Worley Blog

THE BATTLE OF THE TITANS

Posted on: May 20th, 2019 by Clifford F. Lynch

There was some good news in the so-called trade war this week when President Trump said the U.S. would lift the steel and aluminum tariffs on Canada and Mexico imposed last year. This wasn’t so much a surrender as it was a move to encourage Congress to approve the USMCA (U.S. Mexico Canada Agreement), the successor to NAFTA. Whatever the reason, the step was welcomed by many U.S. manufacturers, particularly in the auto industry. Since the tariffs were imposed, the “Big 3”, Ford, GM, and Fiat Chrysler have seen their costs increase by tens of millions of dollars.
Presumably, this will lead to the elimination of the retaliatory tariffs imposed by Mexico and Canada. While this was good news, the elephant in the room is the ongoing battle between the U.S. and China, our largest trading partner. Last year, the U.S. levied a 25% tariff on $34 Billion of imports from China, with airplane parts and farm implements the hardest hit. China immediately imposed tariffs on soybeans and automobiles. The soybean levies have been particularly hard on Midwest farmers who sell large amounts of soybeans to China.
The U.S. came back with a 10% levy on $200 Billion in Chinese imports which was increased to 25% last week after a session of trade talks concluded with no agreement. Washington negotiators felt an agreement was close, but China backed out at the last minute. Trump has now threatened to put a tariff on the remaining $325 Billion of imports from China.
How did all this get started? It began in February, 2018, when the U.S. implemented “global safeguard tariffs” on solar panels and washing machines. Tariffs were seen to be a solution to an ongoing problem with China – the theft of U. S. intellectual property and the practice of making those wanting to operate in China relinquish their intellectual property. The U.S. also would like for China to discontinue the subsidization of Chinese manufacturers.
But will it work? That remains to be seen; and in the meantime, the battle seems to be escalating. President Trump, some time ago, tweeted, “Trade wars are good and easy to win.” Many economists disagree and often point to the failure of the Smoot – Harley Tariff Act of 1930. Seen as a protection for the U.S. its major contribution was an extension of the 1929 depression. The auto manufacturers mentioned earlier saw their costs rise dramatically, and the Trade Partnership estimates that the sanctions levied so far are costing a family of four about $750 annually.
So, the big question is, “Who will win?” Certainly, we should try to protect our intellectual property, but could it have been done through negotiation or some other less disruptive method? More often than not, no one really wins a trade war. Usually the parties penalize each other until one simply gives up. That might not be so busy in the current battle, however.  The U.S. has an aggressive, impulsive, protectionist president who will go to great lengths not to lose. In Xi Jinping however, he goes into the ring with who Time magazine says “has consolidated power in China on a scale not seen since Mao.”
In the meantime, what can a supply chain manager do? There are so many possible outcomes to this issue that it is difficult to know. The best course of action seems to be to remain as flexible as possible while making no sudden moves until either Trump or Jinping cries, “Uncle”. At the same time, we should develop possible scenarios for our companies that will enable us to move quickly and effectively when and if the right comes.