3PLs confident as they brace for challenges under Trump
With the advent of the Trump administration, an unprecedented breadth of significant trade-related issues will be subject to changes that are potentially disruptive — and either destructive or remarkably restorative, depending on the results. With so much uncertainty in the air, how are global third-party logistics providers preparing to minimize the enormous range of risks? And what are they telling their customers to prepare them for the changes?
Among President Trump’s proposals are a 35 percent tariff on cars shipped from plants operating in Mexico, but owned by US companies; a 45 percent tariff on goods from China; and a 35 percent tax on German cars sold in the United States. Time will tell if these proposals advance, or if they are merely initial bargaining points for the new administration. Some may be judged contrary to international law, and thus become dead in the water before — or after — they are debated by the Congress.
3PLs are confident that demand for their expertise and services will be strong, regardless of the policy directions the new US administration pursues. “Global trade has been here for a long time, and there is not a ‘what if’ scenario that we have even thought about that says global trade goes to zero,” said Andy Clarke, chief financial officer of Eden Prairie, Minnesota-based C.H. Robinson. “Trade has and will always continue to exist.”
The issues around regulations will be those involving trade agreements, which are in a state of flux from time to time.
To thrive at a time of extraordinary uncertainty, C.H. Robinson will stick to what has worked in the past, he said. “We have 14,400 people across the globe,” Clarke said. “We have people who are on the ground, and are reacting to these things in real time. The process that we run is complying with all the regulations that pop up every day. We are crossing the border back and forth from Canada and the United States, and between Mexico and the US. We will continue to do that.”
Although reluctant to speak out about the specifics of US trade policy, the North American vice president of trade management for a Europe-based 3PL, agreed that North American providers of logistics services are focusing on the long-term positives that bode well for the sector, rather than complaining openly about potential risks.
“We are in the business of facilitating trade. More trade is good for us, while less trade is not as good for us and everybody in the business,” he said. “Is there going to be this 45 percent tariff on Chinese goods? Very few people expect that. Nevertheless, the general thrust of comments by Trump have been anti-trade. I don’t think the 45 percent figure is (going to be enacted), but to the extent that things are done that hurt trade, that’s not good for anybody, and it’s not good for the world.
“And if you believe in trade, having helped hundreds of millions of people in China or India or lowered prices for people in the US, and if there are actions that are taken that diminish that, then that’s not good either. It’s not a zero-sum game. Everybody benefits,” he said. “You can argue the point about whether people are losing jobs, but people forget the point that probably more jobs have been lost to automation than have been lost to the Chinese. The problem is, it’s a complicated story. Politicians don’t like complicated stories. They like simple stories.”
The 3PL executive added that even a high US tariff on Chinese goods “could turn out to be good for us, because we’re asset-light, and we could move much of our business into Vietnam, or elsewhere in Asia, as much of the traffic moves” out of China.
At C.H. Robinson, Clarke stressed that the precise impact of upcoming changes in US trade policy is impossible to predict, but the changes will likely take longer to play out than many people anticipate. As an example, he cited last year’s UK vote to leave the European Union. “They still haven’t agreed on a plan for how to extract themselves from the EU. For the UK to leave the EU, the UK must invoke an agreement called Article 50 of the Lisbon Treaty, which gives the two sides two years to agree to the terms of the split.”
Prime Minister Theresa May has said she intends to trigger that process by the end of March, so that “the UK will be expected to have left by the summer of 2019,” the BBC reported.
“Trade still exists, and insofar as it changes, the beauty of the way we approach it (at C.H. Robinson) is a very flexible, very non-asset-based, very customer- and solution problem-solving focus, which allows customers to gain visibility into where their inventory is at any given time,” Clarke noted. “We have automotive customers whose freight we are moving between Mexico and the US. If they start manufacturing stuff back in Lordstown (Ohio) or Detroit, we are still going to move their freight. It is going to LTL or truckload or intermodal — multiple solutions — but the good news is, people are still going to consume things. And people are still going to need to get the things from where they are manufactured to where they are consumed.”
He said C.H. Robinson does not try to anticipate which trade policy options will be approved by US legislators. Although he wouldn’t affirm that it is useless to chart various scenarios that would result from trade policy changes, whatever occurs, C.H. Robinson “would not give a directive to people and say, ‘Do this,’ in anticipation of something happening six months from now. Instead, C.H. Robinson depends on the flexibility of its electronic network,” which connects nearly 300 offices worldwide.
“We have the ability to be flexible in terms of the solutions we offer our customers,” Clarke said. “While internal trade within countries is an important part of what CHR does, it also has an important value position in terms of serving trade within markets, as within Asia, for example, where none of the activity has a direct impact on what’s happening in cross-border North America.”
With regard to US policy options, Clarke added, “People put out positions that they are ultimately going to move in from. So, if we said there was going to be an export tax or an import tax based on all these things, where does it ultimately play out? I don’t think we add value to our customers by helping them read the tea leaves of the politics. We help them design supply chain programs that help them react to whatever it is that occurs. We are not here to lobby for one thing or another. We very much stand for free and fair trade, where all parties benefit from inter-country commerce. We believe that globally that helps everybody. We help our customers think about their supply chains in a changing environment, but not by telling them or lobbying or advocating” about specific policy alternatives.”
For 3PLs operating within Mexican borders, the growing financial crisis in that country threatens opportunities to expand their markets south of the border. One of the biggest issues in Mexico today is availability of capital, according to Kirk Sherr, president at Tyson’s Corner, Virginia-based consulting firm Clearview Strategy Group. For all categories of Mexican-based businesses, including those owned by Americans that use logistics services, “capital availability and finance are going to be very, very challenging in the near term,” he said.
The peso depreciated by about 20 percent last year, and the crisis has worsened since Trump’s election because of the uncertainties related to future US trade policy. “That is a real crunch for anyone that has dollar-denominated payments,” Sherr said. “Related to that, interest rates in Mexico are exceedingly high. The uncertainty has bankers battening down the hatches. Uncertainty creates a disincentive to lend. Throughout 2016, as economic conditions in Mexico were challenging because of a lot of internal issues, Trump’s election just exacerbated an ongoing situation in terms of capital ability and lending.”
The first order of business for most companies in Mexico is to conserve cash. “Shorten payment terms, and be very conservative with investment that you don’t absolutely have to make if you are in Mexico operating in pesos,” he added. Short term, these conditions can’t augur well for 3PLs trying to expand their businesses in that country.
On the contrary, Sherr said, “I would imagine that companies are scrubbing their books — and being even more cautious going into the first quarter of 2017 than they were in last quarter of 2016, in regard to all non-essential spending.”