Higher tariffs, lower tariffs. More tariffs, fewer tariffs. Steel tariffs, auto tariffs. The ongoing saga of the U.S.-China trade war feels like Dr. Seuss book meets roller coaster.
Throughout 2018, only one thing has been consistent for business managers when it comes to trade policy and regulation — uncertainty.
“This is no way for retailers to be doing business,” Hun Quach, vice president for international trade at the Retail Industry Leaders Association (RILA), told Supply Chain Dive.
Tariffs on $250 billion worth of goods from China are already in place, and the 10% duties on $200 billion were set to rise to 25% on Jan. 1, 2019.
That all changed after a dinner between President Donald Trump and Chinese President Xi Jinping at the G-20 summit in Argentina on Dec. 1. The two leaders agreed to a 90-day tariff “cease-fire,” in which the countries would negotiate underlying trade issues and agree not to raise tariffs at the start of the year.
Business leaders welcomed the news, although it further added to the uncertainty surrounding planning for the new year.
Think of it as “trade war purgatory,” said Courtney Rickert McCaffrey, manager of thought leadership in A.T. Kearney’s Global Business Policy Council. “It’s not supposed to get worse for 90 days, but it’s also hard to see how it’s going to get any better,” she told Supply Chain Dive.
What happened since Dec. 1?
Trump appointed U.S. Trade Representative Robert Lighthizer to lead the negotiations, which reportedly came as a surprise to China’s leaders who had hoped for talks with Treasury Secretary Steve Mnuchin. Lighthizer is known for taking a hard line on trade and a tough stance on China.
Lighthizer clarified the U.S. and China face a hard deadline of March 1, 2019 to negotiate issues related to trade, after some conflicting messages came out of the two administrations shortly after the G-20 meeting. If a deal isn’t made by then, tariffs will rise to 25%.
On Monday, Dec. 10, Chinese Vice Premier Liu He spoke on the phone with Mnuchin and Lighthizer. A statement from the Chinese Ministry of Commerce, as cited by Reuters, said the leaders discussed a “timetable and roadmap for the next stage of economic and trade consultations work.” The Wall Street Journal reported Liu, who is leading the talks for China, will pay a visit to Washington after the new year.
China is reportedly considering lowering tariffs on U.S. automobiles from the current rate of 40% to 15%, according to Bloomberg citing sources familiar with the matter. The auto tariffs are separate from the duties on $200 billion worth of goods from China but have nonetheless been a source of contention in the U.S.-China trade war. Lighthizer said last month he would look into “equalizing” auto tariffs. Cars from China coming into the U.S. face a tariff of 27.5%.
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What happens next?
Neither the U.S. nor the Chinese government has offered any specifics on the timetable or roadmap for the 90-day negotiation period.
“This 90-day timeline is incredibly ambitious,” McCaffrey said, and it’s unlikely enough time to resolve the trade concerns outlined in the White House’s statement following Xi and Trump’s meeting. The administration said negotiations would revolve around “structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture.”
Technology transfer and intellectual property are the basis of the U.S.’ imposition of tariffs on China under Section 301.
Made in China 2025, a state-led policy seeking to boost Chinese manufacturers, scale up technological advancements and decrease the country’s reliance on foreign suppliers and producers, also lies at the root of the trade tensions.
“Policymakers worry that China’s state-led model and its ambition to control entire supply chains … means that entire industries could come under control of a rival geopolitical power,” an analysis from the Council on Foreign Relations stated.
The U.S. government said China’s efforts to recruit foreign scientists to help boost its domestic business is an example of intellectual property theft.
Made in China 2025, released in 2015, is a relatively new policy, but tensions around technology issues have been in place for several years and administrations. A mere three months is highly unlikely to be sufficient to eradicate these trade practices.
“The issues here are very deep set,” Steve Bowen, Maine Pointe CEO and author of “Total Value Optimization: Transforming Your Global Supply Chain into a Competitive Weapon,” told Supply Chain Dive. “This is not about the immediate trade deficit.”
Given the complexity of the issues to be resolved, several analysts expressed to Supply Chain Dive they anticipate the 10% tariffs will rise to 25% on or shortly after March 1. Following that, “We think Beijing would retaliate, and tensions would just intensify from there,” McCaffrey said. In that situation, 10% tariffs on $60 billion of U.S. imports would rise to 25%.
A fourth tranche isn’t off the table either, which would involve tariffs on $267 billion of goods from China, likely followed by further retaliation. “The only way for a business to operate is to assume things could get worse before they get better,” Bowen said.
Plan for the worst-case scenario
Supply chain managers are always risk planning, and this 90-day “cease-fire” period offers no exception to the rule. “Companies certainly shouldn’t be standing still,” Geoff Pollak, managing director with Alvarez & Marsal, told Supply Chain Dive.
Pollak recommends supply chain leaders review their products with trade experts to ensure the goods are being classified correctly and their business is not paying duties unnecessarily on a product.
In the short term, tariff engineering may alleviate some duties for businesses. Consider a toolbox, for example, with items such as a hammer and screwdriver. The box is subject to tariffs, but if the products in the kit were segmented into parts that could be reassembled, tariffs would not apply. This same concept can be seen in the auto industry, as partly assembled cars face fewer and lower tariffs when exported compared to a fully assembled automobile.
In the medium to long term, however, Bowen said tariff engineering doesn’t go far enough. In planning for the future, supply chains need to conduct stress tests, he said, analyzing cost impacts of 10% tariffs, 25% tariffs or no tariffs, and making decisions strategically based on the scenarios.
Moving the supply chain isn’t always the solution
Many brands — Williams-Sonoma, Harley-Davidson and Honda to name a few — are moving production for U.S.-bound goods out of China to avoid tariffs.
The move may seem like a straightforward way to skirt extra taxes, but it doesn’t necessarily lead to lower costs in the long run.
A Maine Pointe client conducted stress tests for “what-if” tariff scenarios, and in the end, most situations resulted in China as the lowest cost option, even with a scenario of 25% duties. The cost difference was 5-6% less than moving sourcing elsewhere, Bowen said, due to factors such as labor costs and production capabilities. “China still wins the equation,” he said.
For some importers, shifting sourcing is not a viable option because of market dominance. Cotton sweaters are one example, said Quach. “From the yarn to the knitting to the sewing — all of those details are really being dominated in China.”
And even for supply chains that are able to shift, it doesn’t happen at the push of a button or wave of a magic wand. A RILA member that imports plastic stickers from China told Quach moving the supply chain to Taiwan will take about one year.
As of now, the trade war has mostly centered around the U.S. and China, but China is not the only country where the U.S. has a trade imbalance. “If you’re a buyer, and you’re moving to a country that also has an imbalance of trade, they may be next after China,” Pollak said. “Moving from one Asian source supplier to another may not be the right solution.”
The 90-day opportunity
There’s a silver lining to the three-month limbo period casting a shadow over businesses — the gift of time.
Companies that have determined shifting sourcing is an appropriate course of action now have additional time to move their supply chains. Businesses still working out plans have a few more weeks to conduct risk assessments.
The postponement of tariff increases also gives buyers an opportunity to negotiate with their suppliers to keep costs under control. “This is a good time to find a common ground between what the companies want and their suppliers to balance,” Pollak said. “Suppliers have to be willing to have an engaging relationship versus a transactional relationship.”
No one-size-fits-all strategy will apply to every company to mitigate tariffs. The critical lesson for all industries, however, is to plan for any and all possibilities.
“When it comes to international — and add the word politics into that — I don’t think any of us have a crystal ball to predict that,” Bowen said. “You have to prepare for all outcomes.”
