Trade Wars – Relative Negotiation Positions More Complex Than They First Appear

As the trade wars between the US and China escalate, the relative negotiating positions of the two primary parties are interesting to compare.

At first sight, the US is in the stronger position. China exports some $400 billion a year more to the US than vice versa, so hitting China’s exports would seem to be a potential “win” for the US. However, that ignores the pressure that each side is likely to come under from its own "stakeholders".

So in the US, we will see firms who buy raw materials or other goods from China complaining about increased prices and at some point, even the US consumer will see price rises and inflationary pressures because of the quantity of goods coming in from China which will cost more after tariffs are applied. (There will be little immediate substitution with home-produced products, we suspect.) In China however, because there are far fewer goods in particular coming in from the US, that effect will be much less pronounced.

In terms of the producers, China will have more firms than the US who are affected if exports fall. But the voices of the Chinese "shareholders" are likely to be less meaningful to the government we suspect than the cries of anguish President Trump will hear from Boeing, pork producers and others who will see their business affected by Chinese tariffs. As Wall Street falls too, the pressure on Trump to relent will be much greater than President Xi Jinping (President of life now too, remember) will experience in the more heavily state-controlled economy of China.

For that reason, we think the balance of power in this negotiation is much more even than the basic figures suggest. The key issue is how far will Trump be willing to go in terms of hurting his own supporters and citizens to punish China? We think he has a pretty good case here, given the IP theft China has reportedly executed over the last couple of decades, but it will take a lot of courage to damage his own country to the extent that may be needed to extract much in the way of concessions from China, we fear.

This is also a reminder of supply chain risk issues. While we might think first of all about natural disasters as the prime source of risk (floods, earthquakes, etc), it is “man-made” risks that can be just as problematic and value-destroying. They are also often harder to prepare for and address if the risk turns into an actual issue. That is not just trade disputes, but other political risks around wars, revolutions and so on, through to fires, industrial disputes and strikes (we may come back to France shortly as well and look at that situation …).

So procurement and supply chain executives need to be looking at what an escalating trade war might mean for their organisations. That might mean considering alternative sources of supply, building stockholding or other defensive moves. We might see some major price movements too on many items from raw materials to finished goods and even some services.

And remember you can get more advice and insight from our series of 5 short briefing papers, written in conjunction with riskmethods, risk platform providers. One of those focuses on “man-made” risks, but they are all available to download free via these links.

The Most Effective Ways to Mitigate Supplier Financial Risk

Corporate Image & Compliance at Risk: How to Mitigate the Hidden Risks Lurking in Your Supply Chain

Natural Disasters – How to Mitigate Unavoidable Risks: Supply Chain Risk Briefing

“Man-Made” Risk – Different Risks Require Thoughtful Strategies: Supply Chain Risk Briefing

Geo-political Risk – An Informed Global View Is Essential: Supply Chain Risk Briefing

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