The uncertainty of the current trade war is threatening to impact the US economy in many ways including, shipping ports, farming, technology and more, too numerous to elaborate in this blog. For, a primer on trade wars read the attached article Trade War Primer. There are 1,300 plus lines of Chinese goods included in the list of proposed tariffed products outlined in Section 301, by the office of the US Trade Representative (USTR). These tariffs are scheduled to go into effect July 6th.
I have provided a sampling of some of the products in Appendix A, plus a link to the complete proposed list. According to the USTR, “The proposed list of products is based on extensive interagency economic analysis and would target products that benefit from China’s industrial plans while minimizing the impact on the U.S. economy. Sectors subject to the proposed tariffs include industries such as aerospace, information and communication technology, robotics, and machinery.” (USTR, 2018)
The list was refined from the Made in China 2025 industrial policy aimed at shifting China’s economy into higher value-added manufacturing sectors, such as robotics, aerospace and energy-saving vehicles. Although this is a natural path that most developing companies follow, moving from basic consumer goods to higher value items, think Japan. Look at what happened to the US auto industry with the invasion of Japanese cars. The size of China’s economy (2nd largest in the world and growing) makes this change a threat to the US. We already have a $375 billion trade deficit to china, according to the US Department of Commerce. Imagine adding the cost of Chinese airplanes and cars to that deficit. Plus, good bye Boeing (China is already threatening to pull back a $70 billion order in retaliation of the tariffs). Supposedly, the tariffs are not imposed on products directly purchased by consumers i.e., flat-screen televisions. Let’s talk about the effect of the tariffs on corporate supply chains.
Effect of Chinese Tariffs on US Supply Chains
Testifying in Washington at a public hearing of the Section 301 Committee – part of the US Trade Representative’s office that addresses trade disputes – Josh Kallmer of the Information Technology Industry Council said that “the companies that are engaged both in the production of goods and supply of services have really complex global supply chains that cannot just be picked up and moved”.
He added: “Supply cannot just be rendered from another market. It takes years to renegotiate contracts. It takes years to move physical equipment.” Kallmer’s group represents 66 global hardware, software and service companies, including Qualcomm and Intel Corp. (Klein, 2018)
In a recent research report on US-China trade tension, JP Morgan found that “reshuffling and relocating production lines to either the US or other major tech-exporting countries would involve a significant amount of resources and capital and be a rather time-consuming process.” (Klein, 2018)
Most of the media hype about the tariffs have been focused on steel and aluminum. What is not highly publicized is that most of the goods tariffed are parts and machinery that make the goods and products sold in the US by US companies. I’m talking dairy and farm equipment, medical devices, airplane seats, integrated circuits, plastics, etc. US companies may be able to forgo new/replacement equipment for a short time and should be stocking up on component or parts for manufacturing. This would cause China to feel the cost of slower product turn once the tariffs go into effect. Maybe, this tariff situation was seen as a short-term strategy until a fair-trade policy could be put into place. That’s a big maybe. If this strategy does not work quickly, machinery and products will have to be purchased at the higher cost, resulting in a higher cost of goods which most certainly will be passed on to consumers.
Most of the products that will be taxed are being imported to the US because they are expensive to make in the US. Reviving production is an option, maybe. How quickly could steel mills that have been closed for decades be re-opened and at what cost? Not to mention the lack of skilled labor in the manufacturing sector. The steel mill jobs were often passed on from father to son. The last set of closings disrupted that skill transfer. It still may be cheaper for US companies to pay the tariff than to have the steel made in the US.
Let’s talk about strategies that companies can put into place to keep cost down should this trade war truly happen.
- 1. Evaluate stocking up on effected products targeted in round two. Understand the financial risk of an escalation of the trade war. Each company individually knows how long they can hold out before having to buy the higher priced tariffed products.
- 2. Global companies who have multinational manufacturing facilities may reduce their US manufacturing in favor of more overseas production. Instead, of producing in the US and exporting product, have it produced outside of the US. Aluminum is being tariffed but soft drinks in aluminum cans are not. Can you imagine soft drink manufacturers importing soda rather than making it here because of the cost of aluminum? However this can be risky. Look at the backlash that Harley Davidson is getting.
