Global Trade Archives

Global Trade Management in Today’s Contentious Political Environment

Global Trade | By Clint Reiser • 05/10/2017

The political environment and public policy decisions are central determinants of global trade patterns. But political risk seems especially heightened in today’s international business environment. From the Brexit vote, to Trump’s trade renegotiation rhetoric, to Marine Le Pen’s promise of intelligent protectionism, there has been an undeniable trend of political intent to reexamine trade policies and free trade agreements.

I am in the process of updating ARC’s Global Trade Management (GTM) market study and have engaged in several discussions about today’s political environment and its impact on global trade and GTM solutions. Of course, political rhetoric accounts for much of what has already occurred. But the recent election results in the UK and US reinforce the view that substantive change may be forthcoming. And the political rhetoric also seems to have a way of feeding on itself. Executives understand that public policy, especially trade policy, can have substantial impact on their supply chains. Although existing trade policies have not yet changed from these political events, corporate executives want to be informed about the impact potential changes will have on their business, and prepared to quickly adapt their supply chains to function optimally in the new trade environment. From my discussions with GTM suppliers, I see corporations focusing their preparations on two main areas, namely:

External Corporate Environment: The specific political changes and the potential trade impact of these changes on the supply chain.

Internal Corporate Environment: The company’s internal processes and its ability to adjust to the changing trade environment.

External Corporate Environment

The proliferation of free trade agreements over the last couple decades has increased the degree to which preferential treatment of certain goods has shaped supply chains. Ty Bordner of Amber Road puts the number of trade agreements currently in effect across the world at about 600. And the effect of these agreements on supply chain decisions should not be overlooked, as duties and tariffs are substantial enough to redirect sourcing and even production decisions. Rainer Roll of MIC Customs Solutions explained a case to me where a manufacturer estimated that roughly half the cost of a production facility upgrade was going to be financed by duties savings made possible by a free trade agreement. In fact, many companies incorporate duties and tax costs right down through the bill of materials when analyzing various production and sourcing decisions. And it’s not just the GTM vendors stating the relevance of duties in strategic decision making. Toby Brzoznowski of Llamasoft, a leading provider and supply chain design solutions, confirmed in his post Leveraging Supply Chain Design to Thrive in Uncertain Times that taxes and duties are critical inputs into supply chain network design by impacting overall costs, sourcing decisions and manufacturing strategies.

In contrast, the more recent political environment has created uncertainty about existing trade policies, especially free trade agreements. Voters in many nations believe that trade agreements are detrimental to their economic well-being. They often focus on the displacement of a subset of workers, rather than the widespread efficiencies brought about from increased competition and specialization. Linda McKee from SAP’s Global Trade Services team told me that the sudden change in public perception about free trade agreements has caused some executives to become more cautious about the long-term stability of the agreements. Long-term stability may not be a prerequisite for transactional sourcing decisions, but it is essential for supply chain partnerships and capital investment decisions.

The Brexit vote has occurred, but there is still a lot of uncertainty about the specifics regarding the unwinding of the UK in the European Union (EU), including the terms of trade. Although there is still much uncertainty, companies are beginning to evaluate their exposure to trade agreement changes from UK’s planned withdrawal from the EU. Rainer Roll of MIC Customs Solutions stated that companies are analyzing various scenarios to determine the potential effects on their business, both the risks and opportunities. For example, what are the effects of moving production from continental Europe to the UK to support UK demand – and vice versa, the effect of moving production currently in the UK to continental Europe? Companies are analyzing country of origin information and conducting total landed cost analysis so that they are well informed and ready to act when the trade environment does change. In North America, concerns about changes in NAFTA aren’t as acute, but corporate executives are beginning to ask questions about the potential impacts of changes to NAFTA. Chris Jones of Descartes informed me that corporate boards are looking to understand the cost implications of changes to NAFTA and the feasibility of nearshoring operations that are currently in Mexico or Canada. Similarly, Patrick Maley of BluJay Solutions noted interest in determining what the Trump administration can do through regulation and what changes would need Congressional approval.

My overall takeaway is that companies are mostly evaluating these political scenarios from a risk analysis and contingency planning perspective. However, they are doing so with an eye on being prepared and able to act intelligently, competitively, and quickly once the changes do go into effect.

