The Latest on Tariffs and Their Impact on Business Strategies [Video and Audio]
We’ve talked extensively with Omar Nashashibi of the Franklin Partnership and others to record a series of short videos and audio clips that can help you better understand the goal of tariffs, their likely impact on inflation, the current and near-term trade environment, potential global quotas, and strategies for staying competitive.
Europe Is the Latest Front in the Trade War: Possible Tariffs on Imports from the EU
The Boeing and Airbus aviation disputes between the United States and the EU, dating back to the 1980s, have heated up again. U.S. threats to impose a 100 percent tariff on $21 billion in European imports to recover costs from the EU’s illegal subsidies could mean much higher prices on copper and other metals used in the aviation and automotive industries — but also wine and cheese and many other consumer items. The EU, of course, would retaliate with tariffs of its own.
House Vote on “New NAFTA” Unlikely in July
House Democrats are still hashing out fixes to their four areas of concern in the “new NAFTA” deal: prescription drug pricing, labor provisions, the enforcement of those provisions (particularly in Mexico), and environmental issues. But progressives in the party are loath to give President Trump a victory, so “yes” votes are still in short supply. Omar Nashashibi explains when a vote might come to the House floor.
China doubles down on harder-line trade negotiations
We had hoped to see the trade war de-escalate after the GTO Summit in Japan, but negotiations with China have in fact worsened. China’s pledge to purchase $50 billion in U.S. agricultural goods has failed to materialize, and it still has not addressed its theft of intellectual property and other sticking points. It’s unlikely that any tariffs will be lifted soon, and the United States could impose another 25 percent tariff on thousands of items that would directly hit U.S. consumers during the holiday season.
Canadian and Mexican tariffs on steel and aluminum lifted
It’s not all about China. The United States reached agreements with Canada and Mexico to lift the 25 percent tariffs on imported steel and the 10 percent tariffs on imported aluminum. More important, Canada and Mexico have removed all retaliatory tariffs, bringing considerable relief to American exporters.
These agreements help clear the way for ratification of the United States-Mexico-Canada Agreement (USMCA), the “new NAFTA.”
Highlights of the Canada and Mexico agreements
- The 25 percent tariffs on steel and 10 percent tariffs on aluminum from Canada and Mexico have been lifted. All parties will establish an import monitoring system, and the focus on transshipments from China will increase, as well as on those through Canada and Mexico into the United States.
- There are no quotas on imported steel and aluminum from Canada and Mexico.
- Retaliatory tariffs against U.S. exports to Canada and Mexico have been lifted. Tariffs on U.S. exports to the EU, Japan, and other countries remain.
- Canada and Mexico may not re-impose retaliatory tariffs in the future on non-steel or non-aluminum products from the United States. U.S. farm and other products appear to be clear of future tariffs because of this dispute.
- If there is a surge of certain steel and aluminum items imported into the United States, the United States can re-impose tariffs only on those products. Canada and Mexico may retaliate, but only on those products (not dairy, farm, etc.).
NAFTA/USMCA vote appears tenuous
Lifting the 232 tariffs on steel and aluminum certainly removes a major stumbling block to ratifying the USMCA and has brought welcome relief to American farmers, manufacturers, and exporters. But political and policy obstacles remain in the U.S. Congress. The White House must resolve these in the next 30 to 45 days in order for lawmakers to hold a vote prior to their August break. Most observers in Washington believe a vote after Labor Day has a slim chance of succeeding.
Complicating matters, Canada has yet to schedule a vote, and its Parliament shuts down at the end of June in preparation for the October national elections. Prime Minister Justin Trudeau may be hesitant to bring a vote on the new NAFTA that may not pass, injuring him politically. He may not want to risk forcing a vote prior to House Speaker Nancy Pelosi agreeing to move the trade pact through the U.S. Congress.
Tariff rate increased to 25 percent on nearly 6,000 Chinese imports
President Trump has increased the 10 percent duty on $200 billion worth of imports from China to 25 percent, effective May 10, 2019. This will very likely cause even more disruption for your manufacturing and distribution chains, suppliers, and customers.
Included in the list of 5,745 products now subject to a 25 percent import tax (see List 3) are machinery and mechanical appliances, ships and boats, live or frozen fish and crustaceans, cosmetics and shampoo, carpet and floor coverings, wooden home furnishings, and even string Christmas lights.
President Trump announced the imposition of the increased tariff rates following several weeks of failed trade negotiations.
Retaliatory tariffs expected; talks will likely continue
In an effort to ease the markets’ reaction and prevent massive disruption, items from China shipped prior to May 10 and entering the United States prior to June 1, 2019, will be assessed the 10 percent tariff, rather than the 25 percent increased rate. However, this "on the water" reprieve will not extend to items exported to the U.S. as of 12:01 a.m. on May 10.
