tariffs and supply chain

US-China Trade War: Still Grinding On

US-China Trade War: Still Grinding On

But the US-China trade war continues to grind on. While coronavirus takes the headlines, the economic damage from more than two years of trade hostilities between the two largest global economies continues to take a toll. Worse, US President Donald Trump appears eager to escalate the fight all over again for the rest of this year. Many people seemed to have stopped paying attention the trade conflict back when the Phase 1 “deal” was signed in January and implemented on February 14 (both dates seem like a lifetime ago already!). As we noted at the time, the Phase 1 deal was never likely to hold. The agreement had promises in a variety of areas from intellectual property rights to financial services. But the most important element was a promise to purchase goods. The US insisted that China buy $200 billion in products ranging from soybeans to energy in a two-year time frame. This target was never realistic. It was nearly double any previous purchases made by China for US exports and it was coming off extremely low export figures across the duration of US-China tariff escalation. The Phase 1 deal arrived just as the COVID-19 situation was taking off in China. With factories and shops shuttered across the country (and not just in Wuhan at the epicenter), Chinese imports from everywhere sagged. Meeting the series of purchasing targets went from impossible to never-going-to-happen. So what was the appropriate US response? There were two options available to Washington. First, to acknowledge that the scale and depth of the crisis made previous commitments unattainable in the short term and either recalibrate the expectations, adjust the target levels, or shift the timeline. Second, to complain loudly that China had failed to meet the purchasing targets and start the whole conflict all over again.

Second and Third-Order Tariff Impacts: Shutting the Gate Damages Us All

The implications, as the Singaporean trade minister noted, can be hard to calculate.  For instance, American importing companies will need to increase the amount of the continuous bond they hold with US Customs.  In some cases, bond levels may be 20-100 times higher than prior to Trump’s tariff wars began. Shipping volumes have fallen off dramatically.  This has left firms paying more for transportation as well. So it is not just 25% tariff rate increases that affect firms.  The second- and third-order implications are just starting to appear. In the short run, exporting firms have several options to limit risk and exposure to higher tariffs.  They can do nothing and bear higher costs, hoping to ride out a short conflict.  They can work with their importing partners to effectively “share” the costs of higher tariffs. Firms should be reexamining their options to ensure that they understand their current supply chains, tariff classifications and possible sourcing alternatives.  It may be prudent to tweak existing processes to move products into new tariff classifications by, for example, adding or subtracting manufacturing steps in the supply chain from one location to another.