Internal Corporate Environment

Evaluating internal processes and capabilities is part of what companies are doing to make sure they are prepared to act in an uncertain, fluid environment. Companies are evaluating their ability to analyze the numerous potential scenarios and want to make sure they have the required information to determine the duties and rules associated with country of origin for raw and intermediate materials and the necessary data to conduct a total landed cost analysis. This environment reinforces the need for the data and a structured, systematic way of analyzing the cost drivers and supply chain contingencies if the environment does change. At the same time, companies want to make sure that their GTM software providers can handle upcoming changes. For example, there is concern about the existing UK customs system (CHIEF) being retired and replaced with a new system in tandem with the UK’s withdrawal from the EU. Descartes and SAP both mentioned that companies are concerned about the concurrent system and regulatory changes. But the GTM vendors can easily handle these changes. The concern is more with the fluidity of the rules surrounding imports and exports from the UK and whether there will be sufficient notice before implementation of the new rules and the replacement customs system.

Overall, the global trade environment is expected to become more complex. The UK will have to renegotiate trade terms with countries outside of the EU and with those countries within the EU. The Trump administration is looking to establish numerous bilateral agreements instead of one multilateral agreement with Transpacific nations, and other elections such as last weekend’s election in France provoke additional uncertainty about international trade. GTM vendors believe that the increased complexity is stimulating additional demand for their products, as companies look to more formally manage their planning and execution of international trade and customs compliance.

Trump, Trade, Transportation, and the Protectionist’s Dilemma

Global Trade | By Clint Reiser • 02/01/2017

Richard Peretz, UPS CFO, was on CNBC yesterday morning discussing the company’s most recent earnings release. The interview addressed a number of prominent topics in the logistics world. First of all, he noted the ongoing increase in B-to-C as a percentage of UPS’ overall business, and as we have stated repeatedly on Logistics Viewpoints, this is driven by the boom in e-commerce. Secondly, he noted the company’s ongoing investment in the automation of its US network and stated that UPS has completed only 3 out of 30 planned hub automation projects on the company’s automation investment agenda. The scale of this automation initiative is certainly a great example of the warehouse automation investment currently underway in the parcel industry. But the third topic of the discussion was the Trump administration’s agenda on business and trade. I would like to focus the rest of this article on my view toward trade and the Trump administration, as trade directly impacts that logistics industry.

Mr. Peretz stated that UPS is optimistic on simplified trade rules and other information coming out of the Trump administration. He was pressed further on proposed regulations and bills, a 20 percent tax on US imports (I believe they were referring to a border tax proposal) was specifically mentioned. The trade topic was noted as particularly relevant to UPS as a logistics provider. In fact, logistics as an industry has grown as a component of US GDP more quickly than manufacturing and even retail trade in the recent past (see attached diagram of US industry growth rates). Mr. Peretz responded by stating that these proposals are just that, “proposals.” I found that to be a simple yet telling point.

There appears to be a sizable amount of angst surrounding the possibility of the Trump administration enacting a protectionist agenda and sparking a trade war. I believe free trade in general is a net benefit to society. As I stated in a recent article on global trade, it allows local economies, regions, companies, and individuals to specialize, harness their own comparative advantages, and to leverage concepts such as economics of scale to further deliver increased productivity and value through trade. I also believe it is a commonly held view in government, business, and international relations that mutually beneficial trade delivers economic prosperity. However, it is worth noting that some businesses and individuals bear a disproportionate share of the costs due to labor and competitive displacement. It is the protection of these companies and at-risk livelihoods that protectionism appeals to. However, often these protectionist policies serve as a detriment to the larger economy. It is this dynamic that I consider the “protectionist’s dilemma”. I believe it is likely that Trump holds the view that trade is a net benefit to society, and I believe heads of foreign states believe Trump holds this view. Therefore, I see the new administration’s proposals (bilateral rather than multilateral agreement, threatened import taxes, etc.) as posturing and rhetoric to set up future negotiations to leverage the US’s economic clout in an effort to extract trade benefits on the margin. I personally do not see a trade war resulting. However, I do believe there may be some changes that negatively and positively affect specific businesses and individuals. But for now, I remain optimistic that the US transportation, warehousing, and logistics sector will continue to grow at a more rapid pace than the manufacturing sector, and even possibly retail.

In Defense of Global Trade

Global Trade | By Clint Reiser • 09/28/2016

Logically enough, the majority of Logistics Viewpoints (LV) readers work in the logistics field. And LV is a logistics industry blog, not a political op-ed site. However, I believe the issue of global trade is both a core logistics topic and a hot political one. Furthermore, the presidential candidates from both major parties have been denouncing international trade as of late. I actually believe both candidates are supporters of free trade, whether it be domestic or international. But that isn’t obvious given some of the recent rhetoric. So I thought it important to briefly restate the benefits of trade – both domestic and international – given the negative press that it has been receiving and its importance to the logistics industry.

