No end in sight for protectionism

protectionism and procurement

There are no longer any procurement professionals in post who have known anything other than the global web of trade relations that has come about since the General Agreement on Tariffs and Trade was created 70 years ago.


The past seven decades have seen trade barriers come down, as well as cuts to tariffs and new multilateral, bilateral and regional trade agreements.


This invisible framework has allowed companies to broaden and deepen their supply chains, enabling procurement organisations to seek the lowest-cost supply options from around the globe.


While globalisation has always had its critics, those detractors have reached the zenith of power –

most notably US President Donald Trump. His rise has encouraged populist politicians in Europe and some of the more fervent supporters of Brexit in the UK.


Many firms have benefited from global supply chains, which are often essential to their very existence. Fundamental challenges to the global economic and political system created by major western powers after World War II are creating a highly uncertain business environment.


“We have been on a journey where trade has been liberalised, so there has been an assumption that things would get easier rather than more difficult,” says Tom Woodham, digital supply chain leader at PWC.


The headlines have focused on high-profile tariffs, such as the 20%-50% levies the US imposed on imported solar panels and washing machines in January 2018, and the 25% tariff on imports of steel and 10% on aluminium placed on the EU, Canada and Mexico in June.


China applied retaliatory tariffs, prompting the White House in July to publish a list of 6,301 items imported from China worth a total of $200bn each year that would now face a 10% tariff. In August, Trump raised the ante further, saying he will withdraw the US from the World Trade Organization if it does not “shape up”.


Should that tit-for-tat exchange continue over the coming decade, it is certain to bleed into other, less visible forms of protectionism that would be equally disruptive to supply chains. Andrew Kenningham, chief global economist at analyst firm Capital Economics, says: “Protectionism is such a key part of Trump’s political brand that it is surely here to stay.”


According to Zurich Insurance, which has analysed the consequences of protectionism together with the Atlantic Council, this will create two spheres of economic influence – one around the US and the other around China.


Richard Baldwin, professor of international economics at the Graduate Institute of International and Development Studies in Geneva, and an expert on international trade, says Trump is setting up what he calls a “reverse regional trade agreement” as the US imposes tariffs and the other side retaliates.


“Tariffs are raised but only for the partner,” he says. “The result is negative trade creation among the partners, but increased trade between the two and all third nations,” says Baldwin.


Barriers to trade


Other protectionist measures that businesses will worry about include tighter customs procedures, foreign-exchange restrictions, non-tariff barriers, border-crossing delays and new regulations on imports.


“How you get product approval and how your standards are transferable are often as important as the tariffs themselves when companies look to trade with other nations,” says PWC’s Woodham.


“If you have to have your product approved, and the approval in your own country is not applicable, it adds a lot of barriers to entering a market. There are industries where this will have major effects, such as pharmaceuticals and aerospace.”


Given the importance of Just-In-Time supply chain schedules, aimed at minimising the cost of holding inventories, such delays threaten to land firms with huge bills.


At the macroeconomic level, Zurich Insurance estimates that over 15 to 20 years, the creation of two separate Chinese and US economic spheres would result in a $95tn cumulative reduction in global exports. Global GDP would contract by around $35tn.


While these sums are so large as to be almost meaningless, data from the UK’s Chartered Institute for Purchasing and Supply (CIPS) in August flagged up concerns over rising protectionism and Brexit for a collapse in new export orders.


Overseas sales collapsed from 53.0 to 47.4 on a scale where a number below 50 denotes contraction, marking the steepest one-month fall since 2011 at the height of the European sovereign debt crisis. “With a subdued global economy threatened by escalating trade wars and Brexit uncertainty making its mark, it’s unclear where future opportunities to sustain the health of the sector will come from,” says Duncan Brock, group director at CIPS.


John Scott, head of sustainability risk at Zurich Insurance, says the rise in global protectionism stemming from a backlash against free trade and globalisation could endanger economic growth.


“Companies that benefit from global trade may be forced to restructure their supply chains and develop business continuity plans that anticipate disruptions to their manufacturing and retail operations.”


Many experts are looking at Brexit and whether the EU, which has been a key driver of open trade, will negotiate a hard deal with the UK. Woodham says what happens with Brexit will set the tone for how the EU interacts with China and Asia-Pacific more widely.


