Trade Disputes Create Supply Chain Risks — And Opportunity

Global vendors in the supply chain are seeing pressure from multiple sides as a result of ongoing trade disputes and renegotiations. While the effects of that pressure have forced suppliers to examine new ways of conducting business, experts warn that some of their tactics are not always ethical or legal.

One report from Bain and Company, released last week, highlighted how Chinese companies are deploying more strategic, sophisticated merger and acquisition (M&A) strategies in the wake of trade disputes with the U.S. According to CNBC reports, foreign M&A by Chinese companies has slowed in the first half (H1) of 2018, with deals totaling $22 billion for H1. That’s less than half of the $56.7 billion totaled in the first half of last year, and significantly smaller than the $118.7 billion in deals reached in H1 of 2016.

Bain researchers said this year’s deal-making slowdown can be traced back to trade disputes  as well as the weakening Chinese yuan  over countries’ investment restrictions and heightened scrutiny at home over foreign investments. Yet, analysts noted that Chinese companies are taking “a more sophisticated approach” to their deals. It may result in fewer acquisitions, but those takeovers are more likely to be successful, analysts said.

“China’s outbound boom will only continue as companies look to capture new capabilities that strengthen their domestic position, while also growing overseas for a leadership position in industries in which they can gain a competitive edge,” the report stated.

However, other residual effects of ongoing trade disputes are less positive.

While Chinese exporters surged trade volumes in September, in an effort to avoid the upcoming tariffs on $200 billion worth of exports to the U.S. (creating a trade surplus worth $32 billion, according to Bloomberg), some suppliers in both the U.S. and China are reportedly turning to transshipments of goods to avoid the tariffs once they come into play. This tactic involves rerouting orders to other markets  including Vietnam, the Philippines and Sri Lanka  so the orders can be labeled as having a country of origin other than China.

One case, recently highlighted by seafood trade journal Undercurrent News, involved lobster shipments from the U.S. to China being rerouted to Vietnam and Canada to avoid tariffs. It’s an illegal tactic, reports warned, with Vietnam-based smugglers allegedly working to help trading partners avoid the tariffs.

Separate reports in also emphasized the legal risks linked to transshipments.

“When importing into the United States, a series of customs laws make it illegal to import goods using a falsely labeled country of origin, sometimes equating the practice with smuggling,” the publication said. “In some cases, U.S. courts have even held corporate officers personally liable.”

What It Means For Global Traders

Research recently published by AsiaInspection (AI) found that businesses in the region have begun to diversify their supply chains, largely as a result of redrawn trade lines and disputes. As many as three-quarters of businesses polled in the AI Mid-Year Survey said they are looking for vendors in new markets other than China, or plan to do so this year.

This offers an opportunity for some of China’s top competitors, including Vietnam and Cambodia, reports said. However, the survey found only 36 percent of Chinese companies said they have felt affected by the nation’s trade dispute with the U.S. and subsequent trade tariffs, compared to 60 percent of U.S. businesses that said the same.

Regardless, efforts to diversify vendors amid trade disputes may have a resonating impact throughout supply chains, while experts are also warning of the need for heightened supplier vetting to avoid being exposed to legal and non-compliance risks.

Brian Peccarelli, Thomson Reuters co-chief operating officer, wrote in the report that businesses must manage their exposure by tightening control of inventory, and cross-referencing their imports with the lists of goods that are subject to various markets’ trade tariffs. Vendor audits are key, too, he said, and must include third-party players down the supply chain.

With trade tariffs and agreements expected to keep changing as officials continue negotiations, business leaders should see this volatile time as “an opportunity to review supply chain strategies and find cost savings” by inking new supplier relationships and streamlining compliance efforts, Peccarelli stated.