Friday Rant: The New US Congress From Sourcing, Trade and Total Cost Perspectives

The US voting public has spoken. Just as with many mid-term elections, the balance of power of the House of Representatives has flipped. And it's come close to flipping (and many believe it will in 2012) in the Senate. In looking at the shift, it would be easy to focus on the partisan politics of the change, whether you like it or not, but from an economic, trade and global sourcing perspective, I think there are a number of lessons and takeaways from the election. In this rant, I'll share what they are, and provide a bit of opinion as well.

To start, it would be hard not to bring up the elephant (or would that be Tiger) in the room: China. China is not only in our room -- it owns the room (and all the cheap, lead painted furnishings that we sit on and break because of shoddy construction). It also owns the drywall that's given the room a foul stench, but don't get me all revved up too early in this rant.

To me, it's not entirely clear how the new Congress will treat China. I was curious about the unlikely hard line alliance between liberal Democrats (representing their union constituents) and Republicans from manufacturing districts before the election. This group of strange political trade bedfellows jointly came up with the Currency Reform for Fair Trade Act which threatened China (and any other country that displayed a clear pattern of currency manipulation) with a set of import tariffs for its goods, based on the degree of currency manipulation. Some of the supporters of the bill noted that twenty years ago when the initial debate over China trade started, the trade deficit was $5 billion per year. Now it's $5 billion a week, they claim.

Changes like that suggest to me that regardless of political persuasion, the China debate will very much be front and center for the new Congress. On the one side, we'll have the Cato "free trade at all cost" type of Republicans who won't want to rock the trade boat even if rival ships are trying to flood it. On the other, we'll have a bipartisan group of those who take a more activist view. Still, it's my call that the currency bill is dead in its current form given the shift of power, for now. What comes next is very much up in the air, but I suspect that the trade deficit and China, specifically, will form a large portion of economic debate starting in January.

Along similar lines, I think we'll continue to see an unlikely alliance of manufacturing and labor when it comes to Federal support and funding for R&D tax credits, pro-export policy and the like. And this will cross party lines. With the exception of the reopened healthcare debate, the usual union/management fight will be put on hold until the economy comes back to life and exports finally gain sustained steam. In this regard, don't be surprised if we see new policies that encourage both small and large business spending (e.g., tax credits, expensing, etc.)

Perhaps most interesting in terms of economics, I think we'll see a more activist congress when it comes to influencing (or attempting to influence) Fed policy around quantitative easing, especially after the 75-yard field goal try they blindingly attempted to make yesterday (don't hold your breath). I personally believe that the Rand Paul type of Republicans will want to hit the ground running on cutting the deficit while attempting to stop the printing presses (even if it means short-term pain). That, or they'll make a killing investing in commodities while inflation spirals, given their congressional pensions will be all but worthless. But seriously, there are clearly some economic hawks in the new GOP congress that will want to nip inflation before it takes hold, if that will even be possible after this week's Heidelberg moment. I also suspect some might argue that inflation preceded the Fed move, given the escalation of base metals, corn and other commodities in recent months. No doubt the dollar is next. Heck, if China won't play by the currency rules, why do we have to?

Based on these impending policy shifts and activist Fed policy, I'd recommend the following courses of action from a procurement perspective:

  • Monitor the total costs of global sourcing/production closely; new policies may begin to discourage such behavior through tariffs, new tax breaks, etc. (or not, depending on the tack the new Congress takes). Regardless, look closely for currency policy legislation (potentially new), WTO rules and enforcement, trade policy in the form of anti-dumping and countervailing duties and other proposed trade initiatives that may impact total landed cost
  • Prepare for serious inflation ... at some point in time (commodities and everything else). As far as I have read, there has never been a move in history like the one this week without an inflationary result in the end
  • Expect fiscal stimulus only in the form of spending tax cuts for business and potentially an extension of tax cuts for individuals (not "shovel-ready" projects or entitlement spending, the latter of which was the dominant form of the last "stimulus"). If businesses do begin to spend again on capital and goods (not to mention building up inventory), look for potential bullwhip effects as supply capacity comes back online slowly, not to mention potentially rising prices because of base material price inflation outside of speculative investment
  • Republican incentives for hiring will come with fewer requirements to support organized labor in blue collar areas (as was the case with the last stimulus), potentially leading to an increase in contract/contingent workers; with unemployment running out for many, the current "jobless recovery" is likely to become the "part-time/contingent workforce" recovery

If you have something else to add to the economic, trade and policy debate from a procurement or total cost angle, please chime in! And let's keep our fingers crossed that this Congress does not lose site of why voters put them in office -- to focus on the economy and jobs creation. Not to mention righting the trade ship while also helping introduce some Spend Matters thinking into government.

Jason Busch

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