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The economic chaos caused by the COVID-19 pandemic has exposed vulnerabilities in supply chains and raised doubts about globalization. Businesses should use this crisis to revisit their supply chains, understand vulnerabilities and take steps to improve resilience. It’s time to adopt a new vision pertinent to the realities of the new era — one that leverages the capabilities in the trade networks, improves resilience and reduces the risks from future disruptions that are certain to occur. Businesses must also consider regionalizing supply chains and diversifying supplier relationships.
Key takeaways:
With the global trade showing signs of rebound in 2021, experts are predicting continued growth in the volume of goods getting shipped. Data analytics is becoming a mainstream activity within global trade organizations.
Manufacturers and retailers in the US are expected to deal with rapidly increasing commodity prices. Businesses will need to look for ways to operate lean to avoid a squeeze on margin.
Visibility and resiliency will help companies handle disruptions in the future. Taking steps, such as rerouting shipments in transit, stocking inventory to handle delayed shipments, strategically positioning inventory in networks and considering alternative suppliers will help them stay prepared.
For your convenience, full text transcript of this podcast is also available.
Justine Greene
Hello and welcome to the podcast series from EY Global Services. I'm Justine Greene and with global trade experiencing such uncertain times, we continue to look at how organizations can respond to survive and grow. Each episode will be joined by expert guests to share their opinion and insight on our theme. Our focus this time is on the major disruption in global trade and the impact on trade networks. Joining us from Florida is Jim Morton, Managing Director at EY and Leader in US Supply Chain and Operations.
Greene
Hello, Jim.
Jim Morton
Hello, Justine. I hope you're well. I'm excited to be here with you today to discuss this very relevant topic.
Greene
Lovely to have you with us. And, in North Carolina, Jay Bezek, Senior Manager, Global trade at EY. Hello, Jay.
Jay Bezek
Hey, Justine. How’re you doing?
Greene
Really great. Now, Jim, just set the scene for us in terms of the volatility we're seeing in global trade, including the key factors in play.
Morton
Yeah, Justine. That’s a great question, and for me, there are really three macro factors that are driving a lot of the dynamics today. First of all, there's changing global trade patterns that are driven by geopolitical factors. As an example, there's an organization called Geo Quad, and they track these sorts of things. According to their research, global political risk reached a multiyear high in 2020, and that's notable. And then there's been a push toward regionalism, and I'm sure we see this in the news all the time with three emerging economic and political blocs, that being the US, the EU and China. Overlaid on top of this, there's more protectionist behavior by these political blocs that we've seen that's leading to trade policy volatility, including some of the policies like the China 301 retaliatory tariffs. I think Jay will speak more on that, but all of these things are modifying sourcing strategies and global trade patterns. Secondly, the impact of the COVID-19 pandemic has significantly heightened the desire for resiliency in the supply chain. So, for a long time now, companies, amid sourcing and manufacturing, low-cost countries, especially in Asia-Pacific, this creates long extended supply chains with competitive pressures. Companies are primarily focused on cost optimization and not so much on resiliency. Well, COVID-19 came along and it certainly exposed the soft underbelly of these supply chains, with delays in manufacturing at the source, delays in transportation and border crossing, getting the product to the market — a lot of times with insufficient buffer inventory. Lastly, ocean transportation, which you know, I characterize it as a bit of the wild west right now. Even before COVID-19, carriers were invoking policies to keep their rates up and ensure their profitability by taking vessels out of service, slow steaming, etc., a number of strategies. Then, COVID-19 came along and it really created quite a disruption. So, throughput drops significantly in early 2020, but then by the summer, it was rebounding very strongly with a lot of consumer spending. Even in transport of personal protection equipment, a lot of it coming from Asia-Pacific inbounded into the West. But, in the meanwhile, carriers continue to try to keep their business profitable, cancel sailings, balancing supply and demand. The way this is manifested itself, the end result, one example is that the container rates from East Asia to the US West Coast have tripled year over year, and they're expected to increase further in 2021.
Greene
Can you talk us through the other factors behind the serious disruption that shipping is experiencing?
Morton
Yeah, I characterize it as a perfect storm of issues. A part of carrier strategy has been taking capacity out of service to keep prices up. Because of imbalances in trade flows, there are some markets, like in the Asia-Pacific, which actually have a shortage of containers, and that's delaying the companies in China from being able to stuff containers to be shipped over to import markets like the US. When the product gets to import markets, port operations are slower due to COVID-19. In certain markets, trade tensions are actually causing longer than normal inspection periods in customs processing. So, all these types of issues are certainly causing delays and disruption for companies that count on imports.
Greene
Jay, give us your insight on global trade and the disruption over the last couple of years.
Bezek
Yeah, Justine. What Jim was talking about really focuses a lot on the logistics aspects of the trade. What we've seen in the last three to four years when we talk about trade policy and the disruption and how goods are crossing borders from a customs’ perspective is really, really incredible and unprecedented. I've been in the industry for over 25 years, and the last three to four years have probably been more disruptive than I've ever seen by a longshot. So, it really gets down to a lot of the political aspects and the political landscape that we have. We've seen a little bit more of a protectionist type of attitude and more nationalism. That really went even to the US and how we put our trade policy in place. So, the prior administration really took a look at bilateral free trade agreements, and they've moved to more multilateral across multiple countries. The Section 301 tariffs really, really changed the landscape when it came to customs and the duties that were paid on those goods. We also saw Section 232 tariffs that were very specific to steel and aluminum imports, and trying to actually build up more of a domestic production base here in the US to the detriment of a lot of the global trade that we actually had. Then, we did see a significant change in export controls, sanctions and investment restrictions. So, it was both ways. It was both on the product that was coming into the US, but also on how we exported to our overseas customers that changed. Our companies that we work with on a daily basis really had to look at it both on an import and export. I think in the current administration, the rules are set. They want to make sure that people are playing by the rules. Another big part of the current administration is obviously around climate change. How is that going to impact global trade? What is that going to really mean to not just logistics, but also how goods are crossing borders? And probably still the biggest issue that we don't know yet is what is the future position with China? We haven't seen anything change in terms of the 301 tariffs. Is that a long-term strategy? Or, are we, kind of, waiting to see what the next steps in? With China being such a critical trading partner, there are companies around the country that are waiting to see what is actually going to take place and what the next steps are going to be.
Greene
And Jim, do you think the recent events have highlighted the risk of over-dependence on manufacturing from Asia?
Morton
Absolutely. I’m working with multiple client companies right now that are truly rethinking their footprint in the Asia-Pacific, in particular China. Don't get me wrong. China is still a very important growing market. So, maybe there's a bifurcation of strategies in terms of manufacturing in “China for China” versus “China for the world”. So, China is still a pretty high growth rate for companies that have a high market demand in China itself. It still probably makes sense to have that physical footprint in China to satisfy that demand. But for companies that have been traditionally using low-cost country sourcing from China, they're definitely rethinking strategies. Looking at other countries, you know, perhaps Vietnam is another place where they could find qualified suppliers to produce products. Also, looking at, you know, nearshore strategies, you know, maybe some of the manufacturing in Mexico. In some cases, repatriating manufacturing and moving it onshore into the US.
Greene
Jay, your thoughts on this.
Bezek
Yeah, Justine. So, the 301 tariffs were a game changer for many companies that rely on the international supply chain. So, what we really saw is, when the 301 went in place, duties increased by, in some cases, well over 20%. We've seen companies that had a footprint of products and duty for products coming in from China that went from zero to hundreds of millions of dollars. And there's no way in the world that they could absorb that. So, the customs duties were really the driving factor on where they needed to source their goods from: they couldn't absorb those types of costs and they couldn't pass them on to their customers. So, they really had to rethink how they were actually looking at China. As Jim mentioned, we're seeing a myriad of different potential solutions. We're seeing some that are nearshore, and we're seeing some of that is being moved to Mexico or other countries that have free trade agreements because the duties have become such a big part of the overall total landed costs. We do see a lot of companies that may be trying to move out of China and moving, as Jim said, to a place like Vietnam. There are no 301 duties that are being applied to goods coming from Vietnam as of yet. That could take place at some point in the future. So, I think this is one of those ongoing things that we have to watch.
Greene
OK, well, thanks for the moment. Next, we'll talk more about the impact of the disruption and look at possible outcomes. Shipping costs have hit an all-time high. Jay, what impact is this having on trade and economies?
