Trade Flows, Emigration & the Supply chain Re-configuration: The Future is taking shape

Human flows or emigration follows the reverse route to trade flows. If a labor intensive product or service would be crossing borders, it is expected that human flows will be arrested in the other direction.

The best example is the NAFTA, which is a free trade agreement between U.S., Canada and Mexico, which virtually made most of the trade between these three nations without tariffs. One of the reasons cited in favor of the agreement was that it would arrest the movement of people (emigration across the Mexico – U.S. border) as more jobs would get created in Mexico rather than in U.S. The conditions were win-win at some point of time for all three nations, but now it is a different question.

Now that we are seeing a rising tendency to do away with free trade agreements (one was reneged on 23^rd Jan, the Trans-Pacific Free Trade Agreement), we must go back to this argument about migration of people following trade agreements that shift factory jobs from one country to the other.

Raising tariffs on a commodity has widespread ramifications, if tariffs on oil is increased it impacts every other commodity and finished goods and has a ripple effect of that on the economy which is deficient in oil; the same applies to a commodity which is in surplus and must be exported out like food grains, where tariffs placed by importing nations would make the produce less attractive or even protect the farmers of those nations.

Food grain tariffs are clearly a way to arrest poverty, otherwise food grain surplus the world over would make the local peasants lose their only livelihood, which is farming. As diversification of farm produce happens slowly and steadily, these nations lower their tariff barriers as labor in farming becomes deficient and the nation can now afford to lower tariffs on food produce.

The TPP actually was a way to achieve just that, but now has been shelved.

The same argument holds true for infrastructure as well. Consider the EU and you want to suddenly take up infrastructure projects in Germany you would need labor supply from outside of Germany to be able to service that requirement.

The same holds true for U.S. and its infrastructure push. The labor needed for massive infrastructure projects would need Mexican labor for sure.

So the purported Mexican Wall could see a premature fall, if really the infrastructure investments take shape in U.S.

But this article is dedicated not to these contentious moves but to the far reaching impacts this fore-play could have in the re-configuration of supply chains around the world. Think of the impacts on freight rates, ocean freight in particular, if the supply chains have to shift from one geography to the other.

Imagine the most bizarre example of a global supply chain in smart phone that sources its inputs from 40 countries and manufactures in one country and then ships it to one country for global distribution thereafter. How would this global supply chain re-configure if manufacturing has to shift from this base slowly but steadily?

Or imagine the flow of ships with loaded containers from China to U.S. and the return flow having half the containers empty, suddenly getting reversed? Much of this is actually exaggeration for two reasons:

1. U.S. has an unemployment rate of less than 5%, although there is a staggering number of people who are no more searching for jobs and could well be employed on part-time basis, but the fact remains that labor intensive manufacturing has very high costs in U.S.
2. Skills that existed a decade back is no more there and this would take more than the instantaneous switch

So is there any reconfiguration on the cards that would evolve slowly and steadily, as far as supply chains are concerned?

Yes and No.

It is yes, because all future investments outside of U.S. would be seen by a magnifying glass if the products are brought back as imports to U.S.

It is No, because the world’s consumption center is speedily and steadily moving towards East, where the local political systems come in the way of progress, otherwise it is a no-brainer why such a large populace should refrain from consuming for such a long time and save rather than consume.

The times are interesting that transportation cost, which is the primary reason for global progress over the past century, could actually steadily go up given that re-configuration is on the cards, which changes the direction of all movements while economic equilibrium, takes time to evolve.

The consumers, the world over must take the brunt of the cost increase; perhaps that would be the only counteracting force that would eventually decide the extent to which the reconfiguration would succeed, if at all.