“There is a protectionist appetite in a lot of European countries, so you could see more industries being protected.”


Rewiring trade networks


Many believe protectionism will inevitably lead to a rewiring of existing trade networks and will significantly disrupt supply chains. This will expose companies’ vulnerabilities to a host of hazards that were previously regarded as low risk while supply chains operated smoothly.


Procurement functions will need to ask the following questions about their supply chain:

  • How much turnover is vulnerable to protectionism scenarios?
  • How easy is it to substitute suppliers at bottleneck points and at what cost?
  • Can they cope with higher inventory handling costs, higher-cost suppliers, as well as transport costs and delays?
  • Will protectionist measures affect the survival or creditworthiness of any suppliers or customers?


If protectionism led to a recession, how vulnerable are countries in which suppliers are based to economic and civil disruption?


Tight plans


Jonny Michael, chief executive of UK-based procurement advisory firm JMCL Consulting, says risk awareness should prompt buyers to get closer to suppliers. He points to the impact the 2011 earthquake and tsunami in Japan had on the automotive industry.


“It turned out that companies had sixth- or seventh-tier suppliers that might supply one critical component. They had contingency plans for first-, second- and sometimes third-tier suppliers but had not really looked beyond that. With protectionism, they will have to look further down the chain to understand the impact on critical components.”


PWC’s Woodham agrees, saying the first task for any business with a complex supply chain is to carry out thorough modelling to identify companies, countries and regions that may present future problems from a cost, regulatory or reputational perspective.


“It is a question of building into these models that these countries or these sectors are ones where there may be more of a challenge in the future. Based on that risk modelling, where they have a single source of supply with a risk that it is going to become difficult to trade there, they must have a backup plan,” he says.


One silver lining to this storm cloud is the potential for western companies to pursue more local sourcing. This would please environmental groups, which have long been pushing for businesses to reduce their carbon footprints.


With transport costs likely to increase, organisations will be encouraged to source goods locally and drive innovations with key suppliers. This is especially vital for food companies that require timely supplies.


In the short term, however, with US tariffs the main threat, many global companies with plants across the world will have the luxury of simply relocating production, says Woodham. “It may just mean moving [production] to a plant in the US rather than Mexico, but it is still the same company.”


Geneva Graduate Institute’s Baldwin says Trump’s aim is to repatriate supply chain jobs to the

US. “The intent is that cars sold in the US have to have more parts made in the US, [but] the reason they are not made now in the US is that they are cheaper elsewhere,” he says. “The rebundling of production in the US will raise prices inside the US and for US-made exports.”


But looking ahead to 2030 and beyond, sustained protectionism will compel procurement functions to adopt more radical and innovative changes in the way they operate. Fortunately, technology offers some options.


Onshore production


The development of 3D printing will be increasingly important for manufactured goods, according to Woodham. He points to the clothing industry, saying one UK brand had struggled to bring production back onshore because of a lack of skills in an industry that had suffered a severe decline over the past four decades.


“Clothing is an industry where 3D printing will make a huge difference, as that’s one way to get around a lack of skills because you change the way it is done,” he says.


Baldwin uses automation as an example, saying that as robots lower the share of labour costs in manufacturing, firms will tend to localise production to avoid tariffs and delays.


But, for Woodham, one of the greatest potential benefits will be improving end-to-end visibility in supply chains down to the third tier and beyond. “Global supply chains can be speeded up with better communications and if you use digital tools to monitor shipments and take action to ensure they are not delayed, you may be able to compensate for other restrictions on borders.”


Existential change


JMCL’s Michael says these changes could lead to an existential change for procurement, which he believes will become less adversarial and more about building partnerships and joint ventures. He says procurement will have to get better at understanding relationships between purchaser and supplier and managing them better.


“If you are going to have more protectionism and your supply chain changes, you will need to have more procurement people on board. Procurement is going to have to get more skilled and use more strategic thinking,” he says.


“Rather than seeing procurement in terms of what savings we can get, they are going to get smarter about the fundamentals of procurement – procurement process, systems, strategy, structure and supply chain management and measurement.


“If you get those things right, it is better than just achieving savings. Procurement will get more advanced and sophisticated. You will need more educated people, more strategic people and the sort of procurement function you have will become more important.”


This article is a piece of independent writing by a member of Procurement Leaders’ content team.