Customs War from the Perspective of Purchasing Organizations

One of the key messages from the G-20 summit in Buenos Aires concerned the chances of ending the trade war between the United States and China, which has been increasing in scale in recent months.

There is also a risk of an outbreak between the United States and the European Union. It arouses more and more emotions as awareness of its consequences in societies grows. Even the lack of a Santa Claus rally on stock markets this year (e.g., the Dow Jones Industrial dropped 6% on December 2018, 0,32) is attributed to growing trade uncertainty between the United States and China.

Trump's declaration of June 15, 2018, when he announced the imposition of 25% tariffs on Chinese goods worth $50 billion, can be considered the beginning of the trade war. Although the first tariffs (30% on solar panels and 20% on washing machines) were imposed on January 23, 2018, China did not impose any retaliation until April. Back in May, personal talks were held in Washington with Deputy Prime Minister Liu He. They ended with a declaration that China would like to reduce the trade deficit with the United States by increasing imports from this country. However, this did not stop further escalation, including the declaration of June 15. The latest tariffs were introduced on September 17, 2018 on imports from China worth $200 billion, to which China responded a day later with a 10% tariff on goods worth $60 billion. According to data from November 2018, the US trade deficit is growing for the fifth month in a row, therefore the goal of increasing tariffs has not been achieved yet.

The question is whether such an exchange of blows between economic powers, which changes the economic situation in the world, also affects the work of merchants and the functioning of purchasing units?

According to the theory, tariffs change the relationship between supply and demand. In this case, imported goods become more expensive, so the demand for them decreases. If goods subject to tariffs are also produced by the domestic industry, an increase in the prices of foreign goods may lead to an increase in the production of their domestic equivalents. However, foreign producers may, instead of accepting the decline in sales, lower prices (or take advantage of the weakening of their own currency, which may also happen in this case). Reduced prices will be offset by the need to pay customs duties anyway, so domestic consumers usually lose out when tariffs are introduced.

When considering the possible effects of a trade war, we can look for analogies to similar situations in the past. The trade war initiated by China became the cause of the First Opium War (1839-1842). In the XNUMXth and XNUMXth centuries, the demand for Chinese goods in Europe was so high (especially silk, porcelain and tea) that a significant deficit in international trade arose. The British, wanting to balance it, began to export opium to China. The product became so popular that the situation and economic problems in China were reversed. The Chinese therefore tried to stop the import of opium, which triggered a war.

Poland was also involved in a tariff war. In 1925, the most favored nation clause imposed on Germany by the Treaty of Versailles for the Entente countries, including Poland, expired. Germany imposed an embargo on some goods, including suspending coal imports from the Silesian Voivodeship and increasing customs duties on other goods. At that time, exports to Germany accounted for half of the volume of Polish foreign trade. Poland responded by increasing customs duties on German goods. However, these actions were less painful for Germany because it had a larger internal market and more diversified exports. As a consequence, industrial production in Poland decreased by 20%, the zloty weakened, inflation, budget deficit and unemployment increased, and the second government of Władysław Grabski collapsed. The crisis was one of the causes of the May coup the following year. However, over the following years, the Polish economy adapted to the changed situation and difficult access to the German sales market. First of all, this was reflected in the construction of a coal main line connecting the Silesian Voivodeship with Pomeranian ports. Thanks to this, Gdynia was built and the export of Silesian coal to Scandinavia developed.

Currently, it seems that the tariff war is becoming more and more felt. The November turmoil in the US financial markets, which affected Facebook and Apple shares, is attributed to her. In an interview with The Wall Street Journal, American President Donald Trump suggested that the United States could introduce a 10% tax rate. tariffs on iPhones and laptops imported from China. As CNBC reported, Apple shares lost nearly 2% in reaction to this information. in off-session trading. Apple products are currently exempt from customs tariffs. It was previously announced that tariffs could apply to products such as Apple Watches and AirPods, but they ultimately were not on the list when the tariffs were announced. Although iPhones are assembled in China, some of the phone's parts are manufactured in the USA.[1]

Global demand for sea freight transport decreased by 2018% in the third quarter of 1,5, compared to the second quarter. It is true that in the third quarter, the volume of transport on the Asia-Europe line increased by 6 percentage points. percent compared to the second quarter, but only by 2,5 points. percent compared to the third quarter of 2017, and in the first three quarters of 2018 - by only 1,7 points. percent, on an annual basis. What is particularly characteristic is that ultra-container ships (carrying over 16 TEU) in the first half of 2018 were on average only half full, which usually does not guarantee the profitability of transport.[2]

This means that purchasing units should prepare for an increasing share of tasks related to customs duties. As Mateusz Rak, Group Head of Procurement Development IAG GBS, stated at the last CIPS "Born to Be a Buyer" conference in Krakow, long-forgotten skills will be valued again, e.g. the ability to properly conduct customs clearance. As a consequence, knowledge of the law of given countries and the ability to manage a multi-clause contract will be even more important.

At the strategic level of the purchasing process, strategies regarding purchasing categories subject to customs duties will require verification. First of all, the positioning of suppliers will change depending on their geographical location (and whether they are subject to customs duties or not). As a consequence, the way of managing relationships with suppliers will change. Some of them will lose priority due to increases in prices and transaction costs related to customs duties. Additionally, the analysis of cost drivers should be extended to include customs duties, customs service costs and downtime costs. This will therefore affect the total cost of ownership calculation model. The risk register in the category will probably also need to be updated. In addition to customs duties, there is a risk of retaliation from other countries, which may translate into sudden changes in supply and demand. This will be particularly important for categories in which prices are linked to indices, e.g. preforms, coal or steel.

At the tactical level, when conducting a specific purchasing procedure, adjustments will be necessary regarding the required documents, the method of obtaining information about the price and the required deadlines. The issue of extended deadlines will also affect operational contract management and delivery planning.

To sum up, from the perspective of purchasing organizations, a customs war is an opportunity to show their value to the organization. Mitigating its negative effects may become a task for many merchants, who should also develop their knowledge and skills related to customs clearance, settlements and cost analysis. Optimistic declarations from Buenos Aires that China will increase imports from the US and end the conflict should be taken with caution, taking into account the turbulent policy of the current US authorities. In other words, customs issues will not disappear from the scope of merchants' work for a long time.