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The geopolitical uncertainty of the last few weeks and months has seen talk increase of a return protectionism and trade tariffs. For procurement in large corporations that has raised the question of whether business is ready for that and whether there is appeal in localising supply chains to mitigate the potential consequences.
Back in June the UK voted to leave the EU in a referendum. Meanwhile Donald Trump, the Republican presidential nominee, has said he believes that the US is getting a bad deal with trade deals it has in place and would either renegotiate the North American Free Trade Agreement that exists between the US, Canada and Mexico and impose a 35% tariff on imports from Mexico or tear it up completely. With China he has threatened to impose tariffs of 45% - a move that could have a significant impact politically and commercially on both countries.
While the UK is still setting out its position in terms of leaving the EU, it will have to negotiate its access to the single-market and deals with other nations.
All this has the potential to add significant costs and red tape to the activities of those businesses which source goods and services globally and have for many years enjoyed tariff-free trade in many key markets.
For some industries there’s optimism over the suggestion of localising supply chains and reshoring production, yet while this has been a trend seen over the last few years it would be a major step-change for many global businesses and their procurement functions to take a completely different approach to global sourcing.
The likes of retail giant Walmart are one example of an influential business with a focus on local sourcing, according to the Reshoring Initiative, but it is still a trend that is in its early stages and with only select projects.
There are benefits to doing so from lower lead times, lower logistics costs, improved responsiveness, tax incentives and the fact that businesses can label their products with a ’Made in...’ stamp, which resonates with consumers. Indeed, take US clothing retailer American Apparel as an example. The company’s national identity runs through its business strategy and it advertises the fact that its goods are manufactured in the US. It supports local businesses and this makes the brand widely popular in regions including South Korea and Japan.
But, there are challenges here as well as potential higher costs. Western manufacturing markets are more expensive than in other areas of the globe. Added to this would be the expense of adding tariffs to prices, which would leave the function with the decision of either passing these costs onto the consumer or squeezing suppliers. That could ultimately harm the local economy rather than protect it from the forces of globalisation.
This is not to mention the threat of a backlash from other nations.
If China, for example, was to retaliate with trade tariffs on the US, this could shift demand away from US goods, and both Chinese businesses exporting goods and US businesses would face higher costs and tighter margins.
Procurement needs to understand what the outcomes will be of this geopolitical uncertainty and put plans in place to deal with that. Hoping for the best will not be sufficient: functions must prepare for the worst.
This article is a piece of independent writing by a member of Procurement Leaders’ content team.