How will Chinese tariffs affect manufacturing?
Thursday, April 19, 2018
It's often said that in war, there are no winners — and in trade wars, that axiom tends to ring particularly true. In an escalation that leaves manufacturers caught in an unenviable position, the administration's struggles with China are starting to lap at the edges of the loading dock.
Ostensibly, a move to bolster domestic production of goods like steel and aluminum, President Donald Trump's 25 percent steel tariff salvo earlier this year has now earned a troubling response from China in the form of their own list of American import tariffs.
The real victims deal in bulk
Trump is playing a dangerous game with one of the world's largest producers in the trade ware. While logic would dictate consumers would pay the price, it's really factories bearing the brunt.
By excluding popular consumer goods like clothing, shoes and mobile phones, the administration has put manufacturers in the crosshairs, with raw material demands and international fabrication needs that can't afford to get financially caught up in international trade squabbles. China knows it is in a far stronger position to hurt American commerce than vice versa, with American companies having grown dependent on cheap goods and cheap labor from the country.
Volatility could spell future disaster
Diplomacy has been put to some eclectic tests in the last few months. With decision-makers tense and anxious about what either side may do or say next, forecasting is even more of a challenge than usual. Companies are more likely to be conservative in their ordering estimates, looking nervously at escalating international tensions.
Because tariffs are often rolled out erratically, there's a constant concern that yesterday's ship containers or tomorrow's preorders could end up triggering a new, expensive tariff en route, decimating margins and throwing off carefully-planned execution from a supply chain standpoint. This all has a cumulative effect, and cold feet now could spell a dip in the market months down the road.
Don't assume your product is safe
While some Chinese business strategies are extremely linear, don't expect them to target the obvious. Take sorghum, for instance — a major source of livestock feed for American cattle, sheep and more — it also feeds plenty of animals in China, and forms the base of a popular liquor there.
By applying a 179 percent tariff, China disrupts the supply and demand chains between the two countries, leaving the U.S. with a theoretical surplus of a material that could rot, mold or mildew while it's repurposed. The fields, equipment and farmhands dedicated to that sorghum harvest will also suffer, either via layoffs or the added labor of crop-switching. A small "wave" in the grain that spells big trouble for the U.S., this is the first warning shot fired by China, but it may not be the last.
How can manufacturers prepare?
Supply chains can't afford to wait for the other proverbial shoe to drop, particularly if it's a Chinese one. The need to lock down domestic sourcing has never been more evident. Unfortunately, the sheer volume produced by China — and bought by China — isn't easily matched.
Stateside producers need to carefully choose customers that will earn them the highest margins, which in turn drives frenzied competition for innovation and first-to-market speed among their potential clients. Ultimately, this does have the ability to positively impact the U.S. economy, but likely not in a lasting, stable way for at least a few years.
Take a good, long look at where your company is sourcing raw materials, components or finished goods. If you aren't proactive about setting up a domestic backup now, you could find yourself on the unattractive end of the next sky-high tariff from China.
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