from high-value service areas and create massive inflationary pressures within the local economy. This has the potential to reduce jobs back at home, not create them.
It is for this reason that Economist Intelligence Unit rated a Trump presidency as one of the top ten risks facing the global economy in 2016. The research body pointed to a potential trade war between the US’ key economic partners China and Mexico as a significant macro-economic uncertainties which faces the world.
Should Trump win the presidency, every firm in America will need to revisit its business model and examine its supply chain for exposure to massive inflation. Not only for direct suppliers, which may be based overseas, but for their vendors and even the suppliers below them – that is tier two and three.