The June 1 date probably indicates that the U.S. and China will continue talks in the coming weeks. The tariff rate increase was reportedly triggered by China’s removal of language requiring it to pass legislation implementing many of the intellectual property theft changes in the agreement. Both sides had hoped for a final agreement prior to the G-20 meetings on June 28 and 29, and President Trump and President Xi will likely talk by phone in the interim. The U.S. may release the final List 4 of $325 billion Chinese imports potentially subject to tariffs as early as next week. China has reaffirmed its intent to retaliate, though it did not issue a list of American exports facing a tax.
Many industries are feeling the pain
American producers, manufacturers, distributors, retailers, farmers, and consumers bear the brunt of Chinese retaliation and increased prices for imported goods.
Despite the additional disruptions and billions in added taxes on U.S. manufacturers and distributors, hope remains that the two sides will address their outstanding issues and come to a limited solution by the end of June. But in all likelihood, the U.S. will continue to impose a 25 percent tariffs on the original Lists 1 and 2 pending further Chinese compliance with terms of the trade agreement.
What you should do
You should identify vulnerabilities in your current supply chains and potential disruptions from your customers and distributors. Relations with China remain on edge, so be aware of policy changes and think about how to adapt now to prepare for tomorrow. It is important to remember the impact not just on Chinese imports but also U.S. exports as China retaliates with tariffs of its own.
Consider that this trade war may linger for some time. China may delay an agreement to see how the U.S. 2020 presidential elections play out. Many suspect the Chinese would prefer to wait out the current administration. But Democratic presidential candidates may continue with the hard-line approach and possibly try to be “tougher on China” than President Trump. So, even if a Democrat were to win the White House, many non-consumer-direct products from China may continue to face tariffs.
We are here to help
We have strategies to help you adapt to the uncertainty, increased risk, and additional costs from tariffs and U.S. trade policy. If you aren’t already working with a CLA advisor, feel free to email us your questions.
Negotiations take a step backward; more tariffs may be imposed
The Chinese have slowed talks and pulled previously agreed-upon items from the table, and President Trump has threatened to respond with tariffs on an additional $350 billion in goods not previously affected, while also raising the existing 10 percent tariff rate to 25 percent. This setback will probably affect the late May/early June timeline for concluding talks.
Some tariffs expected to remain in place after negotiations
Current negotiations are aimed at addressing China’s theft of U.S. intellectual property and technology transfers, and talks should wrap up by the end of May or early June. We expect much of the $200 billion in tariffs to be lifted, with about $50 billion of them remaining in place to maintain leverage over China. Farmers in particular can expect relief.
Tariff supply chain strategies in 2019
As the trade war continues to ramp up, manufacturing and distribution companies need to think differently about their supply chains. It's time to investigate alternatives, seek opportunities, and reduce risk in order to combat the rising costs stemming from increased tariffs around the world. Our panel of international specialists offers exclusive supply chain insight on the trade war and features:
- Paul Stapanek of Shanghai-based Complete Manufacturing & Distribution
- Matthew Bock of Middleton & Shrul, International Trade Law
- Omar Nashashibi of the Franklin Partnership, Government Relations
Current tariff exposure
Here’s a short summary on the U.S. tariffs on raw materials and imports, as well as the retaliatory tariffs from other countries on autos and automotive parts. There are currently tariffs from all over the world on virtually all steel and aluminum entering the United States.
End game for tariffs
The goal of tariffs is to level the trade balance with China and the entire globe. Ultimately, however, tariffs are designed to create a global quota system that could control the sourcing of materials like steel, aluminum, semi-conductors, uranium, and artificial intelligence items.
Timeline to tariff relief
No tariff relief is likely coming in the near future. There may be more clarity on what lies ahead after the 2018 mid-term elections, but the trade war is a long-term battle, and any easing up on tariff rates won’t likely come before spring of 2019.
Being globally competitive with tariffs
Omar Nashashibi offers strategies manufacturers and distributors can employ to stay competitive on the world market amid tariffs and quotas, including how to consider customers as well as suppliers.
Tariffs increasing reshoring activity
Manufacturers are bringing operations back to the United States from abroad as China becomes more expensive to operate in, partly because of wage increases and rising transportation costs, as well as tariffs and potential quotas.
Tariffs’ long-term impact on inflation
Surcharges and suppliers’ increasing costs are expected to drive the price or raw materials and create a captive market for the next few years, making greater inflation a likely outcome through 2021.
How we can help
CLA’s manufacturing and distribution professionals and international business advisors can help you assess the impact of tariffs on your operations and craft short- and long-term strategies for competing amid the trade war.