Tag Archives: global trade

The Brexit Horror Show: It’s Going To Be Rocky!

We all like to watch a good horror show.. but UK customs trying to manually process our imports? Entertainment it is not!

Are you ready to watch the Brexit horror show unfold?

The National Audit Office (NAO) pubilished a report last Thursday reviewing HM Revenue & Customs’ development of the new Customs Declaration Service (CDS).  The system is being developed in an attempt to manage the predicted 255 million UK customs declarations per year (an increase from 55 million)  once the UK leaves the EU.

But, with a significant amount of work still to be completed before March  2019,  many are concerned about what chaos might ensue.

Amyas Morse,  head of the NAO, did little to disguise his own concerns when he briefed the media on the report this week. He warned of a potential “horror show” at customs if the transition to CDS is not made by January 2019.

He said “What we don’t want to find is that, at the first tap, this falls apart like a chocolate orange.”  (Yep, we were confused by this too – it’s well known that Terry’s Chocolate Oranges are not known for their fragility; hence the marketing slogan “Don’t tap it, whack it!”.)

“It needs to be coming through as uniform, a little bit more like a cricket ball” he continued.

What Is The Customs Declarations Service?

The CDS is a new system, which will be installed to manage all imports and exports post-Brexit, replacing existing system, Customs Handling of Import and Export Freight (CHIEF).

CHIEF can currently process only 100 million declarations per year.  This leaves no question that a new system is needed given that HMRC are estimating an increase to 255 million once new trade and customs agreements are made during Brexit.

Completion of the installation is forecasted for January 2019 which doesn’t allow much room for error or delay given that the UK will officially leave the EU in March 2019. Indeed, the report confirms that there is still a “significant” amount of work to complete and a number of vacancies to fill, which means there’s a pretty good chance that the full functionality of CDS won’t be ready in time.

Ironically, in 2016, the UK came fifth out of 160 countries in the World Bank’s ranking of the efficiency of the border clearance process, including customs. Time will tell if this can be maintained post-Brexit!

Why Should Businesses Be Concerned?

The National Audit Office believes the government is only just starting to realise how difficult Brexit will be.  In a worst-case scenario it would become impossible for customs to collect the £34bn of duty, excise, and VAT taken at the border every year.

Customs officials might have to manually process imports and exports if the new electronic system is not in place, which would of course be a nightmarish scenario for businesses and their supply chains.

Mike Cherry, chairman of the Federation of Small Businesses, said “It’s extremely concerning that the UK’s new customs system may not be ready in time for Brexit, potentially resulting in massive delays to trade and leaving thousands of businesses in the lurch.” And hat’s not to mention a lack of confidence businesses will feel in the UK if their flow of goods is disrupted.

“Can government actually step up in these very difficult circumstances and deliver a unified response?” Morse asked. “I’m not seeing it yet.”

The report, and the alarming comments made by Amyas Morse will no doubt increase the pressure on the prime minister to re-evaluate Brexit progress and policy, but will it be in time to stop a customs horror show?

Let us know your thoughts on the NAO report in the comments section below. 

In other procurement and supply-chain news this week….

Bangladesh Factory Blast

  • Major European buyers of apparel supplied by a Bangladesh garment plant have started investigations after a boiler explosion in the plant killed 13 people and injured dozens
  • The explosion occurred during maintenance work at the factory, whose top buyers include Finnish fashion chain Lindex, which is part of Stockmann
  • Stockmann communications manager Anna Bjarland confirmed to SM that the factory supplied garments to both Stockmann and Lindex saying that the company was investigating

Read more on Supply Management

Hazardous chemicals in Tesco’s clothing supply chain

  • Tesco has joined a growing list of major high street retailers in beginning to remove chemicals thought to be hazardous from the supply chain of its clothing brand
  • Greenpeace said Tesco will immediately begin the process of eliminating 11 groups of hazardous substances from its F&F brand, including phthalates, brominated and chlorinated flame retardants, chlorinated solvents and heavy metals
  • Alan Wragg, technical director for clothing at Tesco, said: “This commitment is part of our goal to protect the environment by sourcing products sustainably and responsibly for our customers.”

Read more on Business Reporter 

Could China lead the way with AI?

  • In the battle of technological innovation between East and West, artificial intelligence (AI) is on the front line. And China’s influence is growing
  • China has invested massively in AI research since 2013, and these efforts are yielding incredible results. China’s AI pioneers are already making great strides in core AI fields
  • It is becoming clear that belief in U.S. dominance of the tech world is flagging. As it stands, China is in the driver’s seat

Read more on Venturebeat

World Trade and Procurement in the Trump Era

Trump’s trade  policies will greatly affect our global supply chains. How will increased protectionism and bilateral deals impact the procurement function?

