Will International Trade Increase or Will We Reshore and Insource?
on Feb 3, 2015
Release of final 2014 numbers and 2015 forecasts of world economic numbers shows a changing picture of national economies. What will the impact be on supply chain strategy?
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A Quick Look at the Global Economy
The U.S. Census, World Bank,1 and World Economic Forum recently released their final 2014 numbers and forecasts for 2015 and beyond. As the U.S. continues modest growth (see Chart 1), it appears that China’s growth slows (see Chart 2). And it looks like there are challenges ahead for most of the world’s economies. Though volatile oil prices have been good for the U.S. consumers, some nations’ economies are floundering.
Chart 1: U.S. Economy
Chart 2: China’s GDP Growth
Make Trade Easier—The Dynamics of Variable and Volatile Global Supply Chains
Eight years ago when the price of a barrel of oil was topping $140, increased concerns about intellectual property violation, counterfeiting, and other challenging factors added to the conversation about the unintended consequences of outsourcing. As well, sustainability and the emergence of the Chief Responsibility Officer brought the dark side of low-cost country sourcing to the forefront. Additional costs of transportation, backups at the ports, and other factors added to the challenges. Bringing it back home was a common conversation.
At the same time, as the U.S. struggled to right its economic ship, U.S. manufacturers and commodities traders (lumber, oil, and food) wanted to increase exports. It’s difficult for a trade negotiator to penalize importers while so many companies actually want more trade—not less. Ultimately both import and export transactions continued to grow for NAFTA nations.
With some recent articles being written about new domestic manufacturing and reshoring as a U.S. trend and yet others showing more manufacturing being outsourced, the topic of opening new source markets continues to be present in the press.
So are we reshoring or offshoring? Both are simultaneously true.
The apparel industry is interesting to look at since this industry is notorious for some of the lowest wages in the world, and, therefore, has the most ‘exploratory’ supply sourcing efforts, always seeking new manufacturing markets. A recent article in Apparel is typical of the discussion. In the article, Small Runs, Big Gains: Reshoring U.S. Apparel Manufacturing,2 the authors cite examples of firms that are manufacturing in the U.S. As the title suggests, the article focuses on the types of manufacturing that might be done in the U.S.
New young companies start out manufacturing close to headquarters, or they use close-to-customer locations for rapid turn on custom products. The companies cited in the article had a mixed strategy—some specialized manufacturing in the U.S., but much of the work still done offshore. We see this trend in most industries. Few have actually opted to close up shop internationally. And in fact, our nation, among others, continues to make global trade easier. Ultimately, this increases imports.
Just Style recently released a research report on the opening of markets in Myanmar.3 International garment manufacturers are beginning to land there as the country finds its place among nations. This represents both new outsourcing as well as a shift in manufacturing from other countries such as China.
And as nations struggle with growth, they are sure to develop strategies to attract manufacturing nations and corporations to visit their shores and find their locations acceptable as source countries. China’s growth is not only stymied by the general slow-down in the world economy, but as their own internal industrial development grows and they choose the “national” product, other companies and nations are responding by taking business elsewhere. The World Economic Forum (WEF) pointed out that “Opinion polls show that the public in countries such as Japan, Germany and the United States is increasingly skeptical about the benefits of trade and foreign investment, even as their governments push for increased liberalization.”4 Governments are looking at a broad spectrum of issues that trade has given rise to, such as access to scarce, but essential, raw materials; the ability to respect international law; and general ‘peace and tranquility.’ Citizens, meanwhile, will continue to look at their own specific economic situation: Does trade help me and my family or not?
Many companies rethought their supply chain networks and did hedge their bets on some reshoring. And there are technologies, such as nano, that are economically viable, have a low labor ratio, and require that technological prowess be kept ‘in-house.’ But the general trend is still to open new markets, find more responsible sources, and move on.
Making Trade Easier
Other conflicting perspectives on trade focus on the regulatory and policy front. 2014–2016 are big years for new regulations—the Dodd Frank Act as it pertains to conflict minerals, the FDA Food Safety Moderation Act, and new Consumer Safety and Protection regulations are upon us.5 Though this adds more work in one way, the data also shows that increased regulation has not slowed the pace of trade.
During the last few years governments also have been automating customs procedures. This year U.S. and Canada go live with simplified and automated filing (Automated Commercial Environment (ACE), and Canada Border Services Agency (CBSA) eManifest). Japan will implement ARS in 2016. This procedure should ultimately make it easier (really) for companies trading with North America.
One place to file import and export documentation
A synthesizing of the multiple regulatory agency requirements into one system. For example, FDA, U.S. Fish and Wildlife, and other agencies will also use ACE. Today, companies have to enter and consult multiple agency systems to get something done.
Surely there will be growing pains. To wit: about 50% of global trade is still done by paper as of a few weeks ago. Importers and exporters will have to find a way to get automated. But once they do, they will have a lot more information with which to manage other aspects of their business. Additionally, for value-adding manufacturers who import and then export, this blending of import and export data will allow them to take advantage of things like duty draw-back, which many firms have never really availed themselves of due to lack of data. There is more to learn and do to get ready.6
ACE will sure be a catalyst for change. Most organizations are laggards at things like keeping data clean. Automation is merciless with bad data. And once live, Customs Boarder Protection (CBP) will look at the data and how well it matches the actual shipments. This allows them more scrutiny on shipments coming in. Although exporters may not see this as a benefit, look at it this way: Just as your Mom rewarded you for a clean room, CBP will reward compliant companies. Automating and having consistent data has big business benefits. It allows importers to be compliant with their customers. Avoiding delays in intermodal handoffs at the port or chargebacks to due to late shipments or inaccurate labeling and data are big opportunities for compliant shippers.
Although the U.S. steams ahead, our growth will be impacted by our partner nations and how they choose to react to slowed or stagnant growth. Will nations retrench, manipulate currency, default on debts, and fight trade wars? Or will the day-to-day needs of consumers and companies live in a parallel universe of trade? As Klaus Schwab, Founder of the World Economic Forum stated, “The shared understanding of challenges is needed as a base for multi-stakeholder collaboration, which has seen increasing recognition as the most effective way to address global risks and build resilience against them.” From environmental factors, cyber security, and reducing conflict, to global trade, we are all one connected world. Even though moves and countermoves can have a positive or negative impact on nations and industry sectors, we can hope for more collaboration.