Trade Troubles

VW's Parts Predicament & Global Re-Routing

UPDATES: Thousands of Porsche, Bentley and Audi cars have been impounded in US ports after a supplier to parent group Volkswagen found a Chinese subcomponent in the vehicles that breached anti-forced labour laws.

Despite disruptions in direct trade between the two countries due to tariffs and political issues, global trade as a whole has not significantly declined. China has adapted by investing heavily in third countries like Mexico and Vietnam to maintain its export market, while the US considers strategies like re-shoring or friend-shoring of supply chains.

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Taken form the Financial Time

US Porsche, Bentley and Audi imports held up over banned Chinese part

By Financial Time

Thousands of Porsche, Bentley and Audi cars have been impounded in US ports after a supplier to parent group Volkswagen found a Chinese subcomponent in the vehicles that breached anti-forced labour laws.

According to two people with knowledge of the matter, the carmaker has delayed delivery of the vehicles until as late as the end of March as it replaces an electronic component that was found to have come from “western China”.

The people stressed that VW was not aware of the origin of the part, which was sourced by an indirect supplier further down its supply chain, until the supplier alerted it to the issue.

They added that VW notified US authorities as soon as it was made aware of the part’s origin.

US-China relations remain mired in their worst state since the countries established diplomatic ties in 1979. But Washington and Beijing have been trying to stabilise their relationship following the summit that President Joe Biden and his Chinese counterpart Xi Jinping held in San Francisco in November.

The US prohibits the import of products that have been made with forced labour in the western Xinjiang region and other areas in China under the Uyghur Forced Labor Prevention Act of 2021.

The people would not confirm whether the part in question was produced in Xinjiang itself.

The issue affects about 1,000 Porsche sports cars and SUVs, several hundred Bentleys, and several thousand Audi vehicles, according to people briefed on the details. 

In a statement, VW said it “takes allegations of infringements of human rights very seriously, both within the company and in the supply chain” including “any allegations of forced labour”. 

It added: “As soon as we received information of allegations regarding one of our sub-suppliers, we have been investigating the matter. We will clarify the facts and then take appropriate steps. These may also include the termination of a supplier relationship if our investigations confirm serious violations.” 

Questions around forced labour found within its Chinese supply chain are particularly sensitive for VW, which has been facing mounting pressure from human rights groups and investors alike over a facility it jointly owns in Xinjiang’s capital, Urumqi.

The German car company on Wednesday said it would discuss “the future direction of business” in the Xinjiang region with its Chinese joint venture partner SAIC, following the publication of fresh allegations of forced labour in German media.

Chinese officials have defended work programmes in the region as helping employment, but the UN’s top human rights body has said China’s actions may constitute “crimes against humanity”.

A Human Rights Watch report this month warned that carmakers were at risk of buying aluminium produced by victims of forced labour in the region. 

VW is balancing falling sales in China with a desire to increase its presence in the US at a time of growing political tension between the two countries. 

In mid-January, VW discovered that some of its luxury cars bound for North America contained a part that was not compliant with US customs rules, two people with knowledge of the matter said.

The part had been sourced by a supplier further down the company’s supply chain and not by VW directly, according to the people. Typically carmakers deal directly with their largest suppliers and may sometimes be unaware of the provenance of smaller parts produced by other businesses further down the supply chain.

A letter from VW to waiting customers blamed “a small electronic component that is a part of a larger control unit, which will be replaced”, but did not specify the origin of the part. 

With the approval of US customs authorities, the company ordered replacement electronic modules, and had already begun fixing cars, two people said. While some were fixed last week, the backlog is unlikely to be cleared until at least next month. 

Swapping the modules is relatively straightforward and does not require the disassembly of the vehicles, although some more complicated models might take several hours to fix, according to people with knowledge of the process. 

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Global trade war - or merry dance?

Mike DolanFebruary 14, 20246:15 PM GMT+7Updated 2 days ago

LONDON, Feb 14 (Reuters) - Globalisation may have stalled amid the fiery geopolitical posturing of recent years - but many doubt it's in reverse yet given supply chains have been re-routed rather than returned home and overall trade volumes less disturbed than first feared.

Direct bilateral trade between the United States and China has clearly fractured during six years of tit-for-tat tariffs, post-pandemic insecurities and all the political and investment rivalries that hardened since Russia invaded Ukraine.