Frantically attempting to understand the new modern world, commentators and experts are struggling to digest the political earthquakes of 2016. It remains wholly unclear what binds together the widespread nationalism, populism and division in countries around the world.

The threat to global supply chains

Trump has a clear dislike of international trade, preferring to shield the USA’s economy from competition. He has a disdain for businesses moving operations to other countries.

Whether or not organisations source much directly from non-domestic sources, they are dependent on global supply chains and networks. These networks are responsible for sourcing the goods and services to meet the needs of stakeholders. Threats to free trade pose challenges to procurement professionals and their ability to source goods and services efficiently and cost-effectively.

For many years, there has been a trend for opening up procurement markets. This trend has entailed removing tariffs on imports, opening up non-discriminatory bidding on public contracts to non-domestic businesses and harmonising regulatory regimes to make cross-border trade less bureaucratic and more efficient. This has allowed procurement teams to drive down costs and increase competition and product choice.

Trump’s abolition of free trade agreements

Since inauguration, Trump has honoured his commitments to abolish pending free trade agreements (FTAs) with the European Union and eleven Pacific Rim countries. Both contained provisions which would have opened up the procurement markets to non-discriminatory bidding for businesses across participating countries. This eases importing processes.

Trump also vowed to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico, which has been critical in creating and sustaining supply chains in North America.

With this move away from free trade, what are the prospects for continued integration of procurement markets in the Trump era? There are two points to cover – new bilateral FTAs including the USA and the movement towards free trade driven by powers beyond the USA.

The prospect of new bilateral deals

Firstly, whilst Trump has expressed a strong distaste for multilateral FTAs such as TTIP, TPP and NAFTA, he has sung the praises of bilateral deals. This has been strongly signalled with the UK in particular.  Trump has made some ambitious comments that there is a  deal ready to sign once the UK departs the EU.

If this were to happen, tariffs and perhaps other barriers would be removed, with the intention of easing cross-border trade.

The prospects for this are not great, however. With Trump’s “America first” agenda, it is not clear how easily any deals could come to fruition. FTAs are based on compromise, whereby countries grant reciprocal access to each others’ economies. For American companies to gain the ability to win public contracts as part of a deal with another country, access to American government contracts would need to be provided to businesses from the other country.

It is far from clear whether the new administration would accept the American government awarding contracts to more foreign companies, effectively moving the jobs associated with that contract to other countries.

China could be the driving force behind liberalising trade

The second topic is perhaps more pertinent then; this is the possibility that other countries or systems will emerge as the force behind liberalising procurement markets to replace a more protectionist and isolationist USA.

China’s global economic influence is steadily increasing. The TPP’s death presents China with the opportunity to be the leader in free trade. It is the lead behind the proposed Regional Comprehensive Economic Pact (RCEP), which includes sixteen countries, such as Australia, Japan, India and South Korea. In total, RCEP covers 30 per cent of global GDP and around half of the global population.

The agreement focuses on tariff removal, with some harmonisation of standards and intellectual property rights. RCEP is not equivalent to TPP in integrating procurement markets in different countries, however. Whilst procurement teams would benefit greatly from cheaper imports from elimination of tariffs, RCEP does not include detailed provisions of government procurement – non-discrimination does not look likely to be included. The eventual, and lofty, ambition of RCEP is to create a free trade area across the Asia Pacific.

Driving integration in procurement markets

Aside from China, multilateral institutions are perhaps the most likely to drive integration and liberalisation of procurement markets over the coming years. The European Union has long been a driver of liberalisation of procurement markets.

In 2016, the EU signed a detailed FTA with Canada,   including detailed provision for procurement.  It has pending agreements with countries such as Singapore and Vietnam and is in long-term discussions with an array of countries and trading blocs.

The World Trade Organization’s (WTO), Agreement on Government Procurement (GPA), consisting of 47 members (including the EU28), reciprocally opens procurement markets. It is looking likely that Australia will accede to the GPA in 2017 and discussions of China becoming a full member, further opening up procurement markets.

Also within the WTO, the Trade in Services Agreement (TiSA) is a proposed agreement to ease trade in services. This would include 50 countries, including the EU countries and the USA. With this, trade in services between the countries would become  frictionless and there would be elimination of preference for domestic suppliers, which might apply without a minimum value threshold for all government agencies.

