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American and Chinese Consumers are Shopping Like There’s No Trade War

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American and Chinese Consumers are Shopping Like There’s No Trade War

What Trade War?

If shoppers are worried about the U.S.-China trade war, it’s not showing up yet in measures of their buying confidence or holiday retail sales.

We are more than a year into dueling tariffs between the United States and China, and we know that tariffs add costs to supply chains, but how much of those costs are passed on the consumer depends on decisions by manufacturers, buyers and retailers as well as the “import-intensity” of the products we buy.

So far, if prices have risen on consumer products, it’s not dampening American appetites to buy. And Chinese consumers don’t rely to a great degree on imports in general, so China’s retaliatory tariffs on U.S. imports don’t appear to be the biggest factor in their personal spending either.

Spending and the U.S. Economy

At the end of the third quarter, the Bureau of Economic Analysis reported that U.S. consumer spending was on track for $14.67 trillion this year, reaching an all-time high.

Personal expenditures make up 68 percent of the U.S. economy, and it’s consumer spending that’s keeping growth of our economy from slowing further. (By comparison, our “negative net exports” or total exports minus total imports, comprise five percent of U.S. GDP.)

Two-thirds of spending is on services such as housing and health care, which are largely impervious to the trade war. The remaining third is spent on non-durable goods such as clothing and groceries, and on durable goods such as cars and appliances.

Brimming with Confidence

The Conference Board’s Consumer Confidence Index is a monthly report on consumer attitudes and buying intentions. Despite analysts’ expectations that concerns related to trade disputes would cause U.S. consumers to become cautious, the index shows a trend of rising consumer confidence since 2009.

Breaking Records Online

Retail sales figures tell us whether that confidence is translating into spending. Indeed, American consumers are still filling their real and virtual shopping carts to the brim.

According to the National Retail Federation (NRF), more than 165 million people were expected to shop over the five-day Thanksgiving holiday weekend. Online sales for last holiday weekend are already being reported and appear to be breaking records.

Americans spent $7.4 billion online on Black Friday, up 19.6 percent from last year. We spent another $3.6 billion on Small Business Saturday, up 18 percent from last year. And while surfing from our desks at work, Americans spent $9.2 billon on Cyber Monday, up 16.9 percent from last year. More than half of Americans surveyed by NRF said they start their holiday shopping the first week of November. Online sales for November came in at a whopping $72.1 billion.

Chinese Consumers Outspent Us All

Cyber Monday is so successful in driving online sales in the United States that Canada, the UK and Germany have all adopted Cyber Monday to kick off their holiday shopping seasons. Australia launched “Click Frenzy” day. The Netherlands’ equivalent is linked to the December 5 Sinterklaas holiday.

But hands down, the world’s largest 24-hour online shopping day goes to China’s Singles Day held on November 11 annually. This year, Chinese online shoppers bought $38.3 billion on Singles Day alone. Think of it this way – that’s more than $1 billion every hour.

This is not a one-day phenomenon. If you were to overlay China’s consumer confidence index with that of the United States, they would look similar. Despite being slightly lower for China and with a dip in 2016 that we didn’t see in the United States, consumer confidence rose between 2014 and remained high in 2019, trade war notwithstanding. In mid-2019, retail spending in China surpassed retail spending in the United States for this first time.

Retail Spending in China Exceeds US

Beyond the Tariff Headlines

Financial analysts are watching China’s consumer spending carefully amidst the trade war. Many said this summer’s drop in car purchases was a harbinger that shoppers are growing wary, but the slowdown also coincided with the end of big discounts. Others say retail sales actually underestimate the strength of China’s overall consumer spending because those numbers offer just a partial picture of personal spending on goods and services, which include large expenditures on healthcare, education and leisure activities.

For this reason, some prominent Chinese investors are nonplussed by the Trump Administration’s tariffs. They look at a decline in certain manufacturing and exports as a structural shift in China’s economy – an “economic rebalancing” – that began long before the current trade war. In their view, household consumption will drive most of China’s future economic growth, and China’s consumer spending is not very dependent on imports.

