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U.S. Trade Ruling on Washers & Solar Rattles Global Supply Chains

“America First” policy confronts globalism with steep tariffs, as LG and Samsung are targeted by severe sanctions.

Beginning in 2016, the import and sale of residential washing machines by Korean manufacturers, LG and Samsung began to skyrocket. The success of these products sent the U.S. washer industry into a tailspin and caused Whirlpool, a major U.S.-based appliance manufacturer, to suffer multi-million-dollar losses. As a result, Whirlpool turned to the U.S. International Trade Commission (ITC) to seek “global safeguards” from cheaper imported washers under Section 201 of the 1974 Trade Act.

While the battle before U.S. regulators played out, Korean manufacturers made a series of moves to relocate production from China to Thailand and then Vietnam. In their last chess move, both Samsung and LG announced plans to build large factories in Newberry, S.C. and Clarksville, Tenn. The hope was that the investment of hundreds of millions of dollars to create new jobs in these American cities would mollify U.S. regulators and soften any penalties that might be imposed. These moves were for naught, as the U.S. announced “worst-case scenario” penalties on both companies on January 22.

The sprawling global supply chains of these companies were rattled when tariffs of up to 50% were imposed not just on imported washers, but also on components imported to produce washers in the U.S. The table provides the details of the new tariffs on LG and Samsung washing machines and components.

The nested and dependent nature of the supply chains for washer components is illustrated by a quote from a senior executive at Korean automaker Hyundai Motor given to Reuters: “Even if you bring your tier-1 supplier with you to...the U.S. manufacturing facilities, your tier-1 suppliers will have tier 2 and 3 suppliers which would source components from abroad. It makes it very complicated to calculate. You’ve got to find a way to adapt or circumvent somehow.”

The tariffs on components mean Samsung and LG will have to develop component production in their U.S. facilities. However, this will take time. In the meantime, procurement managers will struggle with tight limits in their flexibility to source components.

Suppliers to LG and Samsung are now facing the potential of large losses as these companies try to battle the new sanctions at the same time they work to set up new factories. Major Korean manufacturers such as SK Group and Dongjin Techwin will experience lost business as they lose the ability to set up an export/import model that will not be hit by tariffs.

Can New Tariffs Revive a Nearly Extinct US Solar Industry?

Leveraging special incentives and loans provided by China’s Renewable Energy Law, Chinese manufacturers have moved to dominate global production of solar cells and modules. According to the U.S. ITC, “China’s share of global solar cell production skyrocketed from 7% in 2005 to 61% in 2012. China now dominates global supply chain capacity, accounting for nearly 70% of total planned global capacity expansions announced in the first half of 2017. China produces 60% of the world’s solar cells and 71% of solar modules.”

By 2017 all but one U.S. producer of solar cells and eight producers of solar modules using imported cells had either relocated to other countries or declared bankruptcy. The destruction of the U.S. industry took place as Chinese manufacturers drove prices down by 60% between 2012 and 2016 and increased imports by 500%. Finally, Suniva, joined by SolarWorld, appealed to the U.S. ITC for a remedy to the damage caused by cheap solar imports. In response, the new tariffs of 30% beginning in year one and reducing to 15% in year four were announced.

It remains to be seen if the U.S. solar industry will receive enough protection to regain a viable position in the market. Much of the growth in the U.S. market has been facilitated by the significant drop in prices. If prices increase it may cause growth in this industry to falter. Tariffs may provide protection from imports, but they typically harm the local market as price competition and innovations are stifled.

Supply Chain Lessons

The electronics and electronics components industries were some of the largest beneficiaries of the global free trade environment that has been fostered over recent decades. Consumers have benefited from innovative, low-priced products and emerging regions around the world have seen their economies boosted dramatically. However, with a global economic slowdown and growing pressure to protect local industries and workers, the political calculus is changing.

Responding to increased pressure within their own countries, governments such as the U.S. are re-evaluating their trade policies. The potential changes that could emerge have the potential to seriously impact supply chains as illustrated by the U.S. tariffs imposed in the washer and solar industries. Supply chain managers will be studying these developments and developing strategies to respond effectively to a changing global trade environment.

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