Analyst Insight: Never have tariffs held such a prominent place in the day-to-day global operations of businesses. The current U.S. administration has levied millions of dollars of tariffs on U.S. businesses, regardless of size. As a result, any company that imports or exports is experiencing increased costs to make, move or sell their products. And companies are making significant investments in their global supply chains to mitigate the collateral damage that the trade wars are wreaking.
The U.S. has imposed $550 billion in trade actions in the form of Section 301 tariffs on U.S. importers bringing in goods from China. In response, China, the European Union, India, Turkey and Russia have each levied their own retaliatory tariffs against U.S. products. The climate is tremendously volatile and continues to change. A recent World Trade Organization report finds that $460.9 billion of trade is covered by new import-restrictive measures imposed by major economies during the period from May to October 2019. This has reduced world trade growth to just 1.2% in 2019. Yet none of these actions has resulted in improved national security for the U.S. or changes in China’s unreasonable and discriminatory acts, policies and practices related to technology transfer, intellectual property and innovation.
We are seeing imports from China into the U.S. dropping. However, manufacturing in the U.S. is not increasing. This has brought new realities:
Items previously bought from China, and now bought from other countries, cost more than they did when they were procured from China.
The cost of items still imported from China are anywhere from 15-25% higher.
This constantly changing environment is not a good one for business. As a result, businesses are developing radically new models to mitigate or avoid tariff actions altogether. There are four ways in which they are doing this:
Product engineering. Companies are finding ways to engineer their products that shift the item’s tariff to one that isn’t subject to the Section 301 duties. This requires a deep understanding of the Harmonized Tariff System and the rules that govern origin.
Valuation. Companies are moving to using the First Sale Rule for arm’s-length transactions in a multi-tier transaction. This requires a thorough foray into a company’s financial structure and processes, and provides companies with long-term savings regardless of the Section 301 tariffs.
Sourcing. Companies are moving their product manufacturing to countries that are not subject to the Section 301 or retaliatory tariffs. This requires a significant investment in both time and money to stand up a new manufacturing operation.
Product exclusion. Companies are justifying why their products should be excluded from the trade action. This requires a significant investment in making a justification and potentially renewing the request, because product exclusions currently expire.
Even if a company finds a way to avoid the tariffs, it’s likely that the alternative will result in increased labor or transportation costs. Which leaves us in the same place as where we began – experiencing increased costs that are being pushed to the consumer.
Outlook:
If the current U.S. administration remains in place, global trade will continue to be volatile and near-impossible to plan for. If a new administration comes into power, it is unlikely that the tariffs will go away. Companies and candidates must develop new strategies on how to protect America’s assets. It’s time to see a new plan on how to utilize tariffs in a way that helps American consumers and businesses alike, rather than penalizing them.
