Shaky ground

Uncertainty in international trade

May 4, 2018
by Jeff Russell


From the April 2018 print edition

For international trade and global sourcing initiatives, the world has become very small. The Internet has definitely helped in shrinking that world and has increased our ability to source high-quality, low-cost products or services globally.

However, for the rewards (low costs, higher profits), there are also many risks (supply chain disruptions, implementation of unplanned tariffs). If unchecked, these risks can more than offset the any potential reward.

Recent news concerning the actions of the US Government enacting various protectionist policies regarding international trade is making it difficult to source products or services from low-cost countries. Protectionism is a government policy enacted with the purpose of limited perceived unfair competition from foreign companies.

There are four types of protectionist measures a government can enact:

  • Impose a tariff or duty on imported goods;
  • Offer local manufacturers a subsidy, thus enabling domestic manufacturers to lower their prices to compete domestically and globally;
  • Impose quotas, limiting the volume of imports from specific countries; and
  • Lowering the value of its currency, making exports cheaper globally.

The US Government followed type one above by implementing tariffs on a wide range of products, from solar panels to appliances to steel and aluminum-based products. For Canadian industry, we have seen tariffs on softwood lumber and dairy products, with the potential for steel and aluminum-based products if the NAFTA re-negotiation does not conclude favorably for the US.

The problem with protectionist policies is that they restrict competition and inhibit local manufacturers from being innovative regarding their products, which impacts product quality and customer satisfaction. Even greater is the threat of retaliatory tariffs being issued by a foreign country, starting a trade war. After the US issued their tariffs on products from China, that country has recently announced similar tariffs on US products entering China. Take for example the recent announcement by a US Master Distributor: “Based on the US Department of Commerce recommendation, from Section 232 of the Fair Trade Act, new tariffs will be imposed on specific metal products that are manufactured outside the United States. These tariffs range from 7.0% on aluminum goods, to 25.0% on steel goods, effective March 23rd. As a result, your multiplier will increase by 25.0% effective on all shipments after March 22, 2018. We will not be able to offer any price protection or pre-buys and current backorders will be canceled.”

No one wins a trade war, and ultimately, the end user or consumer pays with higher prices.

For procurement professionals looking to buy products at cheaper prices, we are caught in the middle of governments flexing their global power, believing they are doing what is right for domestic businesses and manufacturers. For companies that have long-term contracts at fixed pricing, do you try to renegotiate with the suppliers or manufacturers, protecting your customer? Or, do you pass these increases through to the market place, impacting your customer? The potential risk with this action is that your customer may decide to go back to the market to see if they can get a better price from another source. And what about the cancelation of back orders, suggesting lack of support or unwillingness to protect their own customer base? Customer-supplier relationships are going to be tested to the extreme level, as companies will surely do what they can to protect their own bottom line first before their downstream or upstream partners. If your current inventory is already short in supply and you received a partial shipment of material that covers immediate requirements, as a supply chain professional, you are now faced with the prospect of buying from another source at higher prices, impacting profit margins, or buying at extended lead times, which causes material shortages.

Further complicating global sourcing initiatives for procurement professionals in Canada is the unknown conclusion of the renegotiation of the North American Free Trade Agreement (NAFTA) with the US and Mexico. This is critical for one very important reason—how will the renegotiated NAFTA agreement deal with or define a product’s rule of origin. Rules of origin are a necessary component of international trade, as they set the rules for determining the national source of a product and what tariff treatment is to be applied to a product upon importing.

Under NAFTA, Article 401 and its accompanying annex define origin in four ways:

  • Goods wholly obtained or produced in the NAFTA region;
  • Goods produced in the NAFTA region wholly from originating materials;
  •  Goods meeting the Annex 401 origin rules; and
  • Unassembled goods and goods classified with their parts which do not meet Annex 401 rules of origin but container 60 percent regional value content using the transaction method, or 50 percent regional value content using the net cost method.

Changes to how rules of origin are defined and classified could move a product from being duty free today to having a high tariff tomorrow, making products uncompetitive in the US. Traditionally, products that have been produced in Canada using a small amount of imported products but have gone through a substantial transformation or a tariff change would qualify as Canadian origin and therefore duty free under NAFTA. A tariff change means the final product falls under a completely different tariff chapter than the raw material used to produce that product. For example, pork sausages, under chapter 16, are made from pork meat under chapter two and spices under chapter nine. So long as a company knows and understands where their raw material originates and can substantiate a transformation to a finished product, there won’t be an issue.

However, a new problem arises with future shipments going into the US as recent anti-dumping trade cases by the Department of Commerce have not just looked at the finished product, but have also started to look at the origin of the raw material. Under the current rules of origin with NAFTA, raw material would not be used as a means to identify the country of origin—only the finished product was of concern. Currently, Canadian companies are exempt from the steel and aluminum tariffs; but with the Department of Commerce’s new direction of looking at the origins of raw material, Canadian companies may need to re-source their raw material from non-impacted countries to ensure their products are duty free. Otherwise, their products could be assessed tariffs of 25 percent or seven percent.

The challenge for Canadian procurement professionals who source globally and work for a company that participates in international trade, especially with the US, the changing compliance rules could hamper the ability to buy high-quality products from a low-cost country, impacting profit margins and growth opportunities. The potential threat of anti-dumping duties on imports and exports could literally freeze a buyer from making quick and efficient purchasing decisions.

Jeff Russell is director of procurement at Crane Supply.