- 3. Continue to run what if scenarios that can be implemented with both short term and long-term strategies. Look at your split of suppliers. What percent of my supplies can I still buy from China and not impact my cost? Is it 15% or 40%?
- 4. Know who your suppliers and their suppliers’ suppliers are, to anticipate disruption and arrange back-up suppliers. Avoids dependence on sole suppliers.
A survey by the Business Continuity Institute found that 69 per cent of companies do not have full visibility over their supply chains. “Some companies are investing in supply chain resilience, but the majority have plenty of room for improvement,” says Nick Wildgoose, global supply chain product leader at Zurich Insurance Group. (McCrea, 2018)
- 5. Overlap, Chinese suppliers where possible with US supplier and estimate the cost ramifications. There is an organization called The Reshoring Institute which supports the rebuilding of manufacturing in America through innovation, automation and localization. They may be a source on help in re-opening closed facilities i.e., steel mills.
- 6. Relook product specifications and determine where they can be relaxed to include different suppliers.
- 7. Utilize supply chain design software companies to help decide were to locate plants and warehouses to get the service you need at the lowest possible cost. Companies have to go global on the supply and demand side. These software companies can provide details on tariffs and other trade requirements. TCGi and its partner companies that can do just this, including: logistics planning solutions help organizations reduce costs and improve speed to market: • Logistics network design and optimization. Network visualization, as-is network modeling and calibration, scenario analysis for optimal site selection, and network optimization • Transportation network optimization. Dedicated fleet planning, optimal route planning, load consolidation, and optimizing use of consolidation and deconsolidation hubs • Distribution center/warehouse optimization. Warehouse design and planning, and warehouse process improvement • Carrier sourcing analytics. Optimize costs and service using carrier spend analysis, freight cost optimization, RFX management and analysis, and carrier performance management
- 8. Employ a digital sourcing network for sourcing optimization that can:
– Collaborate with other supply chain partners in the network.
– Uncover alternative sources for raw materials.
– Locate additional resources for manufacturing in non-effected countries
- 9. Invest in spend analytics. Spend analysis is critical in today’s business environment, sourcing needs to be able to handle fluctuating material prices, increasing risk profiles in global markets, and the need to innovate. Logistics planning Global footprints, rising fuel costs, high demand volatility, and evolving customer service needs have increased the complexity of material and information flows. While companies have access to an abundance of data and intelligence, it is often not leveraged effectively, or is acted upon in silos.
“We have observed that major corporations have been able to leverage deeper knowledge of their supplier spend data and are able to successfully convert management information into predictive data that informs decision-making.” (Webb, 2015)
Some of the exciting developments here have stemmed from utilizing big data and making more use of information about purchases, news, market trends and even linking the physical world through the internet of things.” (Webb, 2015)
Digitally transforming supply chains and procurement functions is the only way that companies are going to be able to move at the speed of lightening. The tariff war is an evolving situation with China promising to hit back. They have already vowed to dramatically cut back on soybean imports, immediately effecting Midwestern farm states. Stay tune for part two of the tariff war saga.
(Sourced from the office of United States Trade Representative, Docket No USTR-2017 – 0005)
Notice of Determination and Request for Public Comment Concerning Proposed Determination of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation
AGENCY: Office of the United States Trade Representative
ACTION: Notice of determination, request for comments, and notice of public hearing
A Sampling of Industries Effected and Products Tariffed
Transportation – Auto, Airline, Railway & Ships
- Parts of seats nesoi, for seats of a kind used for motor vehicles
- Seats, of a kind used for aircraft, leather upholstered
- Seats, of a kind used for aircraft (o/than leather upholstered)
- Instrument panel clocks for vehicles, air/spacecraft or vessels, w/clock or watch movement < 50 mm wide, nonelectric
- Electrical instruments and appliances (other than compasses) for aeronautical or space navigation Nonelectrical instruments and appliances (other than compasses) for aeronautical or space navigation
- Optical navigational instruments, nesi
