By Ted Howard
In the September issue of NeuGroup Insights, NeuGroup founder Joseph Neu addresses what treasurers should be thinking about when it comes to China, globalization and supply chains—both product and financial. From here, “[G]lobal companies must move forward with contingency plans for more fragmented markets and compartmentalized supply chains—if not all-out financial and economic ‘war,’ ” he writes.
While war isn’t a certainty, fragmentation is. The trade war with China is—all at once—roiling, boiling, simmering, or now (possibly) cooling down. But whatever the temperature of this conflict, it’s a major concern for companies worldwide. The impact of the trade war, according to JPMorgan, may increase costs for average US households by about $1,000 a year as US businesses pass on higher costs to consumers. It could be more, it could be less. We just don’t know yet.
Cooler heads seem to be prevailing as China and US representatives are heading back to the negotiating table. This likely is happening for two reasons. One is the JPMorgan number above, along with several economic signals flashing US recession, including lower GDP, an inverted yield curve and a contraction-indicating read on the Institute for Supply Management’s Purchasing Managers’ Index (49.1%). And it’s not so great for China either, as Mr. Neu notes, with multinationals moving supply chains to other countries, which means job and wage losses.
The departures include Home Depot, which in August said its suppliers are moving some manufacturing to other countries, including Taiwan and Vietnam. Executives told CNBC this will reduce the impact of the tariffs to about $1 billion from an estimated $2 billion. Also, in July the Wall Street Journal reported that Crocs, Yeti (beer coolers), GoPro and the company that makes Roomba vacuums were making goods outside of China to avoid tariffs.
Meanwhile, the US’s other big trading partners, including No. 1 Mexico, No. 2 Canada and No. 4 Japan (China is No. 3), all either have new trade deals or are on the verge of getting new deals with the US.
“If you add up all the trade we do with Mexico, Canada and Japan, it swamps the trade we do with China,” says Brian Wesbury, chief economist at First Trust Portfolios. So that means a bigger share of US trade is getting “freer” than the portion with China that is getting more “unfree,” he says.
Nonetheless, with a trade deal here and no trade deal there, the supply chain picture gets jumbled—thus Mr. Neu’s call for contingency plans. And despite a seeming clearing in the road to compromise between China and the US, which plan talks in October, there will still be long-term impacts.
This means fragmentation will, at least initially, be a cost. Moving a silicon chip factory from one country to another is a lot different and more expensive than moving sneaker manufacturing.
All of this leaves treasurers in a mode they seemingly have experienced for the last decade or so: preparing for the worst. Or if not the worst, then for change and change again.