Forecasts are always wrong

For any forecast, always attach probabilities of them occurring. A current forecast is the threat to increase tariffs on all goods entering the US and for very high tariffs on goods from China. This was mentioned many times in the recent US election campaign speeches and has received much coverage in the media. As a repeated ‘truth’ it has established a perception (and therefore a forecast) in government and business in the US and internationally that it will actually happen. However, Procurement professionals are aware of this process, which is called Conditioning.

The Conditioning process

The approach can be used when there will be a difficult sales or buying situation at some time in the future. For example, a proposed substantial increase in the price for a product, or the need to obtain a lower total cost of ownership from a powerful supplier. Conditioning by sellers towards buyers in a commercial setting commences early in the process and was discussed in an earlier blogpost.

In the political arena, the complaint by the US over many years has been the exchange rate between the US dollar and the China Yuan, as this affects the value of imports and exports and has an impact on each nation’s economy. The US claims that the Yuan’s exchange rate is weak, which reduces the cost of Chinese exports and therefore increases the trade imbalance with the US. While the US dollar is freely convertible into currencies of all developed economies without restrictions, the Yuan exchange rate is managed by the Chinese government and so trades within a narrow (and controlled) band.

However, imposing tariffs to overcome ‘unfair’ exchange rates can lead to increased costs and subsidies. During President Trump’s first term, importers in the US paid an estimated $32b more annually as a result of increased tariffs. These costs were passed to end users in higher prices (U.S. Chamber of Commerce 2021 report). Also, the retaliatory tariffs by China on agricultural products in 2018 reduced US exports and required the US government to provide U$28b in subsidies for affected farmers.

US negotiators will be aware that increasing tariffs also has the risk of increasing inflation. But, by stating that the US will substantially increase tariffs on goods from China, a perception is established as they ‘condition’ the other side. However, the outcome desired by the US could be that China will agree to increase the Yuan exchange rate and so make imported products from China more expensive. This action has less risk of being inflationary, as buying decisions in the US could change before the goods are shipped.

Conditioning often works because the aim is to prepare the other side’s mind for a certain outcome. Then, achievement can occur because the actual outcome is not as bad or is different than expected.

Factors to consider in the negotiations

As in all business negotiations, both sides have some areas that favour their position and others where they may be in a weaker negotiating position. The commencing situation between the US and China includes:

• China is less reliant on trade with the US. In 2000, China exports to the US were 21 percent of total exports, but for the first 10 months of 2024 the figure was 11 percent of total exports.
• China’s share of US electronics imports has declined by 17 percent since 2019, but US electronic imports (which contain China origin components) from other Asian economies have increased by about ten percent.
  • The new US administration will oversee negotiations in 2026 on renewal of the U.S.-Mexico-Canada Agreement (USMCA). This provides an opportunity to introduce new conditions for Chinese made components in products produced in Mexico.
• ‘strategic sectors’ are industry sectors (such as banking or agriculture) that are protected in a country’s national interest, through laws, tariffs and subsidies. The two main agricultural commodities sold by the US to China are soybeans and corn. The US supplied more than 40 percent of China soybean imports in 2016. For 2024 it will be less than18 percent, but this is more than 50 percent of U.S. exports, which makes the US more dependent.
  • China has diversified its suppliers, with Brazil now being the largest supplier of soybean and corn to China. This is despite the cost of freight for soybeans from Brazil to China being 60 percent higher that Illinois to China, due to shorter distances and more efficient loading infrastructure in the US. (Brazil National Association of Grain Exporters)
• ‘critical materials’ has the current emphasis on materials used in electric vehicles (EV) and pharmaceuticals.
  • The refining capability for base materials used in EVs has few alternatives outside China. The development of refining capabilities and acquisition or development of the required technology by producing countries will take several years.
  • The US imports from China more than 90 percent of some antibiotics and critical medical components (U.S.-China Economic and Security Review Commission)
• At the end of 2023, China businesses operate (a lease), has a joint venture (JV) or ownership at 115 commercial ports around the world, with the potential for China to exercise geo-economic influence.
• Foreign direct investment (FDI) inflows to China decreased from U$344b in 2021 to U$42.7b in 2023. The redirection of investment could increase in coming years and will require monitoring to identify the alternative countries and use for the funds. (McKinsey)
• US companies with operations in China could be targeted for violation of tax regimes and domestic laws. The same could occur for Chinese companies operating in the US.

The range of negotiating positions which could be taken, based on the above list, illustrate that making predictions about your organisation’s future supply chains is fraught with challenges. But this does not mean to do nothing.

Development in your business of the Supply Chains Network Design Map and Supply Markets Intelligence is a critical requirement. These documents enable you to highlight specific locations and suppliers for evaluation of: supplier location risk; supplier supply chain risk; supplier external risk and supplier internal risk. This provides the base data, with analysis of trade-offs and choices, to develop supply chain options for senior management, using Scenario Analysis.