Trade Enables Productivity, Leading to Prosperity
Productivity improvements are considered a primary driver of economic prosperity. Centuries ago Adam Smith and David Ricardo discussed productivity, resource allocation theories, and the concepts of absolute and comparative advantage. The theories explain the mutual benefits from a person, organization, or country, doing what it can do best, then trading with others that have a different core competency. More recently, Michael Porter explained in the Competitive Advantage of Nations that national competitive advantages are determined by the dynamic interaction of a number of determinants that allow a region, national, or set of organizations to produce a good or service superior to that offered by others. Key to Porter’s model is the importance of specialization, investment, and continuous improvement. These factors improve quality and efficiency, and I would also argue they lead to greater variety and more purchasing options – ultimately benefiting consumers with the spoils of progress.

Specialization, Expertise, and Economies of Scale
Specialization allows for a concentration of focus that contributes to expertise. Add competition among experts and this can lead to continuous improvements in a product or service. When a nation specializes and trades, it is likely to obtain increased demand for its superior products or services. Increased sales volume makes capital investments both feasible and increasingly profitable. Investments serve as a fixed cost that reduces incremental costs for each unit. Once these investments are made, the producer increases the potential for total profit, but also becomes more reliant upon high levels of production to pay for the initial investments. Ultimately, this reliance on high volumes reduces price to the consumer even further.

Logistics, Globalization, and Specialization
Logistics is a critical function to global trade and our economy as a whole. In fact, I wrote a Logistics Viewpoint article that discusses economic research crediting modern inventory management practices with modern-day improvements in macroeconomic stability. Similarly, the efficiency of modern transportation allows low price producers to retain their cost advantages even when including transportation and other elements of total landed cost. Sophisticated transportation networks allow consumers to purchase crops from around the world. Fifty years ago it was a rare treat to get an orange for Christmas. US supermarkets now sell apples from the southern hemisphere each spring and domestic apples in the fall. Logistics supports globalization and globalization increases choices. I believe that politicians and the average person understand the benefits of global trade. We just need to remind ourselves of trade’s benefits every once in a while.

What’s Happening to Global Trade?

Global Trade | By Clint Reiser • 03/02/2016

What is happening to global trade? You may ask, “What do you mean?” Well, I think a quote from a World Trade Organization (WTO) September press release describes the situation the best:

“If current projections are realised, 2015 will mark the fourth consecutive year in which annual trade growth has fallen below 3 per cent and the fourth year where trade has grown at roughly the same rate as world GDP, rather than twice as fast, as was the case in the 1990s and early 2000s.” (Emphasis mine)

Global trade has been growing at about twice the rate of global GDP for most of the last 20 years. This growth has been especially beneficial to the logistics industry and the technology vendors and others that support logistics operations. Given the importance of trade growth to the logistics industry, I decided to dig beneath the headlines to obtain a better understanding of the what, when, where, and how of this global trade slowdown.

The adjacent image is a chart of data from the IMF. It provides visual perspective to the WTO quote above. Just from looking at this chart, it is apparent that global trade growth is more volatile global GDP growth. However, the second takeaway is that both data sets have been running in virtual lock-step since 2012, confirming the statement by the WTO. Global trade growth has settled to global GDP growth rates.

Digging Deeper Into the Specifics
Clearly global GDP growth, and global trade are about as all-inclusive as economic data can get. Is trade slowing across all regions, all cargo types, and all routes, or are there specific segments of the market that are dragging down the global aggregate data? The WTO publishes quarterly import and export trade volumes by region. The accompanying charts show quarterly export and import trends by region. North America and Europe look stable to strong over 2014 and 2015 Q1. In contrast, Asia and Other (CIS, Middle East, Africa) show a notable decline over that same period. At the same time, imports by South America and Other declined substantially. The WTO attributed the South America downturn to Brazil’s combination of fiscal difficulties and declining export prices (presumably reducing the country’s aggregate purchasing power).

The slowdowns in these shipping routes are pressuring freight rates across commodity classes. Drewry stated in its Dry Bulk Forecaster that China’s slowdown is negatively impacting iron ore and coal shipping demand. Meanwhile, the Wall-Street Journal reported that approximately 690 dry-bulk ships across the globe are currently sitting idle. However, this supply-demand mismatch is also a result of increased shipping capacity that has become available. Drewry also noted that there is a supply-demand imbalance in the container shipping segment, with the idle fleet near one million twenty-foot equivalents.

What about the US? Cass/Inttra published its ocean freight index through May 2015 (and halted publication thereafter). However, US container import activity looked stable in the first five months of 2015, but US exports were noticably weaker than the prior three years (see chart). It is difficult to determine if the slowdown in US exports is a result of slowing economies overseas, or if it is a result of the strengthening US dollar, leading to US exports being replaced by cheaper alternatives.

