New Articles

Withdrawal From TPP

TPP would have meant more shipments of export cargo and import cargo in international trade.

Withdrawal From TPP

I’ve been travelling the country this week meeting with both American business leaders and government and trade representatives from several Asian countries. During these discussions, I was asked two key questions, the first being “What does Trump’s withdrawal of the TPP mean to the US?”, and secondly, “Will the 11 other nations work to resurrect the agreement?”

To answer the first question, the action President Trump took on Monday was no real surprise to anyone following both the TPP and the comments Trump made during the election campaign, however many, such as Japanese Prime Minster Abe and Australian Prime Minster Malcom Turnbull, were still holding out hope.

To provide a little prospective, the only two ways the TPP was going to be implemented was if all countries ratified the agreement, or if a minimum of six countires collectively representing 85 percent of more of the combined GDP of the twelve countries. Given the US represents 60.3 percent of the combined GDP, without the US signature, the entire deal dissolves.

So, getting to the question, what does Trump’s withdrawal of the TPP mean to the US? There are two key impacts that will occur, the first being the domestic trade impact. Given the TPP has never gone into effect, the US will see very little impact per se. Of course, there are other trade policies currently being discussed, such as the border tax that could impact trade.

If ratified, the TPP would have come with some very positive impacts to specific US industries including opening additional doors for trade in Asia. Conversely, it would also provide negative impacts to a few other specific industries. The US International Trade Commission report confirmed that there would be an annual increase in GDP of $42.7 billion by 2032 as a direct result of the TPP, however key industries such as manufacturing ($10.8 billion loss in exports annually) and electronic equipment ($3.7 billion loss in annual exports) would be the two most impacted. The big gainers would be the professional services industry ($11.6 billion annual increase in exports) and the agriculture and food industry ($10 billion annual increase in exports). As you can see, there are plusses and minuses when it comes to the impact of US industries via a major multilateral agreement such as the TPP.

However, there is the second impact which is more geopolitical in nature. The TPP was eventually developed and led by the US to write the rules for trade in Asia, while conveniently leaving China and India out of the picture. Unlike many other trade agreements, the TPP also included many social elements, focused on environmental protection and labor laws, two key subjects that are typically forgotten as poorer countries work desperately to grow and export. Those countries that were left out of the original 12 were almost falling over themselves to be added, with India, Korea, Thailand, and even China stating that they wanted to be included sometime in the future. The stage was set for the US to be both the writer of the rules and beneficiary of Asian trade. On Monday the 23rd of January 2017, with one signature, President Trump dissolved the entire deal, leaving a huge void in Asian trade leadership.

The ASEAN community has been working on another regional trade agreement, called the Regional Comprehensive Economic Partnership (RCEP), that includes the 10 ASEAN countries, and six of their major trading partners in Asia, namely Australia, New Zealand, India, China, Korea and Japan. It is now widely believed that China is taking the lead in the agreement, using both their heavy investment in Southeast Asia, and other initiatives such as the One Belt – One Road initiative to provide significant influence over the negotiations, effectively replacing the US as the writer of the rules of Asian trade, while simultaneously moving the US to the side lines.

The second question I’ve been asked a lot recently is “Will the 11 other nations work to resurrect the agreement?” Or, as Japanese Prime Minister Abe, whose country has already ratified the agreement, has said, is there a possibility of “twelve minus one.” Australia’s Prime Minster, Malcolm Turnbull is also pressing ahead to ratify the agreement, to apply additional pressure on Trump. Turnbull stated “It is possible US policy could change over time on this, as it has done on other trade deals.” However, many agree that this may be nothing but wasted energy.

My personal belief is that the TPP will die a natural death now that the US has excluded itself. I have spoken to many Asian government officials both involved directly in the TPP negotiations, and those involved in trade policy, and many believe that their respective countries agreed to terms and conditions at the request of the US; terms that they otherwise would have objected to with a less powerful country leading the agreement. Now that the US has left the agreement, many countries will want to start negotiating from the start, a process that originally took over eight years. Most of these countries have already shifted focus to the RCEP, and with China reaching out with gusto after the US withdrawal of the TPP, with equally lofty promises of trade opportunities and growth, my feeling is the Asian shift to a China has already started, and Japan and Australia will quickly fall in line.

Timothy Barnes is the president of Asia Pacific Consulting, and author of the book A Naked View of the Trans-Pacific Partnership.

Dealing with Trump's proposed import tax with parallel manufacturing strategy will shift patterns of shipments of export cargo and import cargo in international trade.

