Uncertainty has always been a fact of life in global trade. But since the Trump Administration took office, this uncertainty and the issue of proposed or already initiated tariffs has escalated to a new level. And it’s making manufacturers, retailers, carriers, intermediaries — the whole supply chain, in fact — worried. It’s also causing U.S. trading partners like China, the European Union, Mexico, Canada and others to take, or threaten to take, retaliatory measures in the form of tariffs.
From all indications, the world is poised for an era of U.S. isolationist trade policies the likes of which it hasn’t seen in more than a century.
Let’s look at a few developments:
The White House imposed a bundle of tariffs on China, with plans to impose more, affecting billions of dollars’ worth of goods — with a threat to levy other tariffs that could impact an additional $200bn or more in products.
Trump’s tariffs on aluminum and steel have angered Canada, Mexico and the European Union (EU), which responded with retaliatory tariffs on everything from blue jeans to bourbon
Because of steel and aluminum tariffs, American automakers that manufacture in Mexico and Canada will likely see their production costs rise — meanwhile a tariff on car imports from other countries is still on the table
U.S. semiconductor companies, whose largest customer is China, as well as U.S. agricultural exporters, face enormous potential revenue losses
U.S. consumers at all economic levels will pay higher prices for many products — far beyond just automobiles and electronics, thus fueling inflation.
Donald Trump’s decision early in his presidency to pull the United States out of the Trans-Pacific Partnership (TPP), a 12-nation global free-trade agreement, was a harbinger of a current spate of retaliatory tariffs and trade war rhetoric. Trump called the TPP a “bad deal” for the American economy.
Many did/do not share this view. According to a recent Forbes article, the TPP will “reduce or eliminate up to 18,000 tariffs on both agricultural and manufactured products, boosting trade, economic growth as well as political ties between the 12 (now 11) countries. Former President Barack Obama and other TPP supporters believe this deal could have helped the United States increase its influence over Asia-Pacific while countering China’s growth in power….”
By withdrawing from the TPP, it appears that Trump’s strategy is an attempt to divide and conquer. The prevailing preference within the Administration now seems to be that the U.S negotiates bilateral trade agreements with individual countries, in the belief that better “deals” are available — one-on-one.
I don’t necessarily think that’s a bad idea. It may result in more countries cutting their own trade deals at a time when China dominates trade policies. But it does add significant complexity to global trade relationships and the supply chains that execute on them.
There’s no doubt that another key driver of the Trump Administration’s pull-out of TPP, and its current and rapidly escalating protectionist trade stance, has its foundation in the president’s campaign promise to reshore manufacturing jobs to the United States. While this may sound like a great idea, and it certainly resonated with his supporters, it may not be realistic. Certainly, it may work for some industries, but I believe many jobs and industries simply will never come back.
Take athletic shoes. The technology and production know-how to make athletic shoes moved overseas years ago. Both are now gone from the United States. Companies are not likely to bring that back.
But back to the topic at hand — the trade war and what companies can do about it.
The fact is that many manufacturers and retailers still are so heavily reliant on their current overseas, and often China-based, manufacturing networks that they don’t have additional production sources. Now they’re realizing that approach carries more risk than they anticipated. They need a hedging strategy and back-up plans — quickly.
So, what steps are businesses taking to weather this emerging trade-war environment? What are these hedging strategies?
Many manufacturers already have been moving production out of China or adding new production locations — such as Vietnam, Indonesia, India, the Middle East and elsewhere — to augment or replace their China operations.
Moving production beyond China, to be fair, began long before President Trump took office. It is fueled by rising labor rates in China, a function of the country’s maturing economy and rapidly growing middle class. China’s labor market is no longer as low-cost as it once was.
Add to that the value of time — which has become ever more important in this world of the “I want it now” customer. Crossing oceans and far-flung supply chains challenge companies’ ability to be agile in their production and in their service to customers.
The threat of a U.S.-China trade war likely will accelerate this diversification of manufacturing beyond China, as companies seek production locations that are not currently embroiled in or threatened by tariff battles. But it’s not clear whether reducing production for export from China will have Trump’s desired effect of impacting China’s economy. The fact is that China’s internal market has developed to such an extent that a tariff penalty structure on Chinese exports to the U.S. may not have a significant impact.
All of that said, shifting production from China to other countries is a real possibility for some companies — but not easy. China has a very sophisticated supply chain infrastructure, while many other countries are not as advanced. Thus, setting up manufacturing in alternate, less developed countries creates a different set of challenges. All these variables must be weighed and assessed from a total landed cost perspective, and now, a political perspective.
Another strategy companies may take to combat the impact of trade tariffs is to change where they source major components of a product. If they change component sourcing to countries that are not subject to proposed higher tariffs or have a more favorable tariff status, this could reduce the overall tariff burden.
Manufacturers, retailers and e-commerce retailers also are taking advantage of the increased Section 321 “de minimis” value threshold for single shipments imported into the United States.
In early 2016, the de minimis value of a single shipment was raised from $200 to $800. To capitalize on this higher threshold, some companies — retailers in particular — have opened facilities just across the U.S. border (often in Mexico) to ship goods — typically parcel — in value quantities that are not subject to U.S. Customs duties and taxes.
Despite all of these options I’ve outlined, I don’t yet see major shifts in trade patterns or flows. The coming months will give us a better picture of exactly how this new trade environment will play out. But the kinds of changes I’ve discussed take time, even for the most agile of companies.
Making America an island in the world economy isn’t sustainable. The world is a fully global economy. We are all reliant on one another for products and services — on exports and imports — on trade. The sad irony is that retaliatory tariffs against other countries may end up hurting U.S. companies and consumers (who will have to pay higher prices), without benefiting the U.S. job market.
Jack Bender is director of sales and marketing for A.N. Deringer Inc.
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