Conclusion
From a regional perspective, this data supports the view that diminishing demand in China, likely from reductions in infrastructure spending, is a root cause of the slowdown. Additionally, Brazil appears to be experiencing the strongest secondary effects from commodity price declines (reduced foreign capital from exports, leading to reduced capacity to import other goods). Also, I believe that the trade volume data provides support for the thesis that oil price declines are at least partially resulting from slowdowns in demand, as opposed to being exclusively a supply-side issue. In contrast, it is my opinion that other slowdowns in trade are residuals from the root causes listed above. Therefore, I believe pricing declines outside of bulk commodity transport will be more transitory and are more of a result of increased shipping capacity. Finally, let’s remember, all of this data is backward looking. So let’s hope this is only a temporary bump in the road that is now in our rearview mirror.

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New Year, New Economic Bloc – the AEC

Global Trade | By Bob Gill • 01/21/2016

Ring out the old, ring in the new, so the saying goes. Indeed, because while 2015 was fading out this last December 31, the new ASEAN Economic Community (AEC) was being born. But if you live much beyond the shores of Southeast Asia it is likely news of this particular birth passed you by. So let me explain, because this region of 632 million people and combined GDP of $2.5 trillion is set to become an ever more important production/consumption node and contributor to the world economy over the next few decades.

The Vietnam War was at its height and the security of the region fragile when Indonesia, Malaysia, Philippines, Singapore, and Thailand came together in 1967 to form the Association of Southeast Asian Nations (ASEAN). As political and military tensions eased following the end of the war, coupled with quite dynamic growth in the 1970s and ‘80s, the grouping started looking beyond peace and stability to boosting trade and economic ties. It grew larger too, with the addition of Brunei (1984), Vietnam (1995), Laos (1997), Myanmar (1997), and finally, Cambodia in 1999.

The new ASEAN Economic Community is a logical extension of the efforts these countries have made over the last few decades to make ASEAN a more cohesive and useful entity. These efforts notably include 1993’s AFTA (ASEAN Free Trade Agreement), which has eliminated virtually all tariff barriers between member states, boosting intra-regional trade. Externally, ASEAN now has FTAs with China, India, Japan, South Korea, and Australia-New Zealand. Other markers on the road to the AEC include the ASEAN Framework Agreement on Services (AFAS) IN 1995 and ASEAN Investment Area (AIA) in 1998.

A key pillar (one of four) of the AEC is a single market with free flow of goods, services, capital, investment, and skilled labor. However, while it may indeed be an official entity as of December 31, 2015, the AEC is still very much a work-in-progress in terms of making this and the other pillars a reality.

Take the free flow of goods. While tariff barriers are indeed history in Southeast Asia, non-tariff barriers remain a significant impediment to businesses trading within the region. Cumbersome customs processes especially in those countries with less sophisticated logistics infrastructure and practices, like Indonesia, Philippines and Vietnam, can leave goods stuck for weeks at entry points awaiting clearance.

Accordingly, on the AEC agenda is an agreement to identify non-tariff measures and eliminate those identified as protectionist by 2018. And there are ongoing and much-needed efforts in several countries to improve infrastructure. Indonesia, for example, is spending tens of billions of dollars to construct new roads, railways, airports and seaports. In Vietnam, where the government estimates logistics costs to have taken away 25 percent of the country’s potential GDP, initiatives include the $1.2 billion Lach Huyen International Gateway Port, which will greatly boost connectivity to the north of the country.

The free movement of skilled labor is also a challenging goal. Southeast Asia is a highly disparate region in terms of not only populations and development levels, but also languages, business practices and professional certifications. And with each country retaining its own immigration policy, irrespective of the AEC, moving to another country to work is not going to be as straightforward as it is in the EU, for example.

Still, while full economic integration and its benefits may be some way down the road, the launch of the AEC takes place against the backdrop of a region that is clearly rising. While many areas of the world face low or even negative population growth, with consequent adverse economic effects, Southeast Asia’s population is set to increase by more than 100 million over the next 20 years. Crucially, this is accompanied by a demographic dividend in the form of an increasing working-age population, which is set to reach 68 percent of the total population by 2025. It is this segment that works, earns and consumes in an economy, and is thus critical to growth. (In contrast, China’s working-age population peaked in 2010 and is now declining.)

As such, the region will become an increasingly active production base to serve Asia and beyond, and also an increasingly important consumer market. And while the phrase “journey not destination” is frequently used to describe the December 31 launch, the AEC is an undoubted milestone in ASEAN’s evolution and in the growth and global relevance of Southeast Asia.

