The big three unknowns for US manufacturers with trade policy in flux

July 25, 2017

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By Bob McCutcheon

The Trump Administration’s aim to tie US trade relations more closely to domestic manufacturing growth is prompting US companies and their trading partners to re-think supply chain and operations strategy. We see US governors, senators and industry associations reaching across US borders to put forward their cases as North American Free Trade Association (NAFTA) heads toward a renegotiation later this year.

While we don’t know what shape a new NAFTA will take, we do think that, at this stage, manufacturers operating within NAFTA need to recognize the potential for change and plan accordingly. As seismic as major changes to the 23-year-old NAFTA pact could be for US industrials, policymakers in all of the world’s top economies today are engaged in re-wiring parts of the global trading system. On top of the EU-UK Brexit negotiations, China is leading an effort for an Asian free-trade pact as well as preparing to invest heavily to seed Eurasia-to-Europe trade routes. Meanwhile, the 11 remaining members to the Trans-Pacific Partnership (TPP), which includes Japan but not China, may push ahead without the US.

At the same time, the digital economy continues to disrupt established ways of doing business across borders. Some issues that are ripe for consideration in new trade agreements include updating customs regulation as well as tackling rules for data flows and privacy, securing access for services and setting protections for investments and intellectual property.

So, what can an American manufacturer do now, given this wide range of potential outcomes? We see three areas of uncertainty that manufacturers may be struggling with. And within these three, we suggest options they could pursue to hedge against vulnerabilities – or capture benefits – of a changing trade era.

1. What’s the imported content of my products?

As more economies move toward value-added tax and also seek to protect domestic jobs, breaking down exactly what is in the final product has become a big focus for policymakers and enterprises. While this is not easy to do, given the complexities of global value chains, we expect US manufacturers could face increasing pressure to account for where parts originated.

Some US end-customers of imported content need to carry out a deeper, more transparent accounting of where their content is sourced to prepare for a possible change in NAFTA rules of origin that would potentially affect not only NAFTA trading partners, but also others, particularly in the Asia-Pacific region.

This could be a heavy task, especially for manufacturers that are constantly designing new parts (which may be tied to a new supply chain) in their end products. For example, a component imported from Mexico may contain content originated from China and Japan. How, then, will that component be catalogued according to rules of origin? Or, if US-originated content (e.g., an automotive part or a raw material such as steel) is exported to Mexico, included in a component, then exported back to the US, how is that accounted for?

2. What could be the resulting effects on my supply chain?

Once manufacturers have a clear picture of precisely where the content in their end-product originates and attach values to that content, they are positioned to reconsider reconfiguring their supply chain. This could have second- and third-order effects across supplier networks. For example, some may accelerate their search for new suppliers in different jurisdictions – and, increasingly, shift supplier networks closer to production for a “build where you sell” model.

Manufacturers can consider scenario planning on all countries with which US has existing trade agreements or where there may be new ones: what are the best-case/worst-case scenarios? They may also consider developing plans for M&A or strategic partnerships to facilitate US-based product sourcing in case tax reform makes that type of network change a benefit.

3. What’s my Plan B (or C) to manage changes in trade policies?

There have been signals in general directions that could help business leaders discern their vulnerabilities. Two investigations are underway that may lead to stepped up trade actions: A Department of Commerce report on trade deficits of 12 nations plus the EU is due in late June 2017, as well as a separate analysis into potential abuses in US trade agreements later this year. Manufacturers sourcing from those countries may want to consider alternative suppliers in countries with which the US currently does not have a trade deficit.

In order to get ahead, businesses can consider building trade-policy and government affairs teams that focus on and track prospective trade policy changes and anticipate a range of all possible outcomes. (e.g., which trade policies can President Trump carry out unilaterally, or which require congressional or other approvals?). They may also consider identifying their biggest “country exposures,” including where the company has a significant amount of export into or import from, which countries with which the US has the highest deficits, and which ones could potentially have tariffs or other non-tariff measures imposed, as well as prepare for trade policy that could affect cross-border data flows and forced data localization. Click over to the full report for more detailed insights.

©2017 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.


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