Q&A on Chinese Tariffs for Manufacturers and Distributors

  • Industry trends
  • 7/26/2018
Glass Globe Money US China

Two industry leaders discuss potential vulnerabilities and exclusions, as well as strategies companies can use to manage the impact.

Manufacturers and distributors have a lot of questions about Chinese tariffs. CLA’s Bill Choler talks with Paul Stapanek, president of Shanghai-based Complete M&D, about the industry’s vulnerabilities and exclusions, as well as tactics and strategies companies can employ to manage the potential impact.

Listen to the conversation or read the transcript below.

Do you anticipate any price increases in the U.S. production of steel and aluminum because to the tariffs?

Historically, when any barriers are added, there are price increases, and we don’t believe tariffs would be any different.

In addition to overall inflation impacting the economy, what other consequences are you seeing?

Companies and people are hesitating at this point. There’s a lot of uncertainty about whether to start new programs related to investments in their supply chains such as new tooling programs, etc., and where to place new programs.

Are you seeing more approved exclusions from the tariffs, and what are the chances that more items will be excluded?

  • It’s a bit risky to hope that we are going to have more exclusions.
  • It’s a very fluid environment.
  • Not many understand what potentially is going to happen next.
  • We are suggesting you deal with the information we have right now and make plans based on that.
  • Anticipate that it’s going to be dynamic, fluid, and volatile for the coming months and even years.

Are there trade associations or other groups contemplating any legal actions?

  • We are not really seeing any legal action at this point.
  • We are seeing a lot of activity in the Chamber of Commerce. They are informing decision makers on both sides about what kind of affect they anticipate the tariffs having.
  • We’re seeing individual owners of companies lobbying and sharing their stories.
  • At this point, it’s less about legal action and more about trying to create some kind of sway or influence.

Based on your experience, how do you think China will respond? And what will that mean for U.S. manufactures both domestically and in China?

  • China has responded with exactly $34 billion worth of U.S. products they would also slap tariffs on.
  • The Chinese side is much more methodical, much more calculated, to be in line with what they have as their five-year plan, as well as their longer initiatives such as China 2025, which outlines what industries they want to be successful in and dominate.
  • Certainly the attitude of the business and operating environment for the American companies operating in China will become more difficult.
  • Where there were open arms and speedy delivery of business licenses and getting through regulations, etc., I think that those things will be slow walked.
  • It’s not the kind of thing that you can draw a straight line to and say this is the exact impact, but without a doubt there will be an impact.

So, do you see this having a long-term impact on the U.S. economy, and will it be good or bad in the end?

  • China was moving more in the direction of free trade, less regulation, more transparency.
  • Then about five or six years ago we saw a trend of China closing quite significantly. It’s difficult for companies, whether foreign or Chinese, to get information that is widely available in other countries. A simple Google search is not available to them, nor is access to social media sites.
  • The pendulum has swung from free trade, and it has swung pretty hard in other direction to being more protectionist.
  • Once you go in the protectionist direction, it’s difficult to move back toward more pro free trade. I don’t think it’s a matter of weeks or months; I think it’s a matter of years.
  • I don’t think this a short-term matter that’s going away soon. It causes problem that are measured in years. It might be two or three years, but it’s definitely measured in years.

How long do you thing this tariff will last?

  • Probably as long as this administration is in office. I see it being a kind of a dance with quite a bit of volatility in the coming months and years.

You talked a little bit about this before, but can you give some unintended consequences that could happen as a result of the tariffs?

  • The largest unintended consequence is that the companies that we are interacting with are on the fence. There are some companies that are being more proactive, but by and large, many companies are taking a wait-and-see approach.
  • A wait-and-see approach is detrimental to growth, because if they had plans in place to do something in 2018. and they don’t make those investments in those new programs or additional production lines, we lose months on that potential productivity or those new programs.

What industries are the most vulnerable?

  • It does go pretty much across the board; however, it is heavy on metal, so steel and aluminum. We are seeing electronics hit pretty heavily. We are also seeing automobile, automotive components, and assemblies taking quite a hit.

What advice do you have to give to manufactures and suppliers? What strategies to share the pain with the customers? Can you give some long- and short-term examples of strategies that you would recommend?

  • The approach that we have seen to be the most productive is one where we take a step back and literally look through the entire portfolio the client has, looking at the HS codes. The HS codes are the harmonized codes that are associated with the product that you are bringing in. which then can be translated into the duty on those particular items.
  • Gather information about what’s happening with potential competitors. Are our competitors also buying and shipping product from China into the United States, or have they already shifted production to another country or to the United States?
  • In a case where you have a client that will be significantly affected by the tariff, there are some pretty tangible options:
    • If you have a product that is manufactured largely in China, maybe there are some secondary operations that could be performed in Southeast Asia. You could do most of the manufacturing and/or assembly in China, and then ship those bits and pieces off to Southeast Asia, and perhaps do another secondary operation or a handful of those, and then put it into assembly, and then to a box with a different “made in” label (rather than a “made in China” label).
    • Involve the supplier in the dialog, as well as the customer. In certain industries, such as automotive, it’s extremely difficult to pass on these types of costs. We do have one client that is working with the supplier that was helping them get some equipment made in China — they are sharing the burden of the additional import with that supplier just at a 50/50 split.
  • Open dialog and gather information to make the right decisions. By including everyone involved in those discussions, we can find some way of mitigating some of that risk and the cost impact.

Is there anything else you would like to make a comment on?

  • In general, in these times of uncertainty when we are reaching out to clients, what we are really saying is that no one really knows what is going to happen next. We don’t know what threat is going to be lobbed across the pond next.
  • We encourage our clients to continue to do business as though it’s business as usual, but we also encourage them take the steps to put in a Plan B. Even if they don’t decide to eventually enact that Plan B, at least we moved some paces down that road to understand what those options are.
  • Even if the whole thing blows over in three months, you are closer to your Plan B versus saying we will wait until the crap hits the fan and then decide what to do. Then you will need to paddle fast to catch up to that wave.
  • We are highly encouraging getting out and understanding the market and what’s happening with competitors and what the options are. I think that is prudent at any time but even more prudent in today’s environment.

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