Globalization brough an higher interconnectivity to our world, but also brought trade policies, that have the potential to shape its dynamics.
One of the key areas influenced by these policies, as you might already expect, is Strategic Sourcing. There is a complex and multifaceted relationship between both, with any changes in trade policies having the potential of affecting supply chain efficiency, cost structures and overall business strategies. Â
But let’s dive deeper into the significant influence that trade policies have on the way companies worldwide source materials strategically, and into the various approaches these companies take to navigate this complex environment.
Understanding Trade Policies
Trade Policies incorporate regulations, tariffs, and agreements, that are implemented by countries to manage international trade flows. These policies have the potential to either safeguard domestic industries or promote free trade.
Trade Policies have the power to severely influence strategic sourcing decisions, by altering costs, risks, and any benefits associated with sourcing from any specific region. Supplier competitiveness can be seriously impacted by tariffs, quotas, embargoes, and trade agreements.
But Can Trade Policies Positively Impact Strategic Sourcing?
The answer is a half certain yes!
Trade policies can significantly influence the attractiveness of suppliers from different regions. Preferential trade agreements can make sourcing from certain countries more appealing, just by reducing trade tariffs. Â
Favorable trade policies can also lower the total landed cost of products, enhancing the competitiveness of any sourced products.
But also consider that trade policies are volatile and scenario planning is crucial for businesses to anticipate the effects on their strategic sourcing decisions.
Does Trade Liberalization Positively Affect Global Sourcing?
Well, the answer is not quite that simple as one would assume.
Trade liberalization is in fact characterized by the reduction of trade barriers, such as tariffs, quotas, subsidies, trade agreements and any regulatory standards.
In fact, trade deals like NAFTA and the CPTPP, involving two or more countries, have made it easier for businesses to trade across borders. They've achieved this by reducing trade taxes and making rules more consistent.
The impact of trade liberalization on global strategic sourcing however is not one size fits all. While some industries do benefit from gaining access to cheaper inputs, others face challenges from increased competition.
For example, textiles and apparel manufacturers in developing countries often capitalize on reduced tariffs to enhance their strategic sourcing, while domestic producers in developed countries may struggle to remain competitive.
And can one really talk about trade liberalization and not mention trade wars?
Trade Wars
In complete contrast to trade liberalization is the rising trend of countries implementing protectional measures that create great conflicts, with the potential to severe disrupt global supply chains and highly complicate any strategic sourcing decisions.
Not so long ago in 2018, the US-China trade war escalated, and the world’s two largest economies clashed causing severe supply chain disruptions and substantially higher shipping costs.
Companies that were heavily reliant on sourcing from China saw a sudden imposition of tariffs that eroded their profit margins and caused swift and mandatory adjustments to their strategic sourcing strategies. Some shifted their production to other countries, while others explored domestic sourcing options.
Embargoes, Trade Agreements and Regulatory Compliance
Governments may also impose embargoes on specific countries. An example is the ongoing Ukrainian -Russian conflict, where most western countries imposed serious trade embargoes and highly restricted trading with Russia.
These restrictions of course will ultimately impact the ability of many western companies to source goods from Russia, and there for having the necessity to adapt their sourcing strategies.
What Strategies help Navigate the Trade Policy Landscape?
- Diversification – Companies should never rely on a single source for critical inputs. Trade policies have the potential to shut down a business supply chain from day to night.
- Scenario Planning – Given the volatility of trade policies, scenario planning is key. Businesses should simulate various policy changes and devise contingency plans.
- Agile Negotiations – Negotiating flexible contracts with suppliers can be extremely beneficial for companies looking to allow adjustments in response to changes in trade policies.
- Leveraging Technology – Strategic Sourcing Software like Scanmarket, can help you update your documents to reflect any trade policy changes, helping business save time and resources.
- Long-term Partnerships – As we have mentioned in past blog entries, establishing long-term relationships with suppliers carries a wealth of benefits, including helping weather short-term policy disruptions.