Bezek
So, the customs and trade is, kind of, the back end of the supply chain. So, shipping costs are really just one of the aspects that are really impacting trade. When we look at it in total landed costs, we're looking at the cost of the product, the cost of the transportation and the duties. When you add those up, you come up with your total landed costs and what it costs to get the product from point A to point B. What we're seeing is that companies are now being much more focused on every aspect of that total landed cost: be it the cost of the products, be it the transportation, or be it the customs duties. A country that has a free trade agreement, or maybe zero duty rate that people go and say, hey, I can maybe manufacture the goods in Mexico. It may lead to exponentially higher transportation costs or increases lead times, which may increase inventories and safety stocks. At the end of the day, it is not the right way to look at it. So, you have to look at all of the factors holistically and together, and not just as, you know, duties versus freight versus the cost of the good. There are many things that come into play when you're looking at the total landed cost and how that is going to drive your decisions.
Greene
The Suez blockage hit the headlines back in March, Jim. How do you mitigate for acute disruption like this?
Morton
Yeah, in fact, that was a particularly acute disruption. I think many of us were, you know, watching the news or looking at headlines with our jaws wide open to see a container ship virtually sideways, blocking all traffic in this very important artery for global trade. There are still some fundamentals that it teaches us that companies should have. So first is around visibility. The more you can see things in advance, the better. I like to divide this into two areas of visibility. One, I would call tactical visibility, and this is something that's actually been around for quite a few years. But the problem statement here is: am I able to understand in near real time, where my freight is at any given moment? Is it, you know, somewhere in the middle of the Pacific Ocean? Is it about to be berthed at the port of Los Angeles? You know where is it? Is it on schedule? Is it delayed? So, that's the kind of visibility aspect for the ocean and other modes of transportation in terms of having that type of visibility. The other, that’s newer, what I call as strategic or extended visibility. If you can imagine, you know, many companies today take a manufacturing company. You've got suppliers, and those suppliers have suppliers, and then those suppliers in turn, probably have more suppliers. So, there's tier-1, tier-2 all the way through tier N suppliers. There are advancements in a new set of visibility tools that take data feeds and information feeds from many different sources. It may be news sources; it may be economic data sources; it could even be social media sources. But these information sources with appropriate technology, which could be artificial intelligence and machine learning, they are discerning patterns and highlighting when there may be risks. It may not be your direct supplier that's having a risk. It could be their supplier. But it's going to propagate down to you. The second key is resiliency. You probably cannot run as lean as you could in the past if you want to be resilient. But you need to have certain capabilities. You need to, if possible, have the ability to reroute shipments in transit. You need to think about having the right amount of buffer inventory or safety stock so that if a shipment that you're counting on is not going to be there in time and you've got critical manufacturing processes that need to happen, you can't afford downtime and you can't afford to not serve your customers. Then you probably need to have a bit more inventory strategically positioned in your network. You need to think about alternative suppliers. If you are single sourcing for real critical components that if there's a delay in their lead time, it could negatively impact you. You need to think about having alternative suppliers or, back to my point on inventory, have some adequate inventory to guard against disruption. And even in your own manufacturing footprint, thinking about manufacturing facilities that aren't just single-threaded around a single product line, but you know, have some ability to be flexible, and have redundancy. So, one of your plants is down for a specific reason or has a disruption, then you can start sourcing from another one even for a short time to help you through the disruption.
Greene
So, Jay, to help avoid this type of disruption, does there need to be a more holistic approach?
Bezek
There definitely does. What we tend to see in the customs and trade aspect, as we react to what happens further up in a company supply chain, we get very transactionally driven. So when things like the Suez Canal blockage hits, we knew that there was going to be essentially kind of a knee-jerk reaction. A lot of companies that we see, they feel that they run extremely lean and when something like the Suez Canal blockage happens, there's a little bit of a panic mode that sets in. And, the next thing you know, we see shipments that are being put on airplanes and shipments that have to be expedited through customs, which causes a lot of chaos and noise in this system. So, what we would like to see is a little bit more holistic planning all the way through the customs process, so that the back end of the entire supply chain, which is the customs clearance and then the delivery to the final end port, is not really managed by an emotion. We do see the emotion coming in and not really the use of data. What we'd like to see, and what the customs teams within companies that we work with would like to be more a part of, is the holistic view of the overall supply chain to say, okay, we have it. It’s not an emergency. If we get the transparency and the visibility to what we need, we can make sure we're still hitting those critical deadlines and dates for getting things through customs and delivered to customers and to manufacturing facilities.
Greene
Jim, give us your opinion on the type of reforms needed to minimize disruption in ocean freight.
