These days it’s pretty common to build a business without borders.
“Just about every supply chain today is global,” says Rob Handfield, executive director of the Supply Chain Resource Cooperative and professor at NC State University’s Poole College of Management. “Nearly every product you buy has components that were produced in another region.” By 2014, the ratio of global trade to world GDP had increased from 20% in 1995 to 30%, according to the World Trade Organization.
Since the mid-1990s, when the North American Free Trade Agreement (Nafta) first went into effect and the World Trade Organization was established, falling barriers to trade across the planet have led manufacturers to spread out their supply chains and take advantage of other countries’ lower labor costs and local specializations.
But now there are indications that the movement toward greater global trade integration might be reversing. The U.S. is promising to enforce existing trade deals, renegotiate Nafta, impose tariffs on Asian trading partners, and overhaul corporate taxes that affect overseas income. The Brexit movement in the United Kingdom, a process that was formally triggered in late March, stands to separate Great Britain’s economy from the European Union. Other European countries are looking inward, including France, which is a linchpin of the E.U.
What will all of this mean for brands’ world-spanning supply chains?
Brant Miller is vice president of Flex’s Financial Supply Chain Design group. It’s his job to evaluate tax and tariff policies around the world and to optimize the financial costs of the supply chain for Flex’s customers. He and his team constantly monitor policy shifts that could affect supply chain costs.
“We have seen an overwhelming level of interest over the past 6 months. Customers are asking us, ‘What would a U.S. strategy look like? What would the cost differences be? How do we leverage your capabilities to drive a new solution?’ We’re working with dozens of customers on a real-time basis capturing insight into their current strategies and supply chain framework. We are also providing awareness on critical supply chain decisions as well as what capabilities we can offer and how a U.S. strategy would work.”
Miller sees several areas where policy shifts are likely.
The Major Changes
First, Miller believes the next several months will see a wave of penalties on companies that aren’t abiding by government incentive rules that actually haven’t been enforced under existing agreements. Because these standards have already been agreed to, Miller notes, they’re the easiest to carry out.
This would likely coincide with renegotiating Nafta, Miller says, which might produce changes to regional value content, meaning how much of a product or component needs to be made from a country’s raw materials to classify as a product of that country. Such changes could directly affect labor standards. Whatever happens, the U.S. is required to give six months’ notice to make changes to Nafta, and it could take a full year for those changes to go into effect, Miller adds.
Miller believes various new bilateral agreements with trading partners that help aid larger countries will emerge as well. While multilateral agreements favor smaller nations because all of the countries involved agree to one set of standards, “bilateral agreements benefit the bigger party—for instance the U.S.—because it has more leverage and can dictate terms that are more U.S.-friendly,” he says.
Consider Vietnam and the Trans-Pacific Partnership, an enormous trade agreement among 12 Pacific nations including the United States that was abandoned this year. TPP was multilateral, and the Asian countries involved were primarily looking to access the U.S. market with more favorable terms, Miller says. Currently, Vietnamese companies face tariffs ranging from 11% to 30% when they ship clothes and shoes to the United States. Under TPP, those tariffs could have been phased out.
Bilateral negotiations take time, and Miller sees those new deals likely happening in a 12- to 18-month time frame. But that could change, too. If European countries continue to look inward and the E.U. starts to collapse, the U.S. would need to start signing bilateral agreements with its European allies and other trading partners.
Corporate tax reform could experience major changes as well. Miller believes the most likely shift would be to convert the U.S. corporate tax system from one that attempts to tax all income earned by U.S. companies anywhere in the world to a territorial one used by most of our trading partners, which taxes only the goods that are sold in the United States, regardless of where they’re made. Paired with a border-adjustment tax that would apply to all countries, a territorial tax system could allow deductions for domestic labor costs and potentially spur companies to create more jobs in the United States.
Policies that favor domestic industries are most likely going to drive up costs. They might also encourage further localized assembly, distribution, and manufacturing. For certain industries, tariffs on locally produced goods can get tricky.
“A lot of automotive companies tend to buy where they sell,” says NC State University’s Handfield. “Although they’re global companies, they source a lot of components for vehicles they produce from local suppliers. And if they don’t have local suppliers, they bring them in and have them set up close to their factories.”
Face-to-face interactions are important for automakers because they deal with complicated component-integration issues, Handfield notes. Local production reduces shipping costs and also allows automotive companies to take advantage of tax benefits. Other sectors could move to a similar production model.
But nothing is changing right away, and no one knows for sure what changes will happen. This uncertainty means that customers of a company like Flex will have to look hard at their supply chains and adapt to more scenarios. With its diversified footprint and deep operations in regions around the world, Flex is well positioned for whatever comes, Miller says.
“These issues are more in focus today because of increased national interests,” says Tom Linton, Flex’s chief procurement and supply chain officer. “It is the job of supply chain professionals to adjust their processes from sourcing to logistics to materials management in order to ensure competitiveness.”
Trade policy change moves at a glacial speed, Miller says: “We’ve got a long lead time. We’re going to continue to have a lot of questions from customers, but we’re well suited to answer those questions, because we don’t just understand tax policy, we don’t just understand trade—we understand the whole supply chain and how to get the best manufacturing decision for our customers.”