According to World Bank data, consumer imports comprise just 13 percent of China’s overall imports. Most of the large multinational consumer goods companies now produce in China for the Chinese consumer. According to McKinsey analysis, across key consumer categories including personal digital devices and personal care products, Chinese brands have become credible competitors to foreign brands, acquiring greater market share – and shielding Chinese consumers from tariffs on U.S. imports.

Consumer Spending to Play Bigger Role in China’s Growth

Consumption is playing a much larger role in China’s economic growth than just a few years ago. In 2011, consumer spending accounted for less than 50 percent of China’s GDP growth. Last year, it accounted for 76 percent of GDP growth, outpacing both manufacturing investment and exports.

In fact, China’s total exports of goods and services as a percentage of GDP has dropped from a high of 36 percent in 2006 to 19.5 percent in 2018, with exports to the United States at just four percent.

That why China’s central bank is also monitoring consumer sentiment. In recently released results from its biennial survey of 18,600 residents in 31 provinces, nearly 80 percent of respondents expressed caution about spending and a preference for saving.

China’s politburo has directed the government to focus on turning up the tap of consumer spending by China’s growing urban middle class and to kick-start spending in rural areas. The government already cut personal income taxes and began offering subsidies for large ticket energy-saving home appliances and energy efficient vehicles. The government is expected to announce more measures in the coming months designed to goose household spending.

WB Chart Title China Exports as % of GDP

Business is Ill at Ease

Economists worry the trade war is causing a drag on economic growth, not just in the United States and China but globally. Businesses say the trade war with its escalating tariffs is a “wild card” in their planning. Uncertainty is causing them to hold back on capital expenditures.

It’s looking less likely the United States and China will agree to a “Phase 1” trade deal by the end of the year, but even if they do, the partial deal may not be enough to restore business confidence. If businesses continue to hold back on investments and reduce inventories, it could start to negatively impact jobs and incomes. This may be particularly true in China where a larger portion of the population is dependent on manufacturing jobs.

Consumers Keep Calm and Shop On

Meanwhile, holiday shopping is in full swing. Some holiday merchandise is already subject to tariffs on Chinese imports, but the tariffs the United States plans to impose on December 15 will affect many more consumer products. If imposed, buyers and retailers will have to decide how much cost to pass on to their suppliers and consumers in the coming year.

For now, shoppers are keeping calm and shopping on with resilience. But as a last line of defense against slowing growth, their confidence can be fragile. Where the trade war is concerned, buyer beware.

____________________________________________________________

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

China

Amid US-China Trade Battle, Here is how America can Remain the World’s Strongest Economy

The Communist Party of China has laid plans for a century of unlimited Chinese power and, with it, the end of the American era. However, we still can — and must — bet big on the future of American economic power. The best antidote to China’s ambitions is to ensure America’s continued economic and technological preeminence.

Far too many strategists, investors, and policymakers accept China’s economic preeminence as an inevitable outcome, given the country’s enormous population and potential for growth.

As the business community looks toward a “partial trade deal” to unwind tariffs and reduce trade hostility between the world’s two largest economies, we must understand that non-negotiable problems in U.S.-China relations will accelerate if China closes the gap with the United States in terms of economic and technological power. With the right strategic mindset and a focus on domestic productivity, America can not only win the economic and technological contest but also turn the tide in the U.S.-China competition for global power.

China’s bid for global power is built on its economic ascendency, which is based on engagement with the United States and our allies. Chinese companies are capturing global markets and climbing the ranks of the Fortune Global 500 by taking advantage of stolen or coerced foreign intellectual property and state-orchestrated market distortions. The Communist Party is converting China’s technological power into a dystopian surveillance state and a military that is focusing its capabilities on the United States and our partners.

Chairman Xi Jinping calls regularly for Chinese forces to “prepare to fight and win wars,” while converting civilian industrial technology into military power through “civil-military fusion.” Meanwhile, China’s current account surplus is employed for global influence, buying “strategic partners” with intercontinental projects like the “Belt and Road Initiative” and state-backed acquisitions of foreign firms.

