Beyond the present frenzy the persistent trade dispute between the two powerhouse nations has fueled, it may be paving the way for a reconfiguration of global supply chains over the long term, according to Randall Chafetz, managing executive officer and deputy head of global corporate and investment banking at Mitsubishi UFJ Financial Group (MUFG).
“We’re seeing what everyone is seeing, which is a meaningful supply-chain disruption,” Chafetz said at the recent 2019 World Trade Symposium in New York, according to a release out Tuesday.
According to MUFG estimates, continued supply chain disruptions could contribute to the redirection of between $20 billion and $50 billion out of China in 2020.
Already, apparel brands and retailers are committed to shrinking their China sourcing, with companies like Michael Kors planning to cut back to only manufacturing around 10 percent of its footwear in the country next year—down from 80 percent four years ago. More than half of Sourcing Summit New York attendees surveyed live in October said they plan to cut their China sourcing back by as much as 35 percent in 2020.
The uncertainty that has settled over trade with China has had a chilling effect on foreign investment, too, as companies aren’t confident in putting down roots in a place they could end up pressured to leave in order to preserve the business. The uncertainty has also contributed to a downtrend in global M&A activity.
“People who are committed to making acquisitions [in support of] growth [are reluctant] to pull the trigger because of…the uncertainty that tariffs and trade are presenting right now,” Chafetz said.
While it’s still at a point were companies are redirecting their supply chains and not yet making permanent shifts, Chafetz said supply chains have become “vulnerable,” particularly in highly centralized or concentrated places.
More than has been the case in the past, supply chain issues are often escalated to the C-suite, and if the U.S. and China can’t come to some sort of workable agreement sooner than later, it could push those CEOs and CFOs to make more lasting decisions about the setup of their supply chains “as soon as next year,” Chafetz said.
“The supply chain is front and center because of the chaotic environment,” Chafetz said, and it remains to be seen how companies will settle into more tariff-resilient supply chain strategies in 2020.
As it stands, the tone of the talks between the U.S. and China have shifted from seemingly positive to pessimistic. Amid efforts toward a phase one trade deal, there has been a dispute as to whether both parties agreed on a rollback of tariffs or not, and the back-and-forth has served to fuel tension and stall talks. So far, reports from both sides have amounted to little more than that conversations are ongoing and a deal may be “close,” though there are few new details surrounding what that deal will look like.
Source: Sourcing Journal