Access to global markets is core for procurement

Globalisation continues to be much maligned by electorates and the media. But for procurement teams who rely on sourcing goods and services from around the world, either directly or indirectly, access to global markets is core to maximising value for money and ensuring public services are as effective and cost-efficient as possible. Without engaging in the broader political debates, it is clear that one industry needs access to suppliers of goods and services, without unnecessary barriers – the procurement industry.

Should Procurement Pros Be Concerned About Global Trade?

Renowned economist and Big Ideas Speaker Dr Linda Yueh explains why CPOs needn’t panic about the President Trump administration but there are causes of concern. 

Register as an online delegate for the London Big Ideas Summit 2017 here.

Donald Trump made good on a campaign promise on the first day of his presidency by signing an executive order indicating the United States won’t ratify the Trans-Pacific Partnership (TPP) trade deal.

Though expected, the move caused a media storm and a flurry of responses from politicians and businesses all around the globe. But what does this mean for supply managers?

Many CPOs are understandably nervous about the Trump administration’s policies with regards to global trade. The resurgence of protectionism in the U.S., coupled with the continuing fallout and trade effects of Brexit, has left many procurement professionals wondering which region of the world they should plan to source from in the future.

The TPP was a massive free-trade agreement advocated by the Obama administration, aimed at deepening economic ties between the U.S. and 11 other Pacific Rim nations, cutting taxes, and fostering trade to boost economic growth in the process. Trump argued on the campaign trail that the agreement would be harmful to the U.S. manufacturing sector. As he signed the withdrawal order, he called it “a great thing for the American worker”.

Economist, broadcaster, author and Big Ideas Summit guest speaker Dr. Linda Yueh’s message to CPOs is one of caution but it’s not time to panic.

Don’t panic

According to Linda, there are three reasons not to panic about what Trump’s protectionist tendencies will mean for procurement, trade, and global supply chains.

  • We need to keep in mind that trade takes place under WTO rules. China is the U.S.’s biggest trading partner, despite no free trade agreement being in place. Of course, if Trump were to pull out of the WTO, then that would be a game changer. But, globalisation, especially e-commerce and the Internet linking markets and people, will mean that trade is likely to continue across borders as it’s hard to see a significant roll-back Costs of trade, of course, are another issue to be focused on.
  • Luckily, the Trump administration hasn’t honed in on e-commerce, which is good news for procurement and supply chains. Currently, one in ten transactions are already undertaken via e-commerce, and this figure will continue to grow.
  • Trump may have moved quickly to sign the TPP withdrawal order on his first day in office, but that wasn’t a formal agreement. Extricating the United States from NAFTA for instance will require renegotiation time and then a period of notice before that free trade agreement would end. Even then, most trade agreements include implementation periods, so a “cliff edge” is unlikely which gives businesses time to plan. Therefore, there’s no need to panic or overhaul your supply chain immediately. But, of course, forward planning and following economic policies would be wise. Also, take Brexit as an example – if Britain succeeds in triggering Article 50 in March 2017, then the UK is scheduled to leave the EU by the end of March 2019 – almost three full years after the people’s vote. And even there, the Prime Minister has indicated that there may be an implementation period to allow more time for businesses to adjust to leaving the Single Market.

Things to watch

So, Linda warns that supply managers should keep an eye on certain factors as global trade adjusts to these seismic political shifts.

1) U.S. border taxes – recently, Trump threatened BMW with a 35 per cent border tax on foreign-built cars imported to the U.S. market. This isn’t an isolated incident and American companies are under even more pressure to produce in the U.S.. Congress is also considering a similar tax, so that is worth bearing in mind as that would have the force of legislation.

2) U.K. Tariffs – one of the consequences of a “hard” Brexit where the UK leaves the EU without any preferential trade deal, which would include no agreement on the Single Market, Customs Union, is the re-emergence of customs for EU trade. Right now, significant customs procedures only apply to non-EU shipments. But, with around half of UK exports going to the EU, taking leave of Britain’s membership in the EU with no deal would means the end of free movement of goods. More customs declarations and duties would raise costs, slow down supply chains and certainly add time at border checks. A potential ‘hard border’ would be a particular issue for Ireland.

3) Resourcing Brexit – the UK Government also needs to think about the resourcing challenges involved in ramping up staff as well as IT systems to cope with the doubling of customs checks on the UK border.

4) NAFTA – As mentioned earlier, Trump has also flagged that the North American Free Trade Agreement (between Canada, Mexico and the U.S.) is up for renegotiation. If you’re a U.S. company, you need to start making plans now about how these changes will affect you. The same applies to any other of America’s free trade deals with 20 countries that Trump would have the authority to re-examine.

