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Modern global trade is growing increasingly complicated and interconnected with each passing year. From sourcing raw materials to producing to assembly to purchase, a single product can be made and consumed in four or five different countries. That’s why the free, unimpeded flow of goods is so critical for trade and production to be effective in such an interconnected world. Tariffs impede that freedom, creating harsh constraints for producers, importers, exporters, and consumers.
2019 saw a trade war between the United States and China, which created a major upset for both countries. Importers, consumers, and operations teams absorbed the majority of the hit of the ensuing trade tariffs.
Let's take a look at how these trade tariffs affected logistics last year.
Prior to this trade war, the United States, along with other Western governments, had two major concerns about the way China had been conducting international business.
First, several governments had accused the Chinese government of artificially minimizing their own currency value in order to generate trade growth. An inequality in currency valuation and exchange would end up putting a heftier load on the American dollar during the importing process.
Second, the U.S. was concerned about the ongoing theft of intellectual property. A number of Chinese companies were stealing technology and designs from U.S. companies, creating “knock-offs” that both constituted as theft and damaged the reputation of American companies. The Chinese government refused to implement or uphold global intellectual property laws, effectively allowing their companies to continue IP theft without consequences.
When China continued to deny or ignore these accusations, President Trump took action and imposed tariffs on Chinese imports. Since China’s economy is heavily based on its exports, especially to America and Europe, the U.S. knew this would put pressure on China to make changes. They hoped this would force the Chinese government to stop artificially manipulating their currency and to implement IP laws (along with some other more minor negotiation points).
In response, China retaliated with a counter tariff on U.S. exports going into China. While the number of American exports isn’t as high as imports, this still had a major impact on U.S. business.
From there, the trade war continued to escalate. The total value of tariffs the U.S. implemented in China in 2019 is estimated at about $200B, and China’s counter-tariffs were about $100B.
In December 2019, President Trump and President XI resolved an agreement for the trade war. They were able to resolve many of America’s objectives with regard to currency manipulation and intellectual protection.
Get more information about phase one trade war agreement between the U.S. and China here.
Although the trade war has now officially concluded with agreements, there are still going to be major impacts of these trade tariffs moving into 2020 and beyond. Just like any war, people don’t want to relive the same issues—so companies and logistics operations are going to change drastically to ensure they’re not susceptible to another sort of trade war.
What impacts do we anticipate moving forward?
Up until 2019, it was common for American companies to import their goods from one or two factories in the same country (like China). They would import large orders from a single source, and ship it all back in large loads to the U.S.
The trade war is making importers feel a little uncomfortable with a single source of imports. Throughout 2019, a lot of U.S. importers already began switching their production locations from China to other countries like Vietnam, India, Malaysia, and the Middle East.
Even though the trade war with China is done, U.S. importers are realizing just how risky it is to source from just one country. Now, we anticipate companies to start sourcing smaller orders from multiple factories and even countries.
This will have a major impact on logistics. It used to be one large order with a single source and destination. Now, there will be a number of smaller shipments to and from many more locations. This means international logistics are going to be increasingly complex. It also means there will be more trade routes, so there will be room for smaller companies to get their hand in the pot.
Since there will be more sources for imports, there will likely also be a greater quantity of smaller orders. This means that logistics companies are going to need to figure out how to best optimize routes, especially with intermodal transport.
It also means that a lot of importers will start focusing on full-service carriers, who can do everything from transport to storage to domestic shipping. This will make it easier on importers, as opposed to trying to connect multiple companies for each line of the supply chain.
More complicated sourcing and logistics are calling for an enhanced sense of visibility and transparency across the supply chain. The best way to do that: blockchain technology.
This allows companies to react to information in real-time, regardless of the economic climate. If a factory runs out of materials, the importer will know instantly and can shift production elsewhere. If a trucker gets stuck in traffic, they can update the ETA for the customer.
Blockchain dramatically reduces the risks of breakdown along the supply chain, while opening up the sharing and communication of data for all logistics partners.
Global trade isn’t going to stop. But the 2019 trade war is showing importers that one small regulation or law change can have a serious impact on business. Since international business is finicky and ever-changing, a lot of importers are looking to minimize risk by sourcing from domestic partners.
Furthermore, it used to be a lot cheaper to source overseas. Now, with raising tariffs and regulations, it’s actually cheaper in a lot of cases to source right here at home.
Logistically, that means that there will likely be an even greater uptick in domestic travel. Artificial intelligence is going to come into play, even more, to optimize routes and minimize congestion as we see more cross-country shipping.
Foreign trade zones are geographical areas near a U.S. Port of Entry where both domestic and foreign goods receive Customs treatment as though they were outside the U.S. Essentially, these zones help reduce burdens of trade tariffs and minimize the number of customs regulations.
The U.S. currently has 230 foreign trade zone projects and 400 subzones. We anticipate more importers will move operations to these geographical areas to minimize the risk of tariff burdens in the future.
Even though the trade war is over, companies and consumers are still feeling its effects—and will continue into the coming months and years as trade tariffs become more solidified. The biggest impact of the trade war was an unsettling uncertainty surrounding the stability of international trade and global supply chains. Companies are going to start making changes to diversify their import portfolios and minimize risk, so they (and their customers) are not as susceptible to economic fluctuations.
Still, there’s still a major supply and demand for international imports and exports. It’s not going to kill the economy. In fact, the after-effects of this trade war will likely blossom business even further. It simply means that shipping and logistics will need to be flexible, as always, to meet the changing demand.
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