Washington Insider-- Monday

Trade Policy Issues Intensify

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Push Continues on Removing US Sanctions on EU Food, Ag Goods

A bipartisan coalition of House members have written to U.S. Trade Representative Robert Lighthizer to urge removal of retaliatory tariffs on European Union (EU) food and ag products imported into the country.

The tariffs are linked to the long-running dispute between the U.S. and EU over subsidies given to Airbus in the form of low interest rates. The World Trade Organization ruled the situation with Airbus ran counter to world trade rules. While the EU insists they have met the terms of the WTO ruling, the U.S. is able to hit EU goods with retaliatory tariffs.

The U.S. has threatened additional EU goods with tariffs, but the August deadline is approaching and it is not clear the U.S. will hold off expanding the tariffs too long.

And while lawmakers praise Lighthizer for his get-tough stance on the EU/Airbus issue, they add, “We hope you will update the United States' approach in this case to eliminate unintended hardships for Americans trying to make ends meet and small businesses seeking to recover.”


WTO Fails to Agree on Temporary Leader

While the WTO is moving ahead to find a new Director General, the group has been unable to agree on a temporary leader for the world trade body.

While the exit of current WTO Chief Roberto Azevedo would normally prompt the trade body to pick temporary leader from one of the four Deputy Directors General. But they did not take such a step.

The General Council agreed to extend the terms of the four sitting Deputy Directors-General — Yonov Fred Agah, Karl Brauner, Xiaozhun Yi and Alan Wolff – until a new leader is chosen.

Labeled “very much a housekeeping matter to facilitate the continued running of the organization,” General Council Chair David Walker of New Zealand said the lack of a consensus on who should temporarily lead the WTO prompted the extension of the terms of all four of the Deputy Directors General.

The four will “consult closely with the members,” the WTO said. Walker stressed that during this interim phase, no structural changes will be made to the WTO Secretariat.

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Washington Insider: Trade Policy Issues Intensify

As trade has become more complex, policy issues have also become more complicated, Bloomberg says this week.

For example, much of the modern trade in goods is actually in the form of components, a development widely attributed to an economic consultant, Keith Oliver, Bloomberg says. Oliver is concerned that current “drastic efforts to realign chains will ultimately hurt consumers.”

Oliver recalls his 1978 work for Booz Allen Hamilton for a unit of Philips NV, the Dutch electronics giant “trying to compete globally back when Japan was the rising economic power in Asia that worried western companies.”

Oliver, then in his mid-30s, pitched a solution initially billed as “integrated inventory management” to unify a fragmented organization — using a new theory of how to run a multinational company.

Bloomberg says supply chain management has gone from back-office obscurity to political scapegoat “because they expose economies to shocks beyond their borders.” Oliver thinks there is “plenty of room for improvement, but he bristles at many governments' plans to nationalize his brainchild.”

“This strikes me as a short-term victory for the political at the expense of the overall economic, intellectual and global social progress,” says Oliver, now retired in Vancouver after more than 40 years with Booz Allen. “Yeah, it'll make it easier because the supply chain won't be as long. However, the costs will go up, so, prices will go up and we'll hammer the consumer.”

Such trade-offs are the subject of much economic debate of late and rare was the second-quarter earnings call where the chief executive officer of a major international producer didn't address them. For example, Bloomberg notes that Tom Linebarger, chairman and CEO of engine maker Cummins Inc., said “our supply-chain organization faced some of the most significant demand fluctuations in the company's history.”

David Calhoun, Boeing Co.'s president and CEO, said the plane maker is “doing everything we can to support our global suppliers and their stability remains a key watch item for us in the aerospace — as our aerospace industry weathers these unprecedented challenges.” Part of that effort means assessing risks and “continuing payments to our more than 12,000 suppliers supporting about 1.5 million jobs,” he said.

“The shortfalls recently demonstrated in supply chains are primarily management failures,” he says. “We do actually have the philosophies, concepts, tools and technologies to manage global extended-enterprise supply chains — the failure is in their rigorous application.”

It wasn't until 1982 that Oliver's concept appeared publicly. U.S. and European companies were woefully behind their Japanese competitors on things like inventory control and built large, costly stockpiles as buffers against demand uncertainties.

Over the following two decades, Oliver says a few broad changes happened that tested the durability of supply chains. The first was a rise in consumer preferences for customization — an iPhone in red, gold, black, white or silver; variety is an enemy because it makes demand hard to forecast.

The second variable was globalization and companies stretching out across the world to reduce costs — ushering an era of low global inflation and low interest rates.

“Remember that the whole reason to go out there was in fact the reduction of cost,” Oliver says. “In the majority of instances, it actually produced a very significant cost reduction.”

There was a societal toll, though, according to officials like U.S. Trade Representative Robert Lighthizer, the architect of President Donald Trump's tariff offensive against China. In an essay in a recent edition of Foreign Affairs magazine, he derided those who've been “obsessed with efficiency” and called supply-chain relocation “a cure-all peddled by management consulting firms.”

Around 2000, Oliver said, he and others realized the three main types of risk — two of which are currently wreaking havoc — needed more attention: internal risks like workers going on strike; external risk such as a trade war that boosts tariffs; and acts of nature like a pandemic that paralyzes the global economy.

“Many companies caught up in the outsourcing frenzy failed to appreciate the risks,” Lighthizer wrote, a statement with which Oliver might partially agree.

Another shortcoming in Oliver's view was a belief among top executives that technology, automation and artificial intelligence would smooth disruptions on their own.

“Turning everything over to a black box is a very dangerous thing to happen in a supply chain,” said Timothy Laseter, who worked with Oliver at Booz Allen. “Progress will continue, but will it ever be as theoretically pure as we want it to be? Probably not.”

Oliver remains optimistic that the recent shocks are surmountable and might even be a catalyst for making supply chains a bigger part of a company's strategic plan. “The progress has been huge,” he said. “I am frustrated that the potential has not been realized.”

So, we will see. In recent years the administration has tended to rely on government interventions and less on economic competition to build sales — and, critics of current administration policy often argue that it has narrowed, rather than expanded, overseas markets. There is growing concern that the current reliance on tariffs will be more difficult to manage than anticipated. This is an important debate that producers should watch carefully as it intensifies, Washington Insider believes.


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