Are US-Chinese Tariffs Part of the New Normal?

Today’s blog post is a guest post by my former student, Krunal Sonpal.  The topic is a timely one: the on-going US-Chinese tariffs and what it means for supply chain executives.  This is an issue that should cause every supply chain executive to take notice, and start thinking about the strategic imperatives that lie ahead…

US and China are currently in a “trade-war” which started when the U.S. proposed to increase tariffs specifically on Chinese goods valued at $200 billion in September from 10% to 25%. The tariffs hike went effective on May 10 after failed negotiations between both the countries. On May 13, China retaliated by imposing tariffs on $60 billion of good starting June 1. Trump also said the U.S. would begin the process of applying the 25% tariff to another $325 billion in imports that have been left alone so far. It could take several months or longer to put them into effect, though, giving the two countries more time to negotiate.  Another survey also suggests that this may be a permanent state of affairs, as 82 per cent of respondents are changing their supply chains to counter the trade war. Perhaps surprisingly, the biggest portion of respondents making changes, by nationality, were Japanese, with 94 per cent of companies polled making changes to their operations.  In addition, 93 per cent of Chinese companies were considering making some change to their supply chains to mitigate the effects of trade tariffs.

The $200 billion worth of Chinese commodities that are subject to the tariffs include metals, beverages, fish, bakery, electronics, furniture, textiles, automobiles and more. However, the new tariffs will indirectly affect every industry due to tightened capacity, increasing supply chain costs, and longer production lead times.

Sebastien Breteau of Supply Chain Brain recently noted that “The ongoing U.S.-China trade war is miring global supply chains in increasing uncertainty, with over half of U.S. companies with global supply chains reporting adverse impact on business operations.  The trade war backlash, impacting more than just soy farmers and auto manufacturers is prompting organizations to adapt in ways that will disrupt global supply chains.”

The companies most affected by the import tariffs are the ones who did not take actions to find alternate suppliers in other countries. Some companies were prompt to act to Trump’s threat to China in September though. Steve Madden is currently in the process of shifting handbag production to Cambodia. Earlier, they sourced over 90% of their leather goods to be sold all over the world from China.

In an April 27 interview with Press Trust of India, Mukesh Aghi, president and CEO of the Washington-based U.S.- India Strategic Partnership Forum said that in the past several months, he has received an increased number of inquiries from roughly 200 U.S. companies to help them move production from China to India. In December 2018, news emerged that Foxconn would begin assembling its top-end iPhones in India. Several other Apple suppliers also announced that they would either build new manufacturing factories or boost production capacity in India.

One of the companies I consult for doesn’t directly buy any products from China, but their supplier for Aerosol container purchases metal from China. The tariff hike has prompted the supplier to raise the cost of the containers which in the end would be borne by the consumer.

Walmart has issued a warning in a letter to U.S. Trade Representative Robert Lighthizer that the company may have to raise prices after the Trump administration moved forward with its plan to expand tariffs on Chinese imports. Walmart said in the letter, “the immediate impact will be to raise prices on consumers and tax American business and manufacturers.” In another letter to Lighthizer, the National Retail Federation warned that the Trump administration is overestimating the ability of US companies to shift supply chain out of China and manufacture goods in the US. They added that “Global supply chains are extremely complex, and it can take years to find the right partners who can meet the proper criteria and produce products at the scale and cost that is needed.”

Some of the questions your company should be asking the procurement team should be:

• What percentage of your companies cost base would be impacted?
• Would they pass on increases/decreases in costs to consumers, and by how much?
• How much would they decrease/increase capex?
• How much inventory should be accumulated?
• Are there any substitute goods?

Some of the key strategies companies have been using to deal with the tariffs include:

• Moving supply chains- shifting production to other countries
• Applying for exemptions or using bonded warehouses
• Raising product prices so that consumers cover increased costs
• Negotiating with Chinese suppliers to share the cost of tariffs
• Finding new raw material sources
• Simply waiting to see what will happen

Procurement executives need to begin thinking through their strategies today.  These tariffs are unlikely to be a short-term issue. They may also go beyond the current presidency in two years.  This could be the start of a very long period of trade wars with China.  I also personally believe that it is a move towards greater localization of supply chains, as organizations begin to move production closer to their customers.