U.S.-China competition is likely to be the hardest geopolitical contest in generations — but it is a contest that the United States can win if we focus on the right objectives.

The People’s Republic of China is a challenge to America’s values and concept of world order. U.S.-China competition is likely to be the hardest geopolitical contest in generations — but it is a contest that the United States can win if we focus on the right objectives. So, where do we go from here?

Focus on GDP

The first step must be a focus on accelerating U.S. productivity growth. U.S. productivity growth need only increase from 1.3 percent a year to 2.5 percent for U.S. GDP to remain ahead of China’s for the entirety of the 2020s, the decade in which many expect China’s economy to surpass America’s.

By 2030, economic leadership will be easier to maintain as China’s demographic problems set in. Such a productivity increase is realistic, given that productivity growth from 1995 to 2008 was higher than 2.5 percent.

Protect America’s edge

The second step is to preserve our edge in advanced and emerging technologies. America must remain ahead of Communist China, not only in hard sciences, but also in the actual production of advanced goods and services.

If America competes against China only through soybean and oil production, we will fail to counter China in advanced industries such as robotics, semiconductors, aerospace and biopharmaceuticals. China is gaining in these and other technologies and industries and could eventually have a decisive advantage over the United States.

As Alexander Hamilton warned 200 years ago, America can’t be great if it is a “hewer of wood and drawer of water.” We must out-invent and outproduce China in advanced technology and industrial goods.

Maintaining U.S. advantage will require collaboration between government and corporations towards national goals in science, engineering and industry. This approach has long served our nation in times of international struggle and led to lasting commercial and national security breakthroughs.

New and Big

In order to attain these goals, Washington must think new and big. New in the sense of a bipartisan consensus that productivity growth and technological competitiveness must be national priorities.

Big in the sense of big and bold proposals. Here are three: First, implement a robust research, development and investment tax credit that will stimulate innovation and investment on American soil. Second, establish a series of well-funded “moonshot” goals to ensure American leadership in emerging industries such as advanced robotics and quantum computing. Third, develop a national productivity strategy that will take the best ideas of government and industry and focus on building the next $10 trillion in annual U.S. GDP by 2030.

Half a century ago, under the leadership of President John F. Kennedy, America faced a Communist superpower that believed that it would “bury” the United States, much as Chinese Communist leaders today believe that the 21st century belongs to China. Kennedy reminded us then that America would “bear any burden” and “meet any hardship” to prevail in that consequential time.

In the end, it was the power of the American economy, the power of American technology, and the power of American industry that brought victory over our ambitious foe. We must unleash these forces once again, wrestle them into national service, and build on toward the greater good — an American era that can and must prevail.

__________________________________________________________________

Dr. Jonathan D.T. Ward is the author of “China’s Vision of Victory” and founder of Atlas Organization, a strategy consultancy on US-China global competition. Follow him on Twitter @jonathandtward

Dr. Robert D. Atkinson is the president of the Information Technology and Innovation Foundation and the author of “Big is Beautiful: Debunking the Mythology of Small Business.” Follow him on Twitter @robatkinsonITIF..

This article originally appeared on FoxBusiness.com. Republished with permission. 

India

INDIA TARIFFS COULD DENT GAINS FROM CALIFORNIA’S BUMPER ALMOND CROP

Celebrating Diwali in India with California almonds

Fall festivals and the wedding season are already ramping up in India. There’s Janmashtami which celebrates the birth of Lord Krishna, the festival for Lord Ganesha, the elephant-headed God of the Hindus, and Diwali, the famously elegant festival of lights, and many more throughout the various regions of India. Almonds are a popular gift for such occasions.

The timing is perfect for California’s almond growers. Across California’s lush green valleys, almonds are being harvested from orchards, loaded on trucks and delivered to mills where the essential nut will be separated from its shell and hull. Almond traders in India await the arrival of the best quality shipments for the festival season demand beginning early September.

Almonds have deep roots in India

Almonds in India date as far back as prehistoric times. Ancient Indian Sanