A Tipping Point in the Trade War? 4 Tips to Consider Now.
While reassured by a recommitment to the U.S.-China trade agreement, companies still need to be vigilant in protecting their supply chains from pandemic aftershocks – and election-year unpredictability.
Think back – way back – to January 2020. The U.S. and China signed the Phase 1 trade accord, agreeing to roll back tariffs, expand trade purchases and renew pledges on intellectual property.
Many global shippers felt encouraged by the prospect of improved trading days ahead. And various American businesses welcomed the chance to equalize their trade footing and to counteract China’s intellectual property practices.
While many companies continue to manage through the hefty impact of the various trade remedy measures of Sections 201, 232, and 301 of the Trade Act, there was hope that Phase 2 of the trade deal between the U.S. and China would signal even better prospects.
But then the coronavirus claimed center stage. Its supply-chain side effects dominated the global marketplace, turning it into a de facto PPE-and-sanitizer delivery system – presenting shippers and manufacturers with an entirely different set of obstacles.
Many global manufacturers and suppliers pivoted to face mask production. French winemakers turned fine wine into the finest hand sanitizer. And American companies in search of these supplies turned to new sources globally, navigating the choppy waters of U.S. Food and Drug Administration (FDA) importing requirements and those of other government agencies in the process.
The administration’s 90-day deferral of import tax payments offered temporary relief to some companies. But for nearly eight months, manufacturers and shippers remained in a state of suspended apprehension when it came to the future of trans-Pacific trading.
Finally, on August 24, U.S. and China trade representatives officially recommitted to carrying out Phase 1 of the trade accord.
The chessboard today
Now, as the U.S. presidential election comes into view, the spotlight is once again on the global chessboard of tit-for-tat tariff moves, amplified by the Trump administration’s desire to counter the practices of U.S. trade partners and address the U.S. trade deficit.
As part of a longstanding dispute over aircraft subsidies, the Office of the U.S. Trade Representative (USTR) initially imposed 10% tariffs on Airbus aircraft – but increased that to 15% in March. Also announced this August, the USTR decided to maintain 15% tariffs on Airbus aircraft and threatened 25% tariffs on other European goods, such as food, wine, and spirits, including a tariff on imported French makeup and handbags, in retaliation against France’s Digital Service Tax (DST). However, no tariffs have been imposed yet as France has not implemented DST.
Trade winds have been equally tempestuous on both sides of the U.S. border. After the U.S. imposed tariffs on aluminum from Canada, Canada retaliated with its own trade penalties.
And the new U.S.-Mexico-Canada Agreement, which took effect this past July, was reassuring for many companies that even dubbed it the new NAFTA. While some North America cross-border shippers are still grappling with compliance and weighing potential trade gains, its changes to cross-border trade overall have been well received by many businesses.
Now, businesses are speculating on the potential supply chain effects in the months to come. Will U.S. tariffs on a long list of Chinese goods be rolled back during the next round of negotiations? That has become the $350 billion question.
Many answers, and potential changes, hinge on the upcoming presidential election.
Be ready for new rollouts
You may recall that the USTR announced – and imposed – some section 301 tariffs quickly after their announcement. While tariffs were suspended on $160 billion in Chinese goods (List 4B) – pending the success of Phase 1 of the agreement – it’s not known if they are suspended indefinitely or if these tariffs could again come into play, further spiking import costs.
Although most believe a swift post-election reversal is unlikely, it’s easy to see the two main party presidential nominees have different strategies on how they would carry out international trade and tariffs post-November. For that reason, the safest course is to be prepared for any outcome. Here’s what you should consider in the coming months to help your company prepare:
1. Speak up about exclusions
So far, the USTR has granted about 2,000 exclusions related to section 301 tariffs, and over 75 exclusions from other section tariffs – many in response to importers’ petitions. In fact, the USTR has announced exclusions to multiple product lists. And while comment periods are over for now, it’s important for companies to voice their opinion for or against tariffs as they’re proposed.
The refunds are retroactive, so some importers stand to gain millions in refunds for previously paid duties.
Since an early exclusion request can produce earlier duty exclusions, vigilance in monitoring and applying for exclusions is vital. But the submission process can be lengthy and complex, requiring businesses to record and report all import product categories that relate to each applicable tariff number or specific product. This is an instance where having a knowledgeable customs broker and trusted advisor, who you can rely on to help and provide expertise, can come in handy.
2. Reconsider drawback and deferment programs
The trade programs you ruled out in the past could be a financial boon now. For example, it may be worth revisiting duty drawback programs, which provide a refund on previously imported goods that are subsequently exported, so consider your current import/export balance. Also, consider if 301 tariffs were to subside, would continuing the program still be practical for your supply chain?
Because formal application to this program can be quite rigorous, consider handing this task off to a 3rd party expert.
You may also want to reconsider bonded warehousing or using a foreign trade zone. Companies that produce major equipment or large machinery, for example, often experience significant lag times between production and sale – incurring duty payments of $200,000 or more per machine.
If you’re not planning on selling major equipment over the next 6 months, it might make sense to import the product into a foreign trade zone and deploy duty deferment tools.
3. If you haven’t already, explore alternative sourcing or production options
The pandemic has reminded companies that diversification is key to business resilience. In practice, that may mean onboarding alternative suppliers or preparing to change production venues in the event of a coronavirus outbreak.
To protect margins as the price of Chinese goods, materials and tariffs climb, many U.S. businesses are turning to lower-priced suppliers in Vietnam and Malaysia. Not only do imports from these countries allow for the avoidance or reduction of tariffs, they can also provide the assurance of a ready workforce and steady material supply.
4. Above all, stay informed
Like most business processes, proficient supply chain management hinges on your ability to manage countless moving parts, and plan and anticipate likely change.
During a global pandemic, amid an economic downturn, and in an election year, change may be the only thing we can predict. Efficiency and preparedness have never mattered more.
Stay current on policy changes and new trade regulations. Consult the USTR website often. Sign up for automated logistics updates and trade advisories. Stay close to your trade association, like the National Association of Manufacturers (NAM) and other industry-specific groups. And turn to a proven 3PL before your internal logistics department becomes overwhelmed.
And then, fasten your seatbelt as we navigate the many changes on the horizon.