Wolfgang Lehmacher, Head of Supply Chain and Transport Industry at the World Economic Forum USA, told FlyingTypers that supply chain managers should hope for the best but prepare for the worst under the new Trump Administration.

FlyingTypers: What is your take on how the Trump administration’s policies (as far as they have been communicated at this stage) will affect trade and transport demand?

Wolfgang Lehmacher: So far, the cancelation of the Trans-Pacific Partnership (TPP) remains the only trade and supply chain-related measure of the new U.S. President. But a mooted 45 percent import tax on Chinese products is looming.

FT: What would new import taxes on Chinese products mean for the U.S.?

WL: The U.S. is the world’s largest importer—it’s a bit ahead of China. If the U.S. administration imposes high taxes on products imported from China, businesses and consumers would need to prepare for multiple consequences. Prices of Chinese products on the U.S. shelves would rise—taxes are costs usually passed on to consumers. Some products would vanish. Others would deteriorate in quality as replacements might not all meet the same standards.
      With the products, sourcing countries would also change. This would lead to major shifts in the product portfolio of manufacturers and retailers. Those shifts usually drive adjustments in the supply chain. The costs that come with these changes and the reduced set of options available for business would force cost optimization efforts, increased automation and layoffs, and would push some companies out of business.
      [This is] all if China itself does not choose to subsidize its exports to the U.S., which is an option too.

FT: How likely is a trade war between the U.S. and China?

WL: Although the option cannot be ruled out completely, I am not really anticipating a trade war. The consequences in the past have been too negative.
      For example, what was experienced after the U.S. government implemented the Smoot-Hawley Tariff act, which intensified global nationalism in the 1930s. Although large parts of the population seem to have lost memory and understanding about the broad range of benefits globalization and international trade has brought us all, governments will most probably try to avoid the severe negative consequences of a trade war.
      However, protectionism will continue to be part of our life as it has always been in the past. And healthy protective measures can help governments avoid sudden shocks. At the end, market realities should prevail to avoid the unnecessary burden and negative consequences of long-term protective measures for consumers, citizens, and the nation overall.

FT: Where does increase protectionism from the U.S. leave businesses and consumers?

WL: Well, the U.S. is dependent on imports. Electronic equipment ranks first, with close to 15 percent of total U.S. imports. In this category, mobile phones make up one third, followed by other electronic products such as integrated circuits, TV receivers, cables, and power units.
      The U.S. economy is integrated in the global production and value platform. This integration has brought lower prices and new business and job opportunities to the U.S. and other countries in the world. If companies are forced to set up specific U.S. operations they would globally and locally lose flexibility and scale advantages.
       
FT: What does this lack of flexibility mean for consumers?

WL: This disintegration and disaggregation of the U.S.-related supply and value chain would roll back the developments and advantages gained over the last decades and put manufacturers, and as a consequence, consumers, in particular U.S. consumers, at a model and price disadvantage.

FT: How should transport providers prepare for these potential changes in demand?

WL: The logistics coverage and high performance of transport networks in the U.S. are able to provide the necessary support for a potential economic restructuring, apart from pilot and truck driver shortages, which could hit the U.S. market anyway at a certain point in time.
      Protective measures might to some extent boost the growth of domestic intra-U.S. transportation, which would also mean additional growth for U.S. airlines and the domestic cargo business of airports. International transport costs on the China-U.S. lane might increase due to reduced volumes. Some lane specialists may struggle. Traffic from other origins could rise. But it is the U.S.-bound flow of goods that companies and governments need to watch closely.
      While China-U.S. traffic might slow, other lanes might see unexpected growth. In light of potential renegotiations of the North American Free Trade Agreement, the cargo volume development between the U.S., Canada, and Mexico remains a question mark.
      While the potential decline in U.S.-bound China traffic on the oceans and in the air might hurt certain logistics and transport companies, the remaining lanes and the other nations’ domestic markets might offer additional growth.
      Potentially, countries all over the world could see more cohesion, more connectivity, more growth, and more activity in production, transport, and logistics than they imagine today. But currently uncertainty prevails.

FT: Will people already be factoring this risk into future supply chain contingency plans, or should they be?

WL: At the end, we will need to see what is actually going to happen. As Donald Trump realizes (with the refugee and visa ban) that campaign promises cannot always be simply put in place, he might reconsider his position on trade.
      Significant taxes on imports from China would not only have a negative impact on respective air freight movements, but the prices of the products as well. People might show their strong disapproval if, for example, the prices of mobile phones suddenly rose significantly.
      Anyway, whatever we might think and hope for the future, companies need to develop different scenarios and assess various probabilities of alternative futures to drive their contingency planning and top-level decision-making. Cargo executives at airlines and airports for example need to watch the trend and behavior of their customers, too. Luckily, the cargo transport industry is one of the first to see potential shifts coming.
      Dependent on good predictive capabilities and the specific risk appetite of individual players, its leadership can drive operational and investment plans to counter such changes. Due diligence is also required by the leadership of governments and international organizations, which need to factor in new possibilities and risks into their policy roadmaps going forward—for the good or the bad.

FT: Where does protectionist sentiment in the U.S. and the UK leave the rest of the world?

WL: The current level of risk presents a great opportunity for European citizens and politicians to remind themselves of the values and basic idea of the European Union: ease of the movement of people, capital, goods, and labor to help economic growth, quality of life, and peace.
      Furthermore, there is a chance that the current situation in the U.S. and the U.K. might melt Asia, Africa, and continental Europe closer together, opening up unexpected opportunities for growth and stability. Trading between countries on the three continents could become easier, which would drive economic growth and benefit sea and air freight companies. The upcoming elections in France and in Germany in 2017 are critical events.
      The One Belt, One Road—the so-called OBOR initiative—which has the potential to become the largest area development project of all time, offers unprecedented opportunities across several continents and along the supply chain. More than 50 countries have signed up and more than 100 have declared interest in the project. The creation of over 70,000 jobs is expected. Fifty-one billion dollars has been pledged for development and fifty-two economic cooperation zones were established in eighteen countries to set up OBOR for success. Twenty-eight existing airports have already been expanded and fifteen new airports built. It’s a potential game-changer.
SkyKing