What about China?

Globalisation has helped China become a manufacturing powerhouse, but with numerous closed markets.

However, there are very good reasons to continue to do business with China. Wages may be rising but that helps businesses to think about China as a market as well as one production locale in a supply chain. Plus, with growing protectionism in America, China’s President has signalled that China may take more of a lead in globalisation. There’s a lot to watch for.

In short, Linda’s advice to CPOs around the world is keep calm, but keep an eye on the details as the globalisation landscape is shifting significantly. Global trade won’t end tomorrow but it will likely look rather different in the coming years.

Join the conversation and register as a digital delegate for Big Ideas 2017 in London.

Trade War Against China? A Supply Chain Perspective

Comments made by President-elect Trump last year sparked talk of a trade war with China. But what impact will this have on supply chains?

This article was originally published on My Purchasing Center.

The Chinese government recently raised a “tit for tat” challenge to new U.S. President-Elect Donald J. Trump over a potential trade war against China, in an editorial published on China’s international state news outlet Global Times.

The op-ed states that “[a] batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted…” if Trump decides to impose a proposed 45 per cent trade tariff.

A Special Trade Relationship

To overstate the significance of the U.S.-China trade partnership is quite difficult.

In 2015, they accounted for $659.4 billion in bilateral trade, of which $161.6 billion were Chinese imports of U.S.-produced goods. As the largest, and yet still one of the fastest-growing consumer markets in the world, China is vital to the strength and prosperity of America’s export economy.

Most notably, of the American-made products included in the Global Times statement, agricultural products ($20 billion), aircraft ($15 billion), and vehicles ($11 billion) are amongst the highest value U.S. export categories. They are therefore critical to the success of American companies operating in these industries.

From China’s perspective, it is no longer the emerging market economy of decades past. It can instead rely on its own considerable production capabilities, rather than sit by the wayside as the U.S. attempts to push a trade agenda through its considerable economic muscle.

iPhone Impact

Amongst the multi-billion-dollar trade categories, the iPhone may seem like a curious inclusion. However, despite FY2016 sales of nearly $50 billion in China market, Apple’s Chinese revenues are still projected to grow.

Beyond the obvious consequences of an iPhone sales freeze, or a 45 per cent trade tariff on Apple’s top line, there are also significant economic implications behind China’s statement from a supply chain perspective. In particular, from the viewpoint of a procurement specialist.

As the most valuable company in the world, Apple’s tremendous growth in recent years has primarily been driven by sales of the iPhone. The device made up over 63 per cent of Apple’s FY 2016 revenues.

Analyst estimates of the iPhone’s profit margins have put it at over 70 per cent of retail value. This makes it by far the most lucrative amongst Apple’s products, and likely across the spectrum of consumer technology products.

According to a recent report by BMO Capital Markets, the iPhone took an astonishing 103.6 per cent of smartphone industry profits in Q3 2016. What enables the iPhone to reap such staggering margins is largely due to Apple’s global supply chain. It entails near end-to-end cost minimisation, and an integrated procurement strategy from its hundreds-strong global supplier network.

Value Chain Activities

Apple’s value chain, from its inbound logistics and manufacturing through outbound logistics and marketing, all go through China in one way or another. Procurement plays a central role in providing each activity with the necessary resources to operate efficiently and at low cost.

A proposed 45 per cent Chinese trade tariff would fundamentally alter how, and from where, Apple procures the majority of these resources. It would also significantly drive up costs and logistical complexities throughout the whole of its global supply chain.

It is important to note that very few companies possess the in-depth supply chain practices of Apple. Therefore, integrating a centralised procurement structure into such companies’ supply chains becomes even more critical.

The prevalence of global supplier and distribution networks, like Apple’s, across modern manufacturing companies relays the important role of procurement specialists in the development of integrated strategies. These strategies must not only generate value, but also mitigate the multitude of risks associated with maintaining international supply chains.

In the event of significant geo-political and economic shocks, such as a potential U.S.-China trade war, procurement can work closely with companies to ensure manufacturing processes are harmed as little as possible.

This means that across affected countries, companies can rest assured that their sourcing, manufacturing, distribution and sales activities can be substituted quickly and cost-effectively through alternative sources, while maintaining similar levels of cost and operational efficiency.

Ultimately, no one can say for sure whether President-elect Trump will initiate a trade war with China. Or to what extent Apple and companies like it will be affected. However, companies with an established supply chain and sound procurement practices can sleep in comfort knowing that they will be prepared to face similar challenges that may come their way.

