Supply Chains and Trump

Without a doubt President Trump has shaken the business environment up. While his election has positively affected the stock market with a 4.459% jump in the S&P 500 in his first 50 days (placing him at 6th for most growth among all U.S. presidents), possible domestic policy changes regarding trade and putting “America First” would most certainly have negative ramifications.

For example, the effectiveness and costs of supply chains become volatile when free trade and globalization of business are put in political cross hairs. If tariffs rise and/or trade decreases, conventional economic theory would say the price of manufacturing, procuring, shipping, etc. would go up, throwing a financial hand grenade at a company’s income statement. However, even if a future policy change leads to freer trade, companies still hold out on making big decisions until the bill is passed or tossed because of uncertainty.

Global supply chains and consumers suffer in the long-term when free trade is restricted, and even if the new policy is beneficial they still suffer short-term due to the weariness to make new investments.

As far as I can tell, Trump still seems set on threatening to raise tariffs and encouraging people to “Buy American.” This has led to business leaders developing fallout plans involving more domestic/regional supply chains and manufacturing while shying away from globalized networks. “‘The basic message is to be more national, don’t just be global,’ Richard Edelman, CEO of communications marketing firm Edelman said.

Some say this will be a good thing due to increased investment in the United States, but what they do not realize is the seen and unseen costs of these investments. It is much more affordable and economically beneficial for all if  Ford built their new plant in Mexico as opposed to in the U.S. While this move will benefit those who get hired at the new plant, the increase in overhead and taxes will lead to a supply chain overhaul for Ford which could cost the final consumers millions of dollars. These are the seen consequences. Unseen consequences of increased supply chain costs could include less hiring and more automation.

Lastly, we need to look at the supply chain implications of a Trump presidency on national defense. According to Defense News, “With a swipe of a pen Tuesday, President Donald Trump issued a new executive order directing the federal government to reemphasize “Buy American” laws – a move which analysts say could impact the existing supply chain for the U.S. defense industry.”

The United States’ military relies heavily on foreign manufacturing for equipment and weapons.

Take the Air Force competition to replace its trainer aircraft, known as the T-X program. The main competitors there are all American companies teamed with international partners: Lockheed Martin is teamed with Korean Aerospace Industries; Boeing is teamed with Swedish giant Saab; DRS Technologies is teamed with its parent company, the Italian-owned Leonardo; and Sierra Nevada is working with Turkish Aerospace industries on their offering.

The F-35 joint strike fighter, meanwhile, is designed specifically to have industrial participation from Australia, Canada, Denmark, Italy, the Netherlands, Norway, Turkey, and the United Kingdom, putting an inherently international supply chain at the heart of the Pentagon’s largest acquisition program. – Defense News

If President Trump wants to get serious about military companies like Lockheed and Boeing buying U.S. parts and raw materials for aircraft manufacturing, we could see skyrocketing defense budgets and inefficient reallocation of resources to meet this demand. However, with saber-rattling on the Korean peninsula and possible escalation in Syria, Trump may have to hold back on this plan so we can afford to fight possible wars.

I guess we’ll have to let this one play out.

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