Donald Trump’s triumph has brought in worries that his anti-globalisation mantra will spread protectionism around the world, put up trade barriers and curb global economic growth. Nick Miller, Head – FMCG, Crimson & Co, talks about what companies with global supply chains should do.
President Donald Trump’s protectionist rhetoric at his Presidential inauguration and his subsequent withdrawal from the Trans-Pacific Partnership (TPP) herald a period where the progress of free trade could well grind to a halt. Businesses with extensive supply chains should therefore take action to insulate themselves against the potential penalties and strident regulation that they could become subject to.
At his inauguration, President Trump outlined his intention to pursue an ‘America First’ policy, stating that “We will follow two simple rules: Buy American and hire American.” The first manifestation of this policy was Trump’s definitive decision not to join the TPP – a flagship Obama trade deal encompassing 11 countries in the Pacific rim which, with American membership, would have been responsible for 40 per cent of the world’s trade. The US is currently in the top three global importers and exporter, making it a major driver for global trade.
Coinciding with Brexit, which the Prime Minister recently revealed will see Britain lose access to the single market, and a surge of anti-globalisation and anti-free trade sentiment across much of the Western World, Trump’s declarations look likely to augur a period where the various initiatives towards free trade will stutter and grind to a halt and potentially reversing into protectionism.
The march towards free trade has always been somewhat precarious, with cycles of protectionism generally coinciding with lower economic growth and sometimes with recessions. For example, in the midst of the recession in 2009, the World Trade Organisation reported ‘significant slippage’ in adherence to its free trade principles. However, Trump’s statements and actions so far, as well as Brexit, represent a threat to free trade that is an order of magnitude higher than anything we’ve encountered in recent years.
At a time when ‘Made in the World’ is the norm, this undoubtedly could cause problems for many businesses. Global business loves free trade for many reasons – one is that it allows them to find the most effective and lowest cost supplier for goods. It also allows them to move people around the business on a global scale as they require. These two factors are now endangered. Any restrictions will lead to higher costs of production – and therefore often higher prices, lower sales, and reduced growth.
There are steps businesses can take to help protect themselves against these alarming shifts. Businesses have to be dynamic and fast-moving to help alleviate the potential costs of these restrictions. Many will have complex supply chains, criss-crossing networks extending across the world, and will therefore need to apply some analytical rigour to the task.
One of the steps they can take is do more ‘nearshoring.’ This means sourcing and manufacturing closer to end markets, therefore reducing the expansiveness of the supply chain and vulnerability to anti-free trade measures such as tariffs. As a matter of good practise, organisations should at minimum carry out final packaging and any product customisation close to their end markets.
Organisations should look for contingencies in differential tax rules in order to reduce the tax burden, as these will not necessarily be affected by any agreements around the transferring of physical goods. Moreover, any kind of trade war or intensifying of trade competition between countries could create opportunities as countries look to compete by differentiating their tax rates.
Geopolitical developments can have dramatic effects on the business community, and organizations should be alert to these possibilities. There are ways to insulate yourself from damage and even to prosper in times of change, if you are prepared to unravel the complex implications of these changes and take the right actions decisively and rapidly.