Enough Worrying About Trade Wars: What Can We Actually Do With Our Manufacturing Processes?

12 November 2019 Dashboard Insights Blog
Author(s): Alejandro N Gomez-Strozzi

A number of business certainties that we had grown accustomed-to during our adult-lives are being shaken. In addition to monitoring variables such as production-costs and import duties, international trade regulations are playing an important, fast-changing role.

Go figure. Instead of worrying here about trade wars, we will be focusing on what can we actually do with our manufacturing processes under current circumstances.

The demand is still there, and the possibility for your company to supply it has cost a lot of time and effort to build and sustain.

Thus, this document pretends to be a decision-making pathway in which to imagine yourself asking the following questions, and a Foley counselor addressing them.

We have constantly-changing trade scenarios; what can we actually do about it?

Prioritize your markets. That is; determine where in the world (literally) is the demand your company will be supplying.

The rational way to determine this is to look at publicly available numbers regarding, firstly, import figures of your product(s) at the Tariff Line level (8 or 12-digit numbers depending on the domestic market you want to export to) and, secondly, to the Apparent National Consumption, that is, the resulting figure of domestic production plus imports minus exports.

OK, we have identified our target domestic- or regional-markets (e.g., U.S. or China, NAFTA or the European Union), then what?

Determine which is the best way to cost-effectively supply such demand, and for that we need to get into some specifics.

Say you want to supply the U.S. or E.U.´s markets, two of the largest consumer markets but, naturally, a high-cost producing location also; if you produce locally within the U.S. or the E.U., it is a basic business-sense equation as to whether your company can make a profit. If it can, good for you, you can stop reading this.

But if not, then the query turns into which is the best country to source such destinations in the most cost-effective manner. For discussion purposes, we will throw in the mix only three options, China, Mexico or any other country that is subject to World Trade Organization´s (WTO) Most Favored Nation (MFN) treatment (meaning countries whose products are subject to import duties of NON-Free Trade Agreement (FTA) partner-countries).

Further, your company would have to look at three major issues: (i) cost-of-production, (ii) import duties themselves, and (iii) time and cost of delivery. We will have to resort to your already practice-gained knowledge as to which country of origin has the lowest, or at least a reasonable, (i) cost of production; regarding (ii) import duties, the reasonable choice would be Mexico as it has FTAs with both the U.S. and the E.U.; and as to (iii) time and cost of delivery, the logical venue also looks as Mexico due to its closeness to the U.S. market and non-stop seaborne delivery into the E.U.

How about business environment predictability and dispute settlement?

Regarding the three options mentioned (China, Mexico and any other MFN nation), in order, China is a major source of the predicament we are trying to address as it is a player in the most relevant trade war with the U.S., so business ambiance predictability is off the charts, and figuring out and navigating its dispute settlement system is challenging as well.

Mexico has been subject to threats of a lower-scale-than-China trade war regarding steel and aluminum (currently exempted), and has an exception letter to motor vehicle and auto-part exports into the U.S. in the United States-Mexico-Canada Agreement (USMCA). It does have the predictability of the current NAFTA, as well as that of the (sooner than you think) USMCA; both agreements also help regarding dispute settlement since they have a couple of important venues such as Investor-State claims, and a catch-all State to State possibility.

Regarding the WTO´s MFN nations, you would think that they have a solid foundation and its multilateral dispute settlement system is working properly. Well, not quite, as the whole system is treading water since its dispute settlement process is a few months away from being non-functional.

That means that if things go as they have for the last two years or so, by December 10, 2019 the WTO´s Appellate Body will not be able to adjudicate claims when the term expires for two out of the three remaining permanent-judges.

Due to trade wars then, can we no longer take advantage of the manufacturing efficiencies of several countries at the same time?

You can still do that by lawfully “engineering” around Rules of Origin, this is, working around the amount of processing, say, Chinese-made inputs have to go through to be considered as NAFTA- / USMCA-made to enter the U.S. or (in the case of production in Mexico) the E.U. under a reduced -which can be 0%- import duty rate as per relevant Free Trade Agreements.

One more thing, what if I want to begin or keep on selling into the Chinese market?

Chances are that the immense Chinese market would be picking steam more on the medium than shorter term. That would allow time for the U.S.-China trade war dust to settle, and then make a decision or, if demand is already strong and your company should not let it go, simply go back to responding the issues we discussed above: (i) cost-of-production, (ii) import duties, and (iii) time and cost of delivery.

If you have any questions, feel free to contact the authors of this article via their contact information below.

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