China Sourcing and Tariffs

In the current climate of new tariffs, many importers are unsettled and worried.  This is partly due to the disruptive effect of changing rules and also due to unclear information.  I mean, tariffs are confusing.  Many importers are wondering whether they will still be competitive with their current supply chain.  Since supply chains take a long time to put together, most buyers hope they will not have to change.

We find ourselves answering a lot of questions about the recent tariffs placed on Chinese goods. We thought, if our clients have questions, surely there are many importers and business owners out there wondering about the same thing – How exactly will they be affected? And, if affected,how do you adapt?  In this blog, we wanted to try andshed some light on the tariffs and provide a broad outline of what they mean, who will be affected and whether this will cause a complete change, or just a partial shift.

What do the tariffs entail?

On June 1, 2018, the United States imposed a 25% tariff on imports of steel, and a 10% tariff on aluminum coming from China– and Europe, Canada and Mexico. The US then imposed 25% tariffs on $34 billion of Chinese imports, and then followed it up with another 25% tariffs on another $16 billion in Chinese imports.You can view a list of major categories of goods affected here.

The administration initially avoided applying tariffs to consumer products because it does not want to increase consumer costs in the USA. Now, there is an impending threat of additional tariffs on $200 billion worth of goods. You can view that list here, which will include consumer products. These tariffs will not go into effect immediately but will undergo a review process, with hearings on August 20-23.

How do tariffsaffect importers?

It depends.  For most,the tariffs will have a competitive impact. If there are easy alternative sources, for example: Mexico, Vietnam or Bangladesh, then importers will move their supply chains there.  If not, then “a rising sea lifts all ships” and importers will pass on the increased cost of the supply chain to their customers. In some cases, where the US manufacturing cost was close to China’s, and other factors made it attractive to make the goods in the USA, the solution will be to repatriate production to the USA.

However, the disruption does not affect everyone the same way, even if the tariffs are the same.  Well-managed companies might seize this opportunity to increase their market share. For example, they may find ways to cut their China sourcing costs to compensate for the increase in tariffs.

How long will the tariffs last?

This is uncertain.  Historically, new tariffs stay in place a long time because the supply chain adapts to the changes. But if tariffs severely disrupt the economy, then future administrations may want to adjust or remove them, as was done during the Bush administration.

How to adapt?

The uncertainty of these tariffs causes people and companies to react differently. Seasoned, experienced importers will tend to stay put. They have a smooth, well-established supply chain, and may take a wait-and-see approach, evaluate the real impact on their business and react once things are clearer.

Those companies with new products and ideas may hesitate more and think twice about sourcing their products in China. They may suffer as a result of lack of competitiveness.

However, tariffs will cause a majority of importers to want to bemore efficient, to try and find ways to reduce their costs.  Those who have the attitude that “in life there are no problems, only opportunities” will focus on solutions that allow them to keep on being successful without too much disruption.  One such solution is to reduce their FOB cost, which can be done often enough. (See our previous blog series on leaving money on the table here)  Saving 10% of one’s FOB cost would reduce the impact of most tariffs.

Overall, few would disagree that tariffs are unsettling, and we hope this blog has clarified things a bit. What do you think? How do you feel your business will be affected? What are your solutions?

 

By Jocelyn Trigueros