Moving towards regionalism.
As multilateral trade agreements negotiated through the World Trade Organisation (WTO) appear to be going nowhere, it is Free Trade Agreements (FTA) that will influence your supply chains. But, FTAs are not about free trade but preferential trade – a country gives preferences to one other country at the expense of others.
This week, Australia signed its third trade agreement of the year – with China; the other two being Japan and South Korea. And the Australian government is talking about an agreement with India within the next twelve months.
But notice the pattern, the agreements are all within the Asia Pacific region and that is the trend; regionalism rather that globalisation. Although trade between regions may continue to grow, the main growth will be within major regions. Each of the regions – Europe, Americas and Asia contain wealthy, consuming nations, fast developing nations and low cost countries (LCC) for supply of standard products and components, so each are relatively self sufficient and competitive.
Trade agreements do not become effective overnight, governments negotiate a period of years for implementation (China will take between four and eleven years to eliminate tariffs on Australian agricultural products) so supply chains have time to adjust.
Review your supply chains
The adjustment period of trade agreements allow companies the opportunity to review their sources of supply and in which part of the region they will manufacture. However, at the same time, transport services will change to reflect the new situation, new and refurbished infrastructure will become available and additional trade agreements will be signed. The situation will not remain static.
A question for consideration by supply chain professionals is whether the increasing number of FTAs will support the regional or global movement of finished goods or an increasing trade in intermediate inputs to products. These include mined resources, parts and components and processed agricultural products; it is in these items where intellectual property (IP) resides.
If trade in intermediate goods takes precedence, finished goods production is likely to move closer to final consumption areas, incorporating an Agile approach; that is, supply chain operations having a process capability to respond to demand volatility based on capable planning systems (e.g. S&OP), machine to machine (M2M) technology and proximity to consumers and customers.
You should not underestimate the time time to understand an FTA, quantify the risks that remain in a trading relationship following an FTA, undertake supply chain analysis and the discussions required with senior management to develop a revised approach to your company’s supply network. Your challenge is to devise the approach for an annual or bi-annual review of your supply chains.