Reaching out to some of the logistics players in the region for their own thoughts on the AEC, here’s what Richard Strollo, managing director, South Asia, BDP International, told me:

“Creating a common market among its nations is the most exciting initiative ASEAN has ever undertaken. Liberalizing the flow of goods, services and investment and reducing restrictions on skilled labour and capital will dramatically transform the region over the next 20 years. Economic integration will make Southeast Asia a powerful trading bloc with increased trade flow both in and out of the region, and the logistics and transport industry will benefit from this increase.”

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Bob Gill is the General Manager for Southeast Asia at ARC Advisory Group. Bob has a background in editing industrial trade publications including those covering Asian logistics and supply chain management.

The Trans Pacific Partnership (TPP) and International Supply Chain Development

Global Trade | By Clint Reiser • 11/11/2015

Source: Office of the US Trade Representative

In last Friday’s “This Week in Logistics News” blog post, I mentioned that the TPP details had finally been released by the participating countries’ governments. Since Friday, I have spent a good deal of time reviewing the TPP trade agreement for topics of relevance to the logistics and logistics technology industries. Here is my first finding – I could never have been a lawyer. The document is not an easy read, to say the least. This should also be seen as a disclosure that my interpretation is that of a layman. I am not an attorney.

In July, I wrote a Logistics Viewpoints post on the structure of the TPP. Obtaining details of the agreement was difficult at that time. Well, now that the details have been released, understanding their implications has become the challenge. The TPP includes policies on the reduction of trade barriers, investments, labor, and intellectual property. I will focus this article on policies related to the reduction of trade barriers and the development of international supply chains, leaving the other topics for future discussions.

Reduction of Trade Barriers
The TPP participating countries are working to integrate multi-national supply chains through the reduction in government imposed competitive barriers. Examples of current tariffs outlined on USTR.gov include a 27 percent Vietnamese tariff on US made auto parts, a 40 percent tariff on poultry entering Malaysia, and tariffs from a number of countries on US made textiles. The TPP agreement outlines the schedules for reduction in tariffs. For example, the US tariff elimination schedule includes staging categories along with the schedules for both the elimination of duties and rate reductions for those categories that are not immediately eliminated. The elimination schedule ranges from the time of TPP adoption to January 1 of each subsequent year out to year 8. Thereafter, the schedule includes broader periodic ranges extending out to 20 years from TPP adoption.

Rules of Origin
The TPP agreement includes a common set of rules of origin to determine whether or not a given product or item originates within the TPP region, and therefore qualifies for preferential, low tariff treatment. There are product-specific rules that limit the type and/or amount of non-TPP materials that can be used if the product is to be treated as a TPP originating good. The concept of “cumulation” is used to describe the way in which materials from one TPP country can be treated the same as materials from any other TPP country when making a TPP good. This is a key concept in the development of more seamless international supply chains among TPP participants, and will provide an incentive and financial advantage to cooperation among companies within the trade partnership area.

Technical Barriers to Trade
The TPP outlines policies for streamlining technical regulations, standards, and approval processes across the trade area. The participating countries will accept qualified testing and certifications performed in any other participating country as if the procedures occurred within their own national borders. The agreement also provides guidelines and protections to some specific industries and technologies. For example, there are protections for providers of cryptographic communications technology, forbidding governments to force these providers to divulge their private keys or secret parameters. As another example, a pharmaceutical’s pricing is not allowed to play into the drug’s approval for marketing in a given country (“if you reduce the price of sale, we’ll approve it.”).

Cross Border Trade in Services
The TPP provides guidelines for cross-border trade in services, as well as physical goods. Since logistics is itself a service, this portion of the agreement is particularly relevant to logistics service providers. The agreement includes as a goal, to recognize professional qualifications and facilitate licensing and registration procedures across the participating countries. Air services are noted as an important function in facilitating the expansion of trade. Parties are encourages to liberalize air services through agreements providing air carriers with greater flexibility on routing and frequencies. However, the chapter specifically states that its text does not apply to domestic or international air transportation services. Therefore, the content is focused on ancillary and support services.

Express delivery services (land, local, etc. – not air express) received its own Annex (Annex 10-B). In my opinion, the most notable measure related to express delivery services is the provision that bars participating countries from subsidizing parcel delivery services with revenues from their respective postal monopolies. Similarly, it includes a provision banning participating countries from requiring foreign express delivery service providers to supply a universal postal service as a condition for obtaining a parcel delivery license within that country. Finally, there is also a provision banning the assessment of fees on foreign parcel delivery providers to subsidize a different delivery service (I assume subsidizing domestic service providers was the concern).

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