Clients with China interests are wondering where to hedge their bets, given these circumstances of uncertainty.
To offer insight, CMD President Paul Stepanek recently joined a panel hosted by CliftonLarsonAllen along with other experts to discuss the fallout and future. Panelists included international trade law attorney Matthew Bock of Middleton & Shrull and government relations expert Omar Nashashibi of The Franklin Partnership.
Matthew shared, “In looking back at 2018, we can now see that Trump was serious about changing the way the US does business with other countries. For a lot of our clients, they were hit by both rounds of tariffs. Many didn’t see it coming, and it’s been a big wake up call.”
Even without the increase, tariffs are making the supply chain bumpy for manufacturers. But are tariffs only the beginning? Omar thinks the next step could be quotas. He said, “Tariffs shook the system, but it seems as though the groundwork is in place to implement quotas. Another lesson learned with tariffs is that Trump is using them as a means to renegotiate trade deals, including the new NAFTA.”
First, it’s clear that China is and will continue to be a hub for manufacturing facilities. That’s not going to change even with tariffs. Tariffs may begin to impact the Chinese private sector. When this happens, the country is likely to spend big to pump up the economy. This could include infrastructure spending on high-speed rail or accelerating focus on their electric car agenda. If domestic spending doesn’t pick up the slack, the Chinese may look at other means of currency engineering.
Five Tariff Mitigation Strategies
Many are wondering to do in the meantime. Here are five strategies shared by experts on the panel.
1. Wait and See
Most manufacturers are moving along with business as usual while keeping an open eye to what happens next. For those that have been working in China for decades, they are continuing to do what works for them. Paul said, “We’ve seen tariffs have little impact on a business to the worst of companies filing for bankruptcy. Now is the time to be fine-tuning your operations and asking questions.”
2. Tariff Engineering
“Tariff engineering” is another strategy, explained by Matthew. He said to ask these questions, “Can you remove the product from classification? Are you even using the right classification?”
3. Apply for Exclusions
Matthew offered insight on this strategy, “Companies can also apply for exclusions to the tariffs if they have a compelling reason that they cannot source domestically. Simply, saying that the tariffs are hurting your bottom line won’t cut it here. There have been tens of thousands of exclusions filed, but the success rate is very low.”
4. Tight Inventory Management
Other tactics include reducing your exposure, warehousing materials early (before the tariffs increase), and balancing your imports with exporting goods to China. If you do export to China, you may be able to get a refund for the tariffs paid on imported goods.
5. Plan B Outside of China
Another option is to get away from China being the country of origin. Sub-assembly happens in China then it goes to another country for final assembly before shipping to the US. Paul relayed, “Our experience with manufacturers has been that they are only looking for a Plan B before the tariffs were even in place. Tariffs alone are not making companies run from China.”
There are alternatives to China in Southeast Asia, but it’s hit and miss. The costs are often on par with China or a little bit less. Quality control and efficiencies are in place with most other Southeast countries like Vietnam, the Philippines, Malaysia, Thailand, and India.
Paul added, “If you are considering a second source, it does take time to ramp up. In about six months, you can expect product. At the one-year mark, you should be able to turn the volume up then by year two, you would have meaningful volume.”
To get started in one of these countries, you can’t just send an email or make a call. There has been a huge increase in interest in these counties, so you really have to go there in person to get a response.
What’s next in 2019?
The US and its current administration have been, since the beginning, trying to rewrite the rules on trade. Omar commented, “The focus for much of 2019 will be…what would replace tariffs? Our message to lawmakers in Washington on behalf of manufacturers is that quotas are much worse than tariffs. Either of these create ripple effects throughout a business’ supply chain.”
There is also the concern of what increased tariffs may do to the stock market—could it take another tumble? Then there’s the fear of a coming recession by the end of this year or 2020. As the landscape changes, we will keep you updated accordingly.
Until then, we invite you to read our eBook, “2019 Jump Start Guide.” Download it today to get practical advice for managing your China interests.