Trade barriers are going up again. Christopher Ludwig writes that carmakers and logistics providers will have to adapt to avoid sinking outside the border.
The narrative of globalisation tells of nations steadily dismantling national barriers for a free exchange of goods and services. But in today’s souring political and economic climate, it’s a story sounding more like a fairy tale than history.
Free trade has never really been a free lunch and has mostly been imposed by force, colonial links or backdoor political deals. The policies of China and Russia today remind us how far we never came. Aside from China’s ever-evolving rules on joint-venture production and its controlled currency, it has recently limited the export of rare earth minerals used for electric cars. The Kremlin uses import tariffs to push foreign manufacturers towards large investment in local production.
While such actions from China and Russia are not surprising, some observers have detected a global shift towards more protectionist policies.
The Financial Times, calling this the “New Protectionism”, cited a report documenting 131 new trade-restricting measures adopted by countries trading with the EU in the past year alone, with BRIC nations among the most protectionist.
Auto industry examples abound. Brazil introduced a steep increase on tax for cars with less than 65% local content and built outside the Mercosur trade region. Argentina has required companies to buy local goods for export to match imports. Porsche is now exporting wine from the country.
It’s not just emerging markets either, as certain factions within the divided American government would like to declare a trade war with China. In Europe, the world’s most important free trade union has shown signs of unravelling, with national and economic divisions reaffirmed and the return of national currencies not as remote an idea as once thought.
Even free trade progress reveals that taking down barriers is a tough negotiation. Agreements ratified between South Korea and the US and EU took years to pass and will still leave tariffs on imported vehicles into South Korea for years. While Russia may finally join the World Trade Organisation, it will wait seven years before lowering import duties so as to protect Russian OEMs and the benefits given to carmakers who agreed to meet the Kremlin’s targets for local production and sourcing.
Your loss will be my gain
Where does this leave logistics providers? Executives from major companies usually describe themselves as ardent freetraders, as the global exchange of material and vehicles has driven the industry’s growth in the past decade.
But protectionism has advantages for local providers, of course, with the growth of Chinese LSPs–many affiliated with state-owned OEMs–a case in point. Likewise, while the legal bureaucracies that some countries impose at borders hurt efficiency, they benefit companies that can relieve such headaches. Among the few to gain from a eurozone collapse would be firms interpreting cross-border contracts across the new financial and logistical barriers that would be erected.
There is little LSPs–or even OEMs–can do to stop restrictive policies, so they must find opportunities within them. Dr Karl May, BMW’s head of logistics, points to growth for SKD and CKD operations as a result of these measures (see p22) in places like India, China and Russia. A Chinese restriction has even forced BMW to use rail for kits for the X1 from Leipzig to Shenyang, to get assembly going as quickly as possible. Sea would be preferred, but the regulation makes rail the reality.
As OEMs shift awkwardly around the walls of the new protectionism, flexible providers must be able to scale these walls too–as there is little to suggest they’ll come down soon.