Experts at credit ratings firm Standard & Poor’s on Wednesday addressed a range of topics concerning the U.S. economy, tariffs, sustainability and the supply chain as part of two programs hosted by S&P Global Market Intelligence.
U.S. policy focus on alliances
From a trade and economic standpoint, the Biden administration faces three key areas at the start of the new presidency.
The first is the ongoing structural change for the demand of merchandise versus the service trade, according to Satyam Panday, U.S. senior economist at S&P Global Ratings. The second is the acceleration of what he calls Industrial Revolution 4.0. The third concerns the increasing national security aspects of trade.
The structural change in demand was already happening before the Trump era, with the trade of merchandise declining due to shifts in global growth, he said. And the industrial revolution, such as digital services automation and the Internet of Things, were a part of a confluence of advances happening concurrently. The final aspect involving trade versus technology competition arose with the rise of China, and the action from the Trump administration was to respond with a tariff on goods, he said.
Some of those changes were accelerated by Covid, the economist said. Because Biden is “no pure free trader,” Panday doesn’t expect any immediate rollback on items such as tariffs with China. The economist believes Biden’s first policy objective is on “repairing the relations with the alliances that we already had with the rest of the economies, the multinational approach that he wants to create and some of the boosting of the domestic industrial output.”
Panday is betting that Biden will roll back some steel-related tariffs, especially those in Canada and with European allies. With China, the question becomes more difficult to answer. “There is still this growing sense of who is going to lead the technology space in the Industrial Revolution 4.0,” he said. “Obviously, we’ll have to see how both China and the U.S. [decide to] create new policy space against each other and how they do it. I think the key difference would be the U.S. will probably go with an alliance with the rest of the world.”
He didn’t expect to see much movement for onshoring in the immediate future, noting that some of the supply chains have been shifting from China to Vietnam or Bangladesh.
Because rebuilding alliances globally is a priority for the Biden administration, expect tariffs on China to keep the status quo, predicted Chris Rogers, supply chain analyst at Panjiva, an S&P Global Market Intelligence company.
That said, Rogers noted that the Biden Administration sees China as a strategic competitor.
“And, as such, it’s not a surprise that the Phase One trade deal is under review,” he said. A review of the performance from China on Phase One shows that they’ve delivered on a lot of what they’ve committed to in terms of structural change regarding intellectual property protection and access to both financial markets and financial services. While Rogers said they fell short on some mandatory purchases, mostly because of the pandemic, the last three months of 2020 saw purchases coming in at $11.5 billion, close to the $12 billion target in the trade deal.
“The Biden administration doesn’t necessarily have great grounds for kicking it out, other than saying, ‘We just don’t want it anymore,’ and if they do, there’s a real price to pay [as] China’s buying will probably drop again and that’s going to have an impact on farmers and ranchers,” he said.
Rogers said the deal is reviewed every six months, and there’s a set of meetings over the next two weeks to review the deal again, which went into effect in the middle of February last year. “China and the U.S. need to act together,” he concluded.
Rogers also said he expects movement toward more regional trade deals across Asia, a process that he said “could liberalize trade in the region. It’s going to present a lot of opportunities.” That said, there could be some challenges ahead, too, he said, noting nationalist offshoring policies, such as Japan bringing back supply chains from the U.S.
As for what to watch in the near term, China is set to vote on its 14th five-year-plan that will define its policies on trade and the economy, Rogers said.
Supply chain shifts
As the Covid-19 virus spread, most companies went into survival mode, but there were some issues with just-in-time supply chains where parts needed weren’t available, which then quickly turned into demand disruption, noted Erik Oak, supply chain researcher at Panjiva. That had companies moving into a position he calls “reoccurring survival mode.”
Out of that came some changes, such as the perception that retail employment and stores became less trendy as consumers shifted to e-commerce. That led to some big-box retailers enabling micro fulfillment from their stores, in effect creating a store-based warehouse to allow for store pickup or one-day shipping.
“And, finally, we also see kind of a dual trend between focusing on stability and focusing on nimbleness,” he said, such as companies going all in with the suppliers they know they can count on. “We’ve also seen a focus on being able to nimbly shift your supply chain across multiple vendors. So, these two strategies aren’t necessarily mutually exclusive, although the stable-nimble supply chain does sound like an oxymoron. You see companies making sure that they have the ability to switch to a diverse vendor base.”
Oak spoke about the whiplash effect during the pandemic, a chain reaction caused by small shifts in demand that build up to a wave impacting down the supply chain, which in turn causes retailers to change order patterns, impacting wholesalers, which then get dumped on to logistic firms.
In addition, the supply chain issues that are now propagating through the system can make it hard to rebound because of less ocean capacity on the water. All of that makes it worse going upstream, mostly because they’re trying to budget for the right amount of ocean freight. And compounding that is the normal supply and demand issues such as soaring rates from the capacity crunch, he said.
Finally, Oak observed that cost structure, such as high labor costs, had already shifted some production out of China, which then became accelerated due to tariffs. As for where else might present opportunities for American firms, the researcher cited Mexico, Canada and other South America and European supply chains due to their proximity to the U.S. market.
Environmental, social and corporate governance (ESG)
ESG is another area that could see a more concerted effort for change under the Biden Administration.
“It’s a really different time in terms of Covid. It’s really changed the landscape and almost accelerated a lot of the momentum that was starting with ESG,” Rochelle March, manager ESG innovation & analytics, S&P Global Market Intelligence, said. “What’s very exciting about Biden’s plan is that he is blatantly acknowledging that we need environmental protection and environmental stewardship, in accordance with economic growth.”
March said that Biden is combining economic recovery with green policies that Europe is already using, such as bond issuances that are green and social bond issuances to deal with Covid that have green and clean energy prerogatives tucked in.
March said that the thinking in the “real-time supply chain [that] two is one and one is none” is an acknowledgment that what is needed is resiliency and redundancy, regardless of environmental implications. And while she noted that environmentally-related investments can be costly, they can also be a major stimulus into building and rebuilding the American economy. If those investment aren’t made today, the future could be much more expensive, she added.