Navigating Trump’s 35-Percent Import Tax

As the jolt of Donald Trump winning the U.S. presidential election reverberated around the world, the media and blogospheres have erupted in commentary and opinions, fueled by tweets, rumors and speculation. One key topic of discussion has, of course, been U.S. trade and bringing jobs back, the reversal of Carrier’s decision to move a manufacturing plant to Mexico, and proposed tax, or “border adjustments” as they are often called, for U.S. companies that have ranged from 35 percent to 45 percent (Trump has quoted both rates historically) to import foreign manufactured products.

Without adding to that speculation, I want to provide my view on how CEOs/COOs and supply chain leaders need to approach this situation, at least theoretically for now, while the policies are being formulated and written. I also want to provide an overview of my model of parallel manufacturing, that can be utilized by U.S. companies to take advantage of both the low cost of global manufacturing, and the threat of import tariffs.

First, I want to lay down some assumptions given Trump has not provided all the details in his plan. The first assumption is that the tax, whatever the rate, will apply to all products imported into the U.S., no matter if it’s from American companies or foreign. The foundation for this assumption is if the tax only applies to U.S. companies that have outsourced manufacturing overseas, automatically all foreign companies will have an instant advantage, crippling U.S. companies and severely hurting the goal of bringing jobs back to the U.S. Of course, there is a long road ahead for Trump to implement the tax, and there is already heavy GOP resistance. But for this exercise, let’s assume it proceeds at 35 percent (the lower of the two rates).

The second assumption is that raw materials and semi-finished materials are not included in the tax. The foundation for this assumption is based on commentary from Trump advisors, and the fact that most raw materials used in U.S. manufacturing now, are sourced internationally, and assembled in the U.S.

As supply chain leaders, we all know that CEOs and COOs make their manufacturing decisions based on a balance of lowest cost and customer accepted quality. It is this cost focus that has resulted in the move of much manufacturing from the U.S. to Mexico, China, and other low cost labor locations. Moving manufacturing jobs back to the U.S. would occur based on two key factors, the first being the falling costs of automation. The CEO of United Technologies, Greg Hayes told Jim Cramer on CNBC December 5, in regards to the Indianapolis factory “we are going to make a $16 million investment in that factory… to automate to drive the costs down to be more competitive.” He then concluded, “What that will ultimately mean is that there will be fewer jobs.” The second cost focus will be tariffs, and avoiding any major tariff or tax increase when importing products into the U.S., specifically the 35-percent import tariff or tax.

Most U.S. companies that manufacture products overseas have two distinct set of customers, domestic customers and foreign customers.

Foreign Customers

For US companies that manufacture, let’s say, in Mexico, and then ship directly, or indirectly via a distribution network to non-U.S. customers, nothing will need to change. Mexico has 45 free trade agreements throughout the world, including most of Central and Latin America, the EU, and Japan. As such, it’s recommended that U.S. companies continue to move manufacturing into Mexico to service their foreign customer base. This will be similar with China, once the Regional Economic Partnership Agreement is in place.

U.S. Customers

This is where U.S. companies will need to review Trump’s plan carefully to remain competitive. Based on our assumption that raw materials will not be taxed, the raw and semi-finished products used in final assembly should not attract the 35-percent tax Trump has quoted. Thus, final assembly can be conducted in the U.S. to service their U.S. customer base. Companies like United Technologies, can be highly automated to keep costs down. The result is a U.S.-assembled product that abides by the assumed rules.

This approach will also add fuel to the final assembly contract manufacturing market, where specialist manufacturing companies based in the U.S. will complete the final assembly on a contract basis. Contract manufacturing companies such as Celestica (based in Toronto, Canada) and Sanmina (based in South Carolina) already have plants in Texas and other places along the Mexico border as well as many other U.S. locations.

This strategy will create parallel manufacturing strategies, whereby the same raw and semi-finished suppliers remain, allowing procurement leaders to keep their costs down by consolidating supply. However the final assembly will be conducted in parallel in two separate locations depending on where the customer is based. This model is used to a lesser extent with companies that supply the U.S. government. They are required to manufacture the specific units sold to the U.S. government in the U.S. or other approved locations (such as Mexico) and not China. As such, many technology companies have final assembly for U.S. government customers in Mexico, and use China for the rest of their customers.

The final plan will obviously need to involve a deep understanding of the policy Trump plans to implement, and each companies’ individual situation, customer base, product composition among other key factors. However, there is a path forward for companies willing to act quickly to retain most of their supply chain footprint and strategy, and engage in final assembly contract manufacture based in the U.S. to avoid the excessive import duties posed.

Acting quickly is critical. Assuming there is a phase-in period for the 35-percent tax rate, there will also be an almost immediate increase in prices for products sold in the U.S. Those companies that have already adjusted their supply chain, and taken advantage of parallel manufacturing will be able to keep their prices stable, and position themselves to take major market share from both domestic and global competitors alike.

Timothy Barnes is with Asia Pacific Consulting in Chapel Hill, North Carolina.