The world may be embracing short-term workarounds to navigate the U.S.-China trade war and its tariffs, but those moves could ultimately contribute to more long-term shifts.
Beyond the current frenzy that the persistent trade dispute between the two powerhouse nations has fueled, the tariff firestorm may be paving the way for a reconfiguration of global supply chains over the long term, according to Randall Chafetz, managing executive officer and deputy head of global corporate and investment banking at Mitsubishi UFJ Financial Group.
“We’re seeing what everyone is seeing, which is a meaningful supply-chain disruption,” Chafetz said at the recent 2019 World Trade Symposium in New York, according to a press release distributed Tuesday.
According to MUFG estimates, continued supply chain disruptions could contribute to redirecting $20 billion to $50 billion in business away from China in 2020.
Already, apparel brands and retailers are committed to shrinking sourcing from China, with companies like Michael Kors planning to cut back to only manufacturing around 10% of its footwear in the country next year, down from 80% four years ago. More than half of Sourcing Summit New York attendees surveyed live in October said they plan to cut back their China sourcing by as much as 35% in 2020.
The uncertainty that has settled over trade with China has had a chilling effect on foreign investment, too, because companies aren’t confident in putting down roots in a place that they could eventually be pressured to leave in order to preserve their business. The uncertainty has also contributed to a downtrend in global M&A activity.
“People who are committed to making acquisitions [in support of] growth [are reluctant] to pull the trigger because of … the uncertainty that tariffs and trade are presenting right now,” Chafetz said.
While it’s still at a point where companies are redirecting their supply chains and not yet making permanent shifts, Chafetz said supply chains have become “vulnerable,” particularly in highly centralized or concentrated places.
More than in the past, supply chain issues are often escalated to the C-suite. If the U.S. and China can’t come to some sort of workable agreement sooner than later, it could push CEOs and CFOs to make lasting decisions about the setup of their supply chains “as soon as next year,” Chafetz said.
“The supply chain is front and center because of the chaotic environment,” Chafetz said, and it remains to be seen how companies will settle into more tariff-resilient supply chain strategies in 2020.
As it stands now, the tone of the U.S.-China talks has shifted from seemingly positive to pessimistic. Amid efforts to reach a “phase one” trade deal, there has been a dispute about whether both parties actually agreed on a touted rollback of some tariffs or not; the back-and-forth has fueled tensions and stalled talks.
So far, reports from both sides have amounted to little more than general statements saying conversations are ongoing and a deal may be “close,” though there are few new details about what that deal could look like.
Editor’s Note: This story was reported by FN sister magazine Sourcing Journal. For more, visit Sourcingjournal.com.