President Trump and Procurement – The Impact

As the weeks unfold, we begin to get a better understanding of what impact a Trump Presidency will have on procurement.

trump impact procurement

There is, of course, no need to introduce the events of Tuesday 8th of November 2016 to readers. On that day, Donald Trump won enough Electoral College votes to be elected as the next President of the USA.

The implications for the procurement industry may at times be daunting and hard to anticipate. However this article should shed some broad light on some of the possible implications. Two of the main implications are infrastructure spending and trade deals.

In terms of Trump’s policy platform, detail is so often conspicuous by its absence. In his “Contract with the American Voter” however, he has outlined extensive policy proposals for his first 100 days as President.

Impact on Infrastructure

The first likely impact is infrastructure, which is one key tenet of this “contract”. Despite having far-right positions on many areas, Trump does have more centrist positions on some areas, especially infrastructure investment.

This may well boost the economy, albeit fuelled by debt, unless highly ambitious funding mechanisms come to fruition. He has vowed to spend $1 trillion on infrastructure over ten years. This would of course require huge procurement expertise for large road and bridge building and various other industries. We will have to wait and see what happens with building walls, however!

But the real impact of this expansive infrastructure spending would not be the huge procurement processes required, but more the method through which it may be achieved.

Whilst it is far from certain how the incoming administration could fund such a project, while providing perhaps the biggest ever tax cut, he would also need Congressional approval.

Public-Private Partnership Proposals

The infrastructure is not proposed as fully funded by the federal government, but largely through public-private partnerships (PPPs). If this sets a trend, the implications for funding of public services in the USA and other countries, especially developed market economies such as Western Europe, could be significant.

PPPs such as this have been generally successful in some cases and rampant failures in others. In the UK’s National Health Service for example, they have been a highly controversial mechanism. Many argue PPPs have fostered long-term financing issues, and harmed patient care and outcomes.

Further, many argue that the privatisation that PPPs cause brings about fundamental change to the relationship between the state and citizens. With this, public services are delivered based on promises of profit. For infrastructure investment to go ahead, it has to be based not on the gain for society, economy or environment, but where a surplus can be extracted.

Impact on Global Trade

The second main impact will be Trump’s influence on global trade, which is a driver of prosperity worldwide, alongside his threats of protectionism. Since the global financial crisis, cross-border trade has stagnated. This has been the longest period of stagnation for over 70 years.

Trump has an overtly protectionist stance. He has already threatened to hike tariffs on imports from China and Mexico, as well as pull out of the North American Free Trade Agreement (NAFTA) with Mexico and Canada.

In broad economic terms, this would increase living costs for domestic citizens. It would, without any doubt, be reciprocated by other countries such as China (as early noise coming from Beijing confirms). It would also affect jobs in export industries in the USA and the USA’s economy as a whole.

For public procurement in the USA however, this could also be significant. American public services could be restricted from products they currently source cheaply from abroad.

The increased costs from domestic purchases have to be made up from somewhere, such as savings in other areas, purchasing lower quality goods or increasing costs for users of public services.

The same could be true in Canada and Mexico. If the USA pulls out of NAFTA and applies tariffs on Mexican and Canadian goods, reciprocal protectionism would restrict Canadian and Mexican access to high-quality goods and services sourced from the USA.

Global Impact

Outside North America, the implications could also be significant for procurement professionals around the world. President Obama has been pushing hard to ratify the world’s largest ever free trade agreement – the Transpacific Partnership (TPP).

This opens procurement markets, and removes tariffs, between 12 countries, including Australia, Japan and Vietnam. Trump has confirmed he will cancel this deal on his first day in office. This will deny public procurement across all participating countries the opportunity to increase procurement competitiveness and reduce sourcing costs. It’s also likely to decrease the choice of the goods and services available for purchase.

The same is true with the Transatlantic Trade and Investment Partnership (TTIP). The trading impact of TTIP, between the USA and European Union, would have been huge. Whilst talks reached an impasse in 2016 when negotiating procurement market access, Trump is likely to be the final nail in the coffin.

TTIP again would have been a boon to procurement teams in all countries, with increases in competition and decreases in price for all countries. This would have provided European contracting authorities with tariff-free access to high-quality American goods and services and vice versa.

Despite the threats of uncontrolled climate change and protectionism, the impacts of a Trump presidency are really yet to be known. Yes, Trump may have secured his “contract” with the American voter. But the contract will be re-tendered in under four years. The outcome of that really is unknown.