And since former U.S. President Donald Trump launched a tariff trade war on Chinese imports in early 2018, China's export market share in the United States has indeed plunged from a high watermark of 21.6% in 2017 to just 14% last year.

Joe Biden's administration has merely reinforced China trade aversion with a 'de-risking' strategy of its own as geopolitics worsened around Taiwan and Ukraine.

That breakdown can be seen most clearly in the fact that after 16 years as the biggest single exporter of goods to the United States, China ceded that crown to Mexico in 2023.

And if Trump succeeds in his bid to return to the White House in this year's election, his promise of more of the same - mooting even higher tariffs of over 60% on Chinese goods - means any repair of direct trade links is a distant prospect.

Boston Consulting Group's (BCG) annual world trade study expects that rift between the world's two biggest economies to deepen and sees the value of bilateral trade between them dropping by almost $200 billion over the coming decade - more than three times the 10-year hit they forecast last year.

And yet fears that broken relationship would seed a wider 'de-globalisation' of trade have not yet been borne out.

According to analysis this week from Stephen Jen and Joana Freire at Eurizon SLJ Capital, total cross-border trade as a share of global output has barely changed and the current 22% share of non-oil trade-to-GDP is well within 20-year ranges.

What's more, China's 15% share of world exports also remains unchanged - it is still the largest exporter in the world by some distance.

"While we cannot rule out de-globalisation in the years ahead, so far at least there has been scant evidence supporting this widely-held view of de-globalisation," Jen and Freire said in their analysis.

THIRD WAY

Jen and Freire argue that China has succeeded in overcoming U.S. tariffs by heavy direct investment in third countries such as Mexico and Vietnam that the United States is still happy to import from, exporting intermediate goods to these third countries for final assembly to avoid U.S. trade barriers.

The BCG analysis bears that out too, showing how familiar routes that defined the world trade map are being redrawn, blocs playing a greater role and "third" countries acting as go-betweens for those at loggerheads or global companies trying to navigate between the two.

However, it forecast that world trade growth over the next decade will indeed be slower than global GDP growth, amid a "fundamental shift away from the trend of trade-led globalism that has been prevalent since the end of the Cold War."

It sees the world of "re-shoring" or 'friend-shoring" of supply chains containing a number of features over the next 10 years.

First is a solidifying of the North America 'stronghold' between the United States, Canada and Mexico - with U.S. trade growing by almost half a trillion dollars with these neighbors by 2032.

Another trend will likely see South East Asian nations become the biggest winners, with cumulative ASEAN trade forecast to grow $1.2 trillion over the next decade - due largely to companies adopting "China + 1" diversification strategies in what are seen as generally unaligned countries.

And, as many point out, they see India as a major beneficiary - with a $393 billion trade expansion through 2032 that includes a $180 billion increase with the United States and $124 billion rise in trade with China.

Jen and Freire say that the relative stability to date of overall global trade to this geopolitical shakeout has other potential consequences - one being that a much-feared inflation pulse from "re-shored" supply chains may be wide of the mark.

If production is merely being shifted away from China to other cheaper-cost developing countries - often cheaper than maturing China at this point and not back 'home' to expensive rich economies as some assumed - then goods inflation may continue to subside.

There are some exceptions to the relative benign scenario for both China and the United States, however.

First is damage to China's ability to climb the value chain of production as a result of the recent collapse in foreign direct investment. That source of overseas 'know how' and research is still seen as badly needed for its development.

And for the United States, any realization of Trump's mooted 60% tariff threat could unavoidably spur inflation at home.

"China has so far managed to retain their dominant position as the world’s pre-eminent manufacturing base," Jen and Freire concluded. "However, we suspect that foreign investors' retreat from China - a change in financial globalisation - may prove to be much more damaging to China's long-term growth outlook."

TS Lombard's Davide Oneglia delved deeper into that "financial reshoring" or capital flight from China and reckoned it was only in its infancy and likely had further to run.

"Capital flows are being redirected into developed markets and other emerging markets in search of superior risk-adjusted returns and to finance the new 'de-risking' and 'friend shoring' agendas of the West - but also to fund China's own efforts to strengthen its foothold abroad."

Even with all the masking of trade in goods, the financial unwind may just be beginning.

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