U.S. professor sounds alarm on supply chains
Tags: Trade, Supply Chain, Trade Restrictions, Export

By Cate Hull

Noah Smith, an opinion columnist and assistant professor of finance at New York’s Stony Brook University, penned a piece for bloomberg.com this week on market trends and what he sees as threats to global supply chains.

His piece raises questions that all who work in freight and logistics should consider. Are fraying trade relations across the globe threatening the concept of global supply chains where major manufacturers build components in their home country and then ship them to other countries for assembly, taking advantage of lower wage rates?

Smith raises the red flag on the topic of export restrictions. He says laws forbidding the export of certain high-value products have the potential to make global supply chains a less feasible strategy.

We have already seen the weaponization of tariffs by the American president, seeking to rectify what he perceives as trade injustices carried out against the United States.

Other countries and even regions have responded in kind, creating a trade war not only between the U.S. and China, but involving many other nations as well.

U.S. exports to China and Chinese exports to the U.S. have both fallen. But that doesn’t mean that production of those goods has now shifted back to the countries where the goods are consumed. For example, multinational companies may move production out of China, but they often just relocate it to other countries, such as to Vietnam, Malaysia, Taiwan or to places outside East Asia. Already, U.S. imports from Vietnam, South Korea and India are rising strongly. In addition, Chinese companies may simply ship their products to places like Vietnam and then re-export them to the U.S. or another final destination in order to avoid tariffs.

Recently, the most prominent use of export restrictions has been the U.S.’s blacklisting of Chinese companies Huawei Technologies Co. and ZTE Corp. These company-specific bans may hobble China’s mobile-equipment giants, which are dependent on U.S. technology, and they will also probably hurt U.S. companies by depriving them of a revenue source, but they aren’t that big of a threat to global trade. A more ominous sign, however, is Japan’s recent decison to restrict the export of certain industrial chemicals to South Korea.

South Korea is the world’s top manufacturer of memory chips. That industry has historically been fought over by advanced countries — first Japan seized leadership from the U.S. in the 1980s, but in the 1990s Korean companies took the pole position and the Japanese market share collapsed. But Korean chipmakers such as Samsung and SK Hynix still depend on certain industrial chemicals produced in Japan. Recently, Japan Prime Minister Shinzo Abe unveiled a policy that would make it harder to sell these chemicals to South Korea.

This is a disturbing development, because Japan has been one of the biggest promoters of free trade during the past few years, according to Smith. A desire to use export restrictions as industrial policy could signal a sea change. European countries might follow — already, the European Union has been tightening its export-restriction regime for so-called dual-use products, such as nuclear technology, chemical equipment and high-tech electronics.

A world of rampant export restrictions could have far deeper effects on the structure of global trade than Trump’s tariffs. Unchecked, the trend could lead countries to abandon international high-technology supply chains. A world where each country makes its own technology products from start to finish would result in more expensive products, and make countries more likely to resort to military force to resolve conflicts. Thus, observers should keep a close eye on the spread of export restrictions, he added.

Cate Hull is the CEO of FreightExchange, a freight and logistics company based in Sydney.