Investment and supply chain strategies for a volatile international trade environment
After a year and a half of surprise US trade moves and growing global fears of overcapacity caused by China’s aggressive industrial policies, multinationals today are like ancient sailors on a dark and perilous sea, navigating uncharted waters in capricious winds. The great merchant houses of prior centuries planned in advance for tempests and squalls by investing in more seaworthy fleets and establishing a network of safe harbors. Multinationals now must similarly plan for turbulent times by ruggedizing their investment and supply chain strategies.
The stormy trade climate has been stirred up by an unprecedented series of Trump administration trade actions in the past year, including:
- Unilateral import barriers imposed for national security reasons under Section 232, and retaliation by a number of US trading partners
- Threatened unilateral tariffs due to "unfair trade practices" by China under Section 301, and retaliatory tariffs by China and counter-retaliation by the US
- More aggressive use of trade remedies against imports under the antidumping, countervailing duty, safeguards and customs laws
- Threatened withdrawal from long-standing trade agreements like NAFTA, withdrawal from important regional agreements the US once championed such as the TPP, and shaking the foundations of the arbiter of the international trade order, the WTO
Today Chinese exporters face new barriers in the US and other major world markets; US exporters face retaliation by both China and traditional allies; and multinational companies in Taiwan and the rest of the world find themselves caught in the middle.
Taiwan exporters face not only the direct effects of new US and China barriers and indirect effects on downstream products, but also disruption of home (Taiwan) and third-country markets as goods blocked from access to one market are diverted to flood others.
What can Taiwanese companies do to adjust?
Like the mariners of old, Taiwanese companies must make their bases of supply more durable and flexible. To adjust to new and unpredictable trade hazards, they must contemplate investing in a multi-link supply chain with built-in "Plan B" options.
To maximize options and resilience: Invest in operations on the other side of the tariff wall
First, Taiwanese companies with an important stake in the US market should consider investing in US production or assembly – either via M&A or greenfield, to adapt to increasing protectionism in the US.
Second, exporters should also assess investing in third-country operations – those outside the US and Taiwan – to further diversify their supply chains. This is especially important for Taiwanese companies, as it would:
- Obtain crucial FTA benefits - Taiwan is not now a party or in negotiations to enter regional FTAs such as the CPTPP and RCEP. The US quit the TPP, is not part of RCEP and may quit other trade agreements. Thus, to obtain the FTA preferences crucial to competitive supply-chain operations, Taiwanese companies must relocate within the preferential region.
- Build in resilience – If Taiwanese exporters or their suppliers or customers face tariffs in important markets, investment in third country production may afford flexibility to shift sourcing to unobstructed locations.
- Provide "China insurance" -- If concerns about China's massive support for sectors prioritized for growth (per the "Made in China 2025" industrial plan) prove true and Chinese exporters challenge the leadership or viability of important companies in other countries, then increasing global countermeasures against Chinese companies seem inevitable. Taiwan, with its substantial investments in many sectors in China, could be caught in the crossfire. Prudent investment in third-country production offers insurance if this plays out.
What special trade-related due diligence measures should Taiwanese companies take to ensure these investments are successful?
In addition to standard investment due diligence measures, Taiwanese companies considering offshore investment should:
- Conduct a risk assessment of a contemplated investment location's susceptibility to protective trade actions. With regard to assembly operations, investors must also analyze anti-circumvention rules to ensure that the nature of contemplated operations is rigorous and adds sufficient value so as not to fall prey to claims that they are improperly evading existing trade remedy measures or "transshipping" and thus should be subject to existing duties or other measures aimed at countries where key components are made.
- Vet locations under national security investment controls. In the US, this includes risks under current CFIUS rules as well as pending amendments under FIRRMA that would expand the sectors deemed "sensitive" and thus subject to review. Outside the US, investors must be aware of the growing trend toward closer national security review of inbound investments in countries such as France, Russia, Germany, Canada and China.
- Conduct an FTA analysis to ensure the investment is located where it will most benefit from trade preferences under existing or pending FTAs. As noted, Taiwan is not now party to important new FTAs, and its position in global supply chains could suffer as competitors located in FTA regions gain price advantages via FTA preferences.
- Enhance compliance measures. Investing in operations abroad brings with it exposure to foreign restrictions on exports, tech transfer and embargoed countries and entities, among other legal mandates. The recent draconian US sanctions against ZTE, which affected many suppliers and vendors around the world (before settling), serve as a case in point. Taiwanese companies with multinational operations must ensure they have designed and implemented a world-class internal compliance system, including oversight of robust internal screening of customers, shipments and technology transfers, with related training and self-checks.
Waiting and hoping for more tranquil times is a risky strategy. President Trump's term runs until 2020—and if he is re-elected, his trade policies would continue until 2024. Further, the "Made in China 2025 industrial policies are likely to face strong headwinds as the 2025 target date approaches. Exporters must plan accordingly.
Taiwanese companies that adopt prudential investment and supply-chain strategies can not only survive but also thrive in these volatile and uncertain times. Failure to adjust could mean increasing isolation and diminishing market share.