The Inauguration Ball; care to dance?

All eyes turn to the inauguration of the 44th President of the United States on the 20th January; and not only those that reside there. Within the context of global trade the renewed interest in American politics will centre on the impact of the new White House administration on free trade. To compliment the President elect’s apparent stance, there are echoes of a past cautionary tale. Just as the world was tumbling into a depression 80 years ago, a significant piece of legislation was proposed (The Tariff Act of 1930) and duly signed into law that increased import duties on 900 different products. In short, the impact aided a heightened level of protectionism worldwide and assisted the demise of world trade by two thirds from 1929 to 1933.

Now in the 21st century, current predictions point to a 2% decrease in World Trade in 2009 compared with 2008, which is not wholly unexpected. Already there have been indicators that this would be the consequence of a consumer downturn, such as exports from China falling by 2.2% in November, the most since 1971. In the context of global trade, there is little doubt that the US/China relationship will be pertinent and play a central role that is likely to set the tone for the rest of the world. Notably, the US can increase import duties from exporting countries by an average of three times before breaking any agreements imposed by the World Trade Organisation.

Similarly, global airfreight which accounts for 35% of the value of goods traded internationally is in freefall; down 22.6% in December 2008 (after 9/11, when much of the global fleet was grounded, the decline was only 13.9%). Of this, Asia Pacific accounts for 45% of international cargo and has subsequently seen the biggest decline in airfreight. Clearly the figures are indicative of a lack of demand and a sign of the economic downturn.

To reiterate a point made previously, we believe that companies purchasing from China (or any other low cost country) must understand the economic and business context within which they are operating. More than ever, it is necessary to manage your suppliers appropriately to mitigate systemic risk inherent in the current business environment. The most effective method is to have some form of local presence.

On the flip side, there are now opportunities to drive product costs down. The Producer Price Index was down to 2% in November from 6.6% the previous month indicating that raw material price increases are reducing as inventory works through the supply chain. Textile quotas have elapsed to the US across 34 different categories, which will likely open up cost savings for US importers. Commercially, the consumer downturn has significantly reduced vendors’ negotiating positions now that there is a scramble for new business. That said, the necessity to mitigate risk (caused by falling orders and a lack of liquidity) from the current trading environment should not be ignored.

Central Government continues to use all means available to maintain a level of growth sufficient to employ the 7 million new workers entering employment each year (India, by comparison, has 14 million new workers per year) and more specific measures are likewise being implemented to assist the export sector. Export rebates have been increased four times in 2008 and there has also been talk of State funded assistance available for ailing SMEs but the extent and how widespread such relief may be remains unclear. The purchasing manager’s index rose in December from November’s figure to 41.2, which although still shows an overall reduction in the manufacturing output across China’s factories, indicates that at least there was less of a decrease compared with the previous month. The 4th Quarter GDP growth is expected to be around the 8% mark, followed by an approximate GDP growth of 7.5% for 2009 (World Bank), although it would not be surprising should this be revised downward early this year.

To put the data to one side, we believe that as long as companies manage their vendors appropriately to mitigate risk and look to maintain good working relationships there will be some considerable cost reductions attainable going into 2009. China is still placed to counter the global downturn better than most other manufacturing countries with a vast current account surplus. However, the possibility of a trade war and increased protectionism continues to linger and will largely depend on the US and China’s ability to take to the floor and lead the way.

ET2C has recently implemented SAP and a CRM tracking system to enhance our performance and transparency across our clients’ supply chain; details will be provided shortly. We have also been conducting a number of surveys further aimed at aligning our service to your needs and would, if you have been randomly selected, appreciate your feedback.

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