The power of large buyers
Change is happening in international trade lanes caused by disputes between countries. These changes can impact supply chains, making items more expensive or more difficult to obtain.
Many supply chain professionals have experience of negotiating with large customers. They are likely to use their buying power as leverage to try and extract lower prices, longer payment terms or other perceived advantages.
If the customers do not get what they want, the (real or imagined) threat is that your business will lose orders. This is considered as normal business behaviour. We should therefore not be surprised when a country which globally purchases large amounts of goods and services, will use its buying power to obtain concessions from supplier countries (called ‘trading partners’).
The current trade dispute providing so much comment is between the US and China; but demands have also been placed by the US on Canada, Mexico, the EU (and Germany in particular), Japan and India, with potentially more to come. Of course, affected countries react to tariff impositions by the US with retaliatory tariff and non-tariff measures against their imports from the US, which increases costs and reduces trade.
America has powerful negotiating levers:
- It is a large purchaser and seller of goods and services in financial terms
- Imports and exports are a low proportion of the US economy, at about 13 and 15 percent of GDP
- The US dollar is a ‘reserve currency’ that affects or influences a very high proportion of international trade activities
As an added negotiating tactic, countries with trading power may have trade rules that are not enforced until needed. For example, the US government can:
- Impose restrictions on imports that ‘threaten to impair national security’, without defining what that means
- Introduce export controls on ‘emerging and foundation technologies’ (EAFT)
- Apply ‘Country of origin’ rules. Identifying the country where an item has last experienced a ‘substantial transformation’. However, no factor is provided in the US import rules to determine when a ‘substantial transformation’ has occurred
- Designate a country as a ‘non-market’ economy that disadvantages the US. However, US legislation (and WTO regulation) does not clearly define what constitutes a ‘non-market’ economy
So, the application of US economic actions anywhere in the world has a high likelihood of a real effect on international trade patterns and the supply chains of businesses.
Adding to the uncertainties are increases in protectionist sentiments about global trade. Since 2010, the G20 countries have been adopting new trade restrictive measures more quickly than they have been removing old ones.
Compounding these trade uncertainties is the impending departure in October 2019 of the UK from the EU, with the trade and currency exchange rate unknowns that it contains. There are also new trade agreements being negotiated or ratified, such as the African Continental Free Trade Area (AfCFTA). Over time, trade facilitation agreements do influence from which countries organisations buy and sell their goods and services.
Possible response to the dispute
The longer and more acrimonious the US-China trade dispute becomes, the more likely there will be a realignment of supply chains. These could become more regional; for example, between China and its technology advanced neighbours in North Asia and the ASEAN member countries of South East Asia. It could also include countries participating in China’s belt and road initiative (BRI). This would accelerate the move of contract manufacturing and low and mid-range technology production from China, despite the current benefits of developed infrastructure and supply chains.
However, relocation of production would not necessarily be on a ‘like for like’ basis, so buyers could experience increased purchase costs. China based companies (including divisions of MNC) that do move operations within the Asia region will need to address the cost and implementation time for: upgrading knowledge and skills in technologies and supply chains and implementing logistics infrastructure requirements.
This could be considered by buyers as an ‘efficiency loss’ in economic terms. However, it should act as an accelerator for regional development in what is already regarded as the world’s fastest growing region, providing future supply chain opportunities.
Change to what scenario?
The media publicity and response of share (stock) markets concerning the US-China trade dispute could have an influence on attitudes by senior executives about supply chains being strategic rather than just a cost. Sourcing the cheapest item is not sufficient if that item is no longer available, only available from another supplier in a different country or at a much higher total cost.
The unknowns concerning international trade are affecting how world trade is likely to interact in the future. Therefore, the question to ask for your organisation is ‘Change to what’? But the answer is not known – we can only evaluate and respond to scenarios developed inside each business.
To be responsive means that an underlying requirement of your organisation is to build flexibility into your supply chains. But to achieve this requires Supply Network Mapping to build future scenarios for your supply chains. To build a map, identify at least the following:
- Changes in trade lanes which might occur
- Nodes, links and flows in your Supply Network
- Roles of logistics services providers (LSP) in each supply chain
- Identify and evaluate trading rules for new supply routes
- Availability, role and cost of supply chain hubs
- Potential bottlenecks, lead times and wait times at border controls
- Capability of potential suppliers to compete in locations other than China
- identify ex-factory costs, quality of product and service, logistics services availability and competence and infrastructure status.
With such a powerful country now using threats of trade sanctions as a negotiating tactic, we could assume that other countries with a large buying power could be as demanding on its supplier countries in the future. Flexibility in your supply chains is therefore likely to grow in importance.
So, if you work in an organisation that imports or exports materials, components or goods (or if you just buy items from importers), are you confident about the future security of supply or the route capacity and lead time for critical items?
Unfortunately, last week’s blogpost could not be published due to IT problems when changing between ISPs. Five days to identify and fix a problem in technology that is twenty years old is a warning about believing the hype concerning ‘new’ technologies.