Global supply chains make trade war difficult

How much less American will Harley-Davidson motorcycles be if they’re made in Thailand? A lot, Donald Trump thinks.

US President Donald Trump in Washington, DC this week. Picture: SIPA/MEGA

How much less American will Harley-Davidson motorcycles be if they’re made in Thailand?

A lot, Donald Trump thinks. “A Harley-Davidson should never be built in another country — never! Their employees and customers are already very angry at them. If they move, watch, it will be the beginning of the end,” he tweeted recently, chastising the American icon for shifting some of its production to Thailand.

The US President’s determination to reduce the US trade deficit has sharpened focus on where goods are made. (He doesn’t care much about trade in services, which are typically in the US favour, only goods). But stamping Made in America, or Australia even, on goods isn’t as easy as it was.

Mr Trump has railed in particular against the near $US400 billion ($541bn) trade surplus China has with the US, boosted in no small way by the millions of iPhones US tech giant Apple manufactures there. The value of finished ­iPhones is recorded as a Chinese export and as an import by the receiving country, but that’s not the full picture.

“China only contributes around 5 per cent of the value added embodied in an iPhone, mainly in the form of assembly services. The remainder of the value added originates in other countries that supply components and software: Taiwan, Korea, the US, Germany and others,” the Productivity Commission noted in a research paper last year.

“When measured in value added terms, the trade deficit in the US-China iPhone trade is very small. More generally, if the overall US-China trade deficit is recalibrated on a value added basis, it would be reduced by 25 per cent.

WEB business trade agreements graph

That’s roughly the reduction in the trade deficit Mr Trump has demanded of China: $US100bn.

The iPhone has more claim to being “made in the world” than “made in China”. It’s the same with German cars, another of Mr Trump’s recent targets. Between 1995 and 2008 the share of German value added in BMWs and Mercedes has dropped from 79 per cent to 66 per cent, according to the World Input Output Database.

These are two examples of the growing importance of global supply chains, where services, ideas, raw materials and components are traded across countries, assembled and then dispatched to their final customers.

Two forces have underpinned their growth. First, the number of regional and bilateral trade agreements has increased fivefold to 250 since the early 1990s.

And second, new technology has slashed the cost of international transport and communication. “Cheaper and more reliable telecommunications as well as information management software and increasingly powerful personal computers have significantly decreased the cost of organising complex activities over long distances both within and between companies,” the OECD said in a paper on global supply chains.

In Thailand, Malaysia, Korea and Singapore around 40 per cent of the value of exports arises from the value added in other countries, according to OECD data.

“Australia’s participation in global supply chains is primarily oriented towards the overseas processing of its exports, rather than the domestic processing of imported intermediate inputs for re-export,” the commission said. Around 15 per cent of Australian exports hinge on contributions from other countries.

Harley-Davidson motorcycle engines are assembled at the company's Powertrain Operations plant in Menomonee Falls, Wisconsin. Picture: AFP Photo

Even the origin of basic groceries is becoming harder to pin down, as the ingredients, the packaging and workforce hail from different parts of the world.

From July 1 the competition regulator will introduce new country of origin labels. “Grown in” will be a claim about where the ingredients come from. “Produced in” will be a claim about where the ingredients come from and where processing has occurred. And “Made in” will be claim about the manufacturing process involved in making the food.

Global supply chains will make a trade war more difficult. Indeed, for all the bluster, its extent has been exaggerated. These pockets of rising protectionism aren’t limited to the US, but they all remain at the margins of what are improving economic conditions globally. Since 2009 the number of new protectionism measures has been steadily rising, but they haven’t been powerful enough to slow trade growth. The US tariffs on steel and washing machines affect a tiny share of US trade.

The appearance of action matters more than reality.

Around the same time as Mr Trump announced in April a third round of tariffs on Chinese imports worth $US50bn, the World Trade Organisation was gushing about strong global trade growth. Last year trade grew 4.7 per cent, the fastest since 2011. And the WTO expects growth to be almost as fast this and next year.

Only this week Standard & Poor’s concluded: “Trade momentum measures showed a minor uptick in recent months after declining earlier”. These are hardly precursors of a trade war. China and the EU have been cautious not to exceed the US tariffs. It’s not in any country’s interest for the global trading system — which China strove so hard for years to join in 2001 — to unravel. Consumers would ultimately suffer from much higher prices.

Ultimately, living standards are determined by the cost of goods and services.

Harley Davidson must believe its customers won’t care enough to shun their Thai-manufactured bikes, otherwise it wouldn’t have moved there.