Handling the Trade Deficit’s Impacts on Supply Chains

The U.S. goods and services trade deficit increased to US$75.1 billion in May, up from the revised $74.5 billion recorded in April, according to U.S. Bureau of Economic Analysis and the U.S. Census Bureau figures.

The increase — the deficit was $68.9 billion earlier this year — was fueled by rising demand for consumer goods like cell phones, food and beverages. Motor vehicles service imports, including travel and transport, were also a factor.

Siddharth Priyesh, a trade technology expert at CrimsonLogic, says a high volume of imports has numerous critical supply chain implication. These include:

• Increased dependency on foreign suppliers for goods and materials. This can make domestic industries vulnerable to supply chain disruptions like geopolitical tensions and natural disasters.
• Strengthened global supply chains. A high volume of imports can provide resilience through diversified sourcing and expanded market access. However, trade imbalances can provoke retaliatory measures like tariffs against foreign trade partners.

Reshoring and Nearshoring

The coronavirus pandemic precipitated a push toward alternate sourcing and manufacturing locations, including reshoring. But the high deficit and level of imports seems to indicate the opposite.

There are several reasons for this, says Priyesh, who heads the Americas and Caribbean regions for the global company. “Even though production is gradually returning to the U.S., it will take more time for domestic output and capacity to meet existing consumer demand,” he says. “When this happens, we will see a more noticeable reduction in imports.”

Also, some raw materials can be sourced only from other countries or may not be sufficiently available in the U.S. Thus, there is still a need to import, he says.

The country of assembly also can impact the number of imports. More items are being assembled in the U.S., which can increase import volumes of assembly parts.

The pandemic also caused a push to nearshoring, particularly to Mexico, a situation also reflected in the trade deficit total, Priyesh says. “The nearshoring trend is growing,” he says. In May, both Mexico and Canada surpassed China in imports to the U.S., according to the U.S. Census Bureau.

How AI Can Help with Disruption

Priyesh says that artificial intelligence (AI) systems can help organizations manage import volumes through potential risks and disruptions:

Regulatory and compliance risks. Countries have different regulations, increasing the complexity of compliance for companies relying heavily on imports, Priyesh says. “Use artificial intelligence (AI) to streamline trade compliance by continuously monitoring regulatory changes and automating documentation to reduce filing errors and avoid unnecessary delays, fines and extra manpower costs,” he says.

Supply chain disruptions, which can lead to delays and shortages. AI-driven supply chain visibility tools can enable organizations to monitor global events in real time, predict potential disruptions and suggest alternative routes or suppliers to avoid delays, he says.

Logistical challenges. Increased import volumes can strain logistics and warehousing capabilities, leading to inefficiencies and higher operational costs. “AI can optimize logistics through route planning, demand forecasting and warehouse management, improving efficiency and reducing costs,” Priyesh says.

Dependency on foreign suppliers. Heavy reliance on imports makes supply chains vulnerable to disruptions in foreign markets. AI can analyze vast amounts of data to identify and evaluate alternative suppliers. This will enable companies to diversify supplier bases and reduce single-source dependency, he says.

Other Points

In Q&A format, Priyesh offers thoughts on other trade deficit topics.

Question: How can supply management professionals, manufacturers and organizations reduce their import levels?

Answer: Actions include improving supply chain visibility, demand forecasting, domestic manufacturing capabilities, product quality and competitiveness, and collaboration and ecosystems. AI can aid organizations in achieving each dynamic.

Q: How realistic is it to expect the trade deficit and imports to decrease?

A: Expecting the trade deficit and imports to decrease is a complex and multifaceted issue, influenced by a variety of factors: economic (domestic demand, exchange rate, cost competitiveness), policy (trade policies, reshoring incentives, regulatory frameworks) and structural (supply chain dependencies).

The extent to which it will decrease will depend on the timeframe and technological advancements. Automation and AI can improve the efficiency and cost-competitiveness of domestic production but take time. Digitalization can enhance supply chain visibility and efficiency to reduce costs and improve the reliability of domestic supply chains, making local production more viable.

In the short term, expecting a significant reduction in the trade deficit and imports is challenging. Efforts to reshape supply chains and boost domestic production take time to yield results.

(Image credit: Getty Images/Vertigo3d)