After the numerous supply chain issues of the last two years, businesses are hoping for an improved logistics landscape in 2022. While there is somewhat smoother sailing on the horizon, international trade waters will remain choppy in 2022 as logistics issues and government actions continue. Some pressure on the logistics portion of the supply chain may ease, but the cost of shipping will continue to increase. Moreover, new issues are expected to arise in 2022 resulting from government action that will continue to put pressure on the supply chain.
Logistics Issues Will Remain
Logistics-related supply chain pressures may ease during 2022 as a result of lessons learned. During 2020 and 2021, the pandemic upended the logistics industry. Supply chain pressures stretched ports to maximum capacity, and there was (and continues to be) a shortage of truckers. Companies sought to side-step the delays by paying extra to take another company’s spot-on containerships and take other creative actions. Some logistics-related issues likely will ease in 2022 due to companies learning from their experiences during the pandemic. Companies have learned to adapt to the ‘new normal’ and will continue to do so. Recognizing that “just-in-time” supply chains will not return to their prior efficiency, companies will continue to adapt in 2022 by warehousing essential inventory (when possible), diversifying supply chains, and selecting to manufacture closer to the consumer base.
Diversification and relocation will be incentivized in 2022 by high logistics costs and governments (as discussed later). Trucking companies and other logistics companies are experiencing higher costs, such as higher salaries resulting from the tight labor market. Similarly, prices for ocean shipments are expected to reach record highs under annual contracts. Logistics costs are expected to remain high through 2022 and likely 2023. However, many expect that more supply capacity will come on stream and the demand-side pressures should ease this year.
Congress seeks to address logistics issues with the Ocean Shipping Reform Act of 2021, which overhauls federal regulations for the global shipping industry. This bill seeks to ensure a more competitive global ocean shipping industry, protect American businesses and consumers from price gouging, and establish reciprocal trade to promote U.S. exports as part of the Federal Maritime Commission’s (FMC) mission. It also prohibits ocean carriers from declining opportunities for U.S. exports unreasonably and provides additional enforcement tools to the FMC to address injurious ocean carrier practices.
Any ease in logistics supply chain pressures will be countered if there is a COVID-19 outbreak in China. China’s zero COVID policy has kept most of the country operating under normal conditions. However, more infectious variants such as Omicron could be a factor, and China’s domestic vaccines reportedly offer less protection than vaccines used in the West. An outbreak and the consequent shutdowns could cripple many companies that rely on goods from China.
Government Action Likely Will Cause Friction
Additional trade friction can be expected in 2022 as a result of action by Congress and the Biden Administration. The Uyghur Forced Labor Prevention Act (Forced Labor Act) will cause ripples through the supply chain once implemented in June 2022. A similar result will occur if the Biden Administration decides to initiate an investigation into China’s industrial subsidies under Section 301.
The Forced Labor Act prohibits the import of goods made with forced labor and implements a rebuttable presumption that all goods produced in China’s Xinjiang Uyghur Autonomous Region (XUAR) are made with forced labor. Although the focus is on the XUAR, the presumption of forced labor will extend to entities that are not located in XUAR. Moreover, the import ban extends upstream to capture finished goods that use inputs from the XUAR, regardless of where the finished good is completed. Companies will be required to prove with “clear and convincing” evidence that forced labor was not used at any point in their supply chain. U.S. Customs and Border Protection is expected to issue compliance guidance.
In order to make changes to the Section 301 Intellectual Property tariffs (beyond eliminating them), USTR will need to conduct a new investigation. The potential Section 301 action on industrial subsides in China would authorize the Biden Administration to place tariffs on additional products from China, but also lower (or remove) tariffs on other items. Signals suggest that certain factions of the Biden administration want to impose additional tariffs, but USTR Katherine Tai wants to continue the dialog with her Chinese counterparts. While a breakthrough is possible, China has historically used a dialog to prevent action against it rather than take meaningful action in response to U.S. and other Western government’s requests. Moreover, outside of China, it is not disputed that the Chinese Government provides significant subsidies to a number of industries – including green energy, semiconductors, and automobiles. An investigation will demonstrate as much, relying on Chinese government documents. If action is taken under Section 301, it is likely that the tariffs will be targeted to assist the Administration’s supply-chain and re-shoring goals.
These actions, however, will cause additional disruption on goods from China. China likely will take retaliatory actions in response, including tariff and non-tariff actions on U.S. imports into China. China could also take action on exports leaving China. It is unclear how China will react, and retaliation may occur in China’s domestic market. The Government could encourage a boycott of certain U.S. companies via Chinese press and netizens. Similarly, the Government of China could take unfounded regulatory action against U.S. and other western countries, as it has done in the past. Even if China does not take retaliatory action, recent regulatory upheaval in China suggests that additional restrictions could come, if China’s leaders think an industry is becoming too powerful or influential.
Business Leaders Should Brace For Higher Costs And Consider Taking Action
Business leaders should brace for higher costs in the near-term, even if goods begin to flow more easily. Inflation will continue to push input prices up, and compliance will add administrative costs and burdens. Nevertheless, supply chain due diligence – although costly – should be conducted to ensure there is no forced labor at any point in a company’s supply chain, because the cost of non-compliance will be far greater, particularly for companies operating in or purchasing goods from China and importing merchandise to the United States. Even if a company is not operating in or purchasing goods from China, due diligence should be conducted to ensure no part or input includes forced labor.
Given the increase in shipping costs and other frictions, business leaders may consider relocating their supply chains. The Biden Administration and Congress are incentivizing business leaders to do just that with two pieces of legislation currently moving through Congress: the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength (America COMPETES) Act in the House of Representatives, and the United States Innovation and Competition Act (USICA), in the Senate. The central component of these two bills is the funding for the Creating Helpful Incentives to Produce Semiconductors Act (CHIPS), which provides incentives for companies to build semiconductor production facilities in the United States. The bills also appropriate significant funds aimed at countering China’s influence domestically and abroad. These bills have bipartisan support and portions have been labeled as “must-pass” legislation. Included in these bills are proposals to expand the role for the federal government in “strategic sectors” – including semiconductors, drones, wireless broadband, and artificial intelligence – with increased funding, supervision, and regulation of various industries. Other components include tackling supply chain vulnerabilities to make more goods in America, turbocharging America’s scientific research and technological leadership, strengthening America’s economic and national security at home and abroad, and bolstering President Biden’s Buy American agenda. The Biden Administration also will use executive power to provide incentives to business seeking to relocate to the United States, and federal agencies have been directed to assist business in any way they can.
Lee Smith is the leader of law firm Baker Donelson’s International Trade and National Security practice. He advises clients on matters involving export controls, customs compliance, trade remedy investigations, trade policy, market access and free trade agreement interpretation. Smith can be reached at (202)326-5026 or email@example.com.