US-China trade war

The Year Ahead: 2023 for Asian Trade

The Year Ahead: 2023 for Asian Trade

It’s that time of year again—ready to gaze into a crystal ball and guess the 2023 future of trade in Asia?  The overall picture looks mixed, with continuing disruptions which may be offset by new opportunities. 

Continuing Covid impact: while much of the world (and probably all Talking Trade readers) seem eager to put the Covid-19 pandemic in the rear-view mirror, the virus is likely to continue to affect trade in Asia for much of 2023.  Disruptions will be caused by individuals that are continuing to get sick and are unable to report for work.  Fluctuating staffing levels can make it difficult for companies to deliver goods and services on time as intended.  These delays will continue to reverberate across the region and create continuing headaches for supply chain managers, particularly in the first half of the year.  As with the earlier waves of Covid, government reactions and responses to potentially rising infection levels are also important.  While complete border shutdowns may be a thing of the past, governments have shown a new willingness to make rapid adjustments to policies that can catch firms by surprise.  

Inflation and recession worries:  The jury remains out on whether inflationary pressures are going to sharply or modestly moderate in the near term, but there is a growing consensus that several major economies are still poised for recession.  Given the importance of key markets in the US and Europe to most Asian economies, even a mild recession in either can be quite damaging.  Inflation and rising interest rates are also posing new challenges to domestic firms and consumers. 

Uncertain supply and demand:  Firms in Asia are also grappling with continuing uncertainty about the supply and demand for goods and services in the near term.  Many of the economic patterns developed during covid, such as working from home or extensive shopping online, will change in 2023.  But the “new normal” is also unlikely to snap back to pre-covid times.  This leaves firms and supply chain managers facing a set of forecasts that are probably obsolete and few clear answers on what sorts of supply and demand pressures might be most relevant now.  High levels of uncertainty make it all too easy for firms to over or undershoot expectations, leading to mountains of unsold inventory, staffing levels which are not right sized, or an inability to deliver at volumes.

US Trade Policy Under Biden: More of the Same

US Trade Policy Under Biden: More of the Same

United States Trade Representative (USTR) Katherine Tai gave what was billed as a major speech at CSIS outlining US trade policy on October 4. A careful review of China policy has been underway for months and Tai’s speech was to deliver the results of this study. At the end of her prepared remarks and a short round of questions, observers were left with few clues about the future trajectory of US policies and little detail beyond broad brush strokes already sketched over previous months. What was made clear is that US trade policy, in practice, is not likely to look substantially changed from paths pursued by the previous Trump administration. In fact, if Tai’s speech were read alongside similar policy statements made under the Trump team, it would be difficult to pick out who said what. First, Tai argued that China has failed to follow appropriate actions or adjust its bad behavior despite a long history of engagement. The approach used under the Trump administration, in particular the Phase 1 agreement, may not have been exactly the model she would have chosen (what model she might have thought more suitable was not discussed), but it remains in place. Tai did express distain for the term “Phase 1,” even as she essentially promised to follow it. Tariffs will continue to be imposed on Chinese imports, although the administration will restart the process of reviewing requests for exclusion. With limited details available on the process, however, it is unclear whether tariffs will be waived in large part, or only in limited circumstances. Nor was there any clarity on how long the process may take to conclude. Given the relatively limited time “left” on the Phase 1 agreement, even a short delay may deliver only modest benefits to US firms struggling to manage tariffs of up to 25% which have now been imposed, in some cases, for years.

US President Joseph Biden: Time for a “Reset” on Trade?

US President Joseph Biden: Time for a “Reset” on Trade?

If this disruption at the top were not impediment enough to pushing for new policies, it remains unclear exactly what both parties will want to accomplish, particularly on trade issues. Traditionally, Democrats have been more skeptical of trade. This stance has changed in line with American public opinion to be more receptive to trade as a potential force for good. But it remains unclear how the Democratic party will respond to specific trade initiatives. It is also uncertain how Republicans will approach trade. In the past, free trade was a key plank in the party platform. Donald Trump scrambled this approach and it is not obvious how the Republican party will choose to address trade in the coming few years. Getting clarity inside both parties will take time. Trade, in general, is not going to be the key priority. Instead, expect Biden and the incoming Congress to focus significant time and attention on a host of domestic policy items including handling the escalating pandemic and economic fallout from disruption. There are two specific trade issues that will likely come up first: China and the CPTPP.

US-China Decoupling: Implications for Asia

US-China Decoupling: Implications for Asia

While firms have shifted some production already out of China, it is economically risky for companies to completely ignore the unique advantages that China offers including its quality infrastructure and sizable domestic market, which serve as strong incentives for firms to stay put. Most companies that believe they may be exposed to an ongoing set of trade tensions between the US and China have engaged in internal reviews and scenario planning. COVID-19 has both put a hold on and, paradoxically, accelerated some of this thinking. While the pandemic has made it difficult for many companies to focus on strategy not directly related to immediate survival and management of a series of supply chain disruptions caused by market shutdowns, it has also amplified the risks of potential exposure to new challenges. Every company has begun talking about building more resilience into their systems. What, exactly, such resilience will mean is less clear. For some, it means holding more inventory. For others, it means identifying key chokepoints in the supply chain and looking for additional sources of supply to lower risks in these specific aspects of the chain. For others, it means shifting production closer to final markets to reduce disruptive effects caused by border closings and other specific obstacles. At this point, however, most firms have already instituted supply chain reshuffling between internal locations, if such options are available. For example, companies that have overlapping capabilities in multiple locations have ramped up production in some markets while lowering production elsewhere. Internal swings to mitigate risks have already been put in place wherever possible.

Shifting Supply Chains in Disruption

Shifting Supply Chains in Disruption

The extreme level of disruption appears to have caused firms to finally think seriously about their existing supply chain footprints. Companies in multiple sectors have now vowed to develop more resilient chains. In many cases, firms have supply chains that have evolved organically, with little coherent planning. Staff, to pick one example, often run disparate parts of global firms from locations that may not make sense if viewed from the perspective of today. Companies might have an office in one location that was originally set up because a key staff member liked the area, only to watch it evolve into a much larger operation than ever anticipated at the outset. Companies typically do not design supply chains from scratch, but bolt on different parts over time, as the firm grows or acquires new companies or moves into new sectors. The net result is often supply chain footprints that actually make little rational sense. Warehouses might be located in places that no longer have the transport links originally intended. Traffic, as an example, could be so heavy that goods are stuck in transit much longer than planned. With so many staff locked down in houses or slowly venturing back to offices, it makes sense to seize the opportunity to re-examine supply chains and determine whether and how the existing footprint can be adjusted to cope with new stresses.