Trump’s trade policies will greatly affect our global supply chains. How will increased protectionism and bilateral deals impact the procurement function?
Frantically attempting to understand the new modern world, commentators and experts are struggling to digest the political earthquakes of 2016. It remains wholly unclear what binds together the widespread nationalism, populism and division in countries around the world.
The threat to global supply chains
Trump has a clear dislike of international trade, preferring to shield the USA’s economy from competition. He has a disdain for businesses moving operations to other countries.
Whether or not organisations source much directly from non-domestic sources, they are dependent on global supply chains and networks. These networks are responsible for sourcing the goods and services to meet the needs of stakeholders. Threats to free trade pose challenges to procurement professionals and their ability to source goods and services efficiently and cost-effectively.
For many years, there has been a trend for opening up procurement markets. This trend has entailed removing tariffs on imports, opening up non-discriminatory bidding on public contracts to non-domestic businesses and harmonising regulatory regimes to make cross-border trade less bureaucratic and more efficient. This has allowed procurement teams to drive down costs and increase competition and product choice.
Trump’s abolition of free trade agreements
Since inauguration, Trump has honoured his commitments to abolish pending free trade agreements (FTAs) with the European Union and eleven Pacific Rim countries. Both contained provisions which would have opened up the procurement markets to non-discriminatory bidding for businesses across participating countries. This eases importing processes.
Trump also vowed to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico, which has been critical in creating and sustaining supply chains in North America.
With this move away from free trade, what are the prospects for continued integration of procurement markets in the Trump era? There are two points to cover – new bilateral FTAs including the USA and the movement towards free trade driven by powers beyond the USA.
The prospect of new bilateral deals
Firstly, whilst Trump has expressed a strong distaste for multilateral FTAs such as TTIP, TPP and NAFTA, he has sung the praises of bilateral deals. This has been strongly signalled with the UK in particular. Trump has made some ambitious comments that there is a deal ready to sign once the UK departs the EU.
If this were to happen, tariffs and perhaps other barriers would be removed, with the intention of easing cross-border trade.
The prospects for this are not great, however. With Trump’s “America first” agenda, it is not clear how easily any deals could come to fruition. FTAs are based on compromise, whereby countries grant reciprocal access to each others’ economies. For American companies to gain the ability to win public contracts as part of a deal with another country, access to American government contracts would need to be provided to businesses from the other country.
It is far from clear whether the new administration would accept the American government awarding contracts to more foreign companies, effectively moving the jobs associated with that contract to other countries.
China could be the driving force behind liberalising trade
The second topic is perhaps more pertinent then; this is the possibility that other countries or systems will emerge as the force behind liberalising procurement markets to replace a more protectionist and isolationist USA.
China’s global economic influence is steadily increasing. The TPP’s death presents China with the opportunity to be the leader in free trade. It is the lead behind the proposed Regional Comprehensive Economic Pact (RCEP), which includes sixteen countries, such as Australia, Japan, India and South Korea. In total, RCEP covers 30 per cent of global GDP and around half of the global population.
The agreement focuses on tariff removal, with some harmonisation of standards and intellectual property rights. RCEP is not equivalent to TPP in integrating procurement markets in different countries, however. Whilst procurement teams would benefit greatly from cheaper imports from elimination of tariffs, RCEP does not include detailed provisions of government procurement – non-discrimination does not look likely to be included. The eventual, and lofty, ambition of RCEP is to create a free trade area across the Asia Pacific.
Driving integration in procurement markets
Aside from China, multilateral institutions are perhaps the most likely to drive integration and liberalisation of procurement markets over the coming years. The European Union has long been a driver of liberalisation of procurement markets.
In 2016, the EU signed a detailed FTA with Canada, including detailed provision for procurement. It has pending agreements with countries such as Singapore and Vietnam and is in long-term discussions with an array of countries and trading blocs.
The World Trade Organization’s (WTO), Agreement on Government Procurement (GPA), consisting of 47 members (including the EU28), reciprocally opens procurement markets. It is looking likely that Australia will accede to the GPA in 2017 and discussions of China becoming a full member, further opening up procurement markets.
Also within the WTO, the Trade in Services Agreement (TiSA) is a proposed agreement to ease trade in services. This would include 50 countries, including the EU countries and the USA. With this, trade in services between the countries would become frictionless and there would be elimination of preference for domestic suppliers, which might apply without a minimum value threshold for all government agencies.
Access to global markets is core for procurement
Globalisation continues to be much maligned by electorates and the media. But for procurement teams who rely on sourcing goods and services from around the world, either directly or indirectly, access to global markets is core to maximising value for money and ensuring public services are as effective and cost-efficient as possible. Without engaging in the broader political debates, it is clear that one industry needs access to suppliers of goods and services, without unnecessary barriers – the procurement industry.