Morton
Yeah, to be clear, I do expect some level of volatility to continue in global trade and ocean freight. And as they say, the only thing that's constant is change. I think trends are suggesting that it's not going to change. But also, I don't think this is something necessarily the government or some international authority can completely mitigate through reforms. That said, you know there are some actions that are being taken. For example, the National Industrial Transportation League is a well-established trade association here in the US. They've recently proposed some recommendations to the Shipping Act that includes some things like prohibiting common carriers and marine terminal operators from applying unreasonable demurrage and detention rules. So, that would be an example of maybe some things that are happening.
Greene
Jay, looking ahead, what do you think are the key influences to reduce disruption in global trade generally?
Bezek
So, just to step back and put things in context, there's still over US$4 trillion in goods that are shipped globally each year. 2020 saw a decline of about 5.3% in volumes, primarily due to the pandemic. But in 2021, we're already seeing an over 8% increase in volumes. What we're seeing with a lot of our clients and with companies now is, there's a better use of data and how to get ahead of certain disruptions and almost try to be as predictive as possible. Data analytics, which probably 5 to 10 years ago on global trade, was never even heard of. It is now becoming more of a mainstream activity within global trade organizations. Historically, customs organizations have been very transaction-driven and very tactical. We're now seeing, essentially because of the 301 tariffs and the pandemic, the customs teams are having a seat at the table with the strategic decision-makers within an organization to help drive strategy. That never really happened to the extent that it is right now.
Greene
A question for both of you. Which one will win the day in shipping: supply chain resilience or lower operating costs?
Morton
I'll throw in my opinion. I mean, I think realistically, it's a balance of the two. But certainly, there's an increasing priority on resilience right now for obvious reasons. Honestly, it's a pendulum that swings back and forth. Companies right now are swinging back toward prioritizing resiliency after becoming so exposed. But, right now, on the horizon, we're seeing, at least in the US, rapidly increasing commodity prices that manufacturers and retailers are having to deal with. That would suggest there's going to be a need to try to take cost out of the supply chain and operate in a lean fashion in order to avoid a squeeze on margin. So, it's what makes supply chain and global trade so interesting — just being able to balance things and optimize multiple things at once. And it's not always straightforward, but hopefully, we gave a few tips on how to manage that effectively.
Bezek
Yeah, and just to kind of follow up on that, I think companies are getting better prepared to actually deal with the next disruption. Whether they minimize or not, there are too many variables that actually play into what can cause a disruption. Something as simple as one boat in the Suez Canal had a ripple effect within global supply chains. A pandemic global trade policy — we’ve to be in a better position to be very flexible and pivot. So, as those types of things actually come down the pike, we'll be able to make quicker, more educated and better decisions on how to deal with them in order to minimize their impacts.
Greene
And finally, what are both of your thoughts as to whether the vulnerabilities and disruption in shipping will improve anytime soon?
Morton
Yeah, that's a really good question, and I wish we all had a crystal ball. I think some of the factors that we've talked about today, like you know, kind of the protectionism and some of those geopolitical factors and some of the dynamics of ocean transport, I think they're here to stay. There will be peaks and valleys. I think the one thing that thankfully we're seeing the end in sight is with, you know, the COVID-19 vaccine getting a foothold in the US, maybe a little bit less extent globally, but it's getting traction. That’s helping businesses get back to normal. I think we're seeing, hopefully, the end of the pandemic over the next six months to maybe nine months. So, I'm not an expert in that space, but it looks like that's the one factor. The COVID-19 has been so disruptive and, you know, hopefully that's going to be going away. But I think there will be some other factors that will continue to make things a bit volatile.
Greene
And Jay?
Bezek
Yeah, I do think that we are seeing things stabilized. And as Jim said, with just the improvements in the vaccine in COVID-19, that's having a huge stabilization factor within global supply chains. Whether we're going to say that there's not going to be disruptions or they're going to minimize, oh, too early to tell that. I mean, something could happen tomorrow that could actually change the landscape, and we just have to be able to deal with that. You can plan around stability, so actually seeing the pandemic come to more of an end, as you can kind of see a normalizing of kind of the trade policies. We're optimistic that things are improving, but you never know what tomorrow is going to bring.
Greene
Too true. Well, it's been a very interesting conversation. Thanks to our guests for sharing their insight and opinion. Jim, thank you.
Morton
Thank you. I've really enjoyed it.
Greene
And Jay, thank you.
Bezek
Thank you, Justine. It’s been a pleasure.
Greene
Do join us next time when we will continue to discuss global trade with our expert guests. Also, you can subscribe to this series, so you won't miss an episode. From me, Justine Greene, Jim Morton and Jay Bezek, thanks for listening, and goodbye.