- Ships’ logs and depth-sounding apparatus
- Electrical navigational instruments and appliances, Nonelectrical navigational instruments and appliances, nesi
- Parts and accessories of automatic pilots for aeronautical or space navigation of subheading 9014.20.40
- New pneumatic tires, of rubber, of a kind used on aircraft
- Rail locomotives powered by electric accumulators (batteries)
- Diesel-electric locomotives
- Railway or tramway passenger coaches and special purpose railway or tramway coaches, not self-propelled
- Railway or tramway tank cars and the like, not self-propelled
- Motorcycles (incl. mopeds) and cycles, fitted w/recip. internal-combustion piston engine w/capacity n/o
- Motorcycles (incl. mopeds) and cycles, w/electric motor for propulsion
Parts and accessories for instruments and apparatus for measuring or checking semiconductor wafers or devices, nesoi
Optical measuring/checking instruments/appliances for inspecting semiconductor wafers/devices or photomasks/reticle used to mfg such devices
Electronic integrated circuits: processors and controllers 8542.32.00 Electronic integrated circuits: memories 8542.33.00 Electronic integrated circuits: amplifiers 8542.39.00 Electronic integrated circuits: other 8542.90.00 Parts of electronic integrated circuits and microassemblies 8543.70.45 Other electric synchros and transducers; defrosters and demisters with electric
Oscilloscopes and oscillographs, specially designed for telecommunications
- Apparatus based on the use of X-rays other than for medical, surgical, dental or veterinary use
- Dental fittings and parts and accessories thereof, other than of plastics
- Artificial joints and parts and accessories
- Ozone, oxygen and aerosol therapy, artificial respiration or other therapeutic respiration apparatus, and parts and accessories
- Orthopedic or fracture appliances, and parts and accessories
- Artificial teeth and parts and accessories thereof, of plastics
- Printed circuit assemblies for defibrillators
- Electro-medical instruments and appliances
- Malaria diagnostic test kits
- Carding machines for preparing textile fibers
- Combing machines for preparing textile fibers
- Drawing or roving machines for preparing textile fibers
- Machines for preparing textile fibers
- Textile spinning machines
- Textile doubling or twisting machines
- Textile winding (including weft-winding) or reeling machines
- Machinery for producing textile yarns nesi; machines for preparing textile yarns for use on machines of heading
- Weaving machines (looms) for weaving fabrics
- Braiding and lace-braiding machines
- Embroidery machines
- Machinery for making felt hats; blocks for making hats; parts
- Sewing machines specially designed to join footwear soles to uppers, automatic
- Sewing machines, other than automatic, specially designed to join footwear soles to uppers
- Sewing machine needles
- Parts of sewing machines, nesi
- Plows for soil preparation or cultivation
- Disc harrows for soil preparation or cultivation
- Agricultural, horticultural or forestry machinery for soil preparation or cultivation, nesi; lawn or sports ground rollers
- Parts of agricultural, horticultural or forestry machinery for soil preparation or cultivation; parts of lawn or sports ground rollers
- Mowers nesi, including cutter bars for tractor mounting
- Haymaking machinery other than mowers
- Straw or fodder balers, including pick-up balers
- Combine harvester-threshers 84335200
- Threshing machinery other than combine harvester-threshers
- Root or tuber harvesting machines
- Harvesting machinery or threshing machinery, nesi
- Milking machines
- Dairy machinery other than milking machines
- Parts for milking machines and dairy machinery
- Presses, crushers and similar machinery used in the manufacture of wine, cider, fruit juices or similar beverages
- Parts of presses, crushers and similar machinery used in the manufacture of wine, cider, fruit juices or similar beverages
- Machinery for preparing animal feeds
- Poultry incubators and brooders
- Poultry-keeping machinery
- Agricultural, horticultural, forestry or bee-keeping machinery
- Parts of poultry-keeping machinery or poultry incubators and brooders
- Parts for agricultural, horticultural, forestry or bee-keeping machinery, nesi
Nesi = Not elseware specified or included
China Trade Tariff Complete List of Products
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LYU, Dong, and Yuan Gao. “Supply Chain Caught in Crossfire of U.S.-China Trade Conflict.” Bloomberg.com, Bloomberg, 16 June 2018, www.bloomberg.com/news/articles/2018-06-16/supply-chain-caught-in-crossfire-of-u-s-china-trade-conflict.
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“Under Section 301 Action, USTR Releases Proposed Tariff List on Chinese Products | United States Trade Representative.” Countries & Regions | United States Trade Representative, 1 Apr. 2018, ustr.gov/about-us/policy-offices/press-office/press-releases/2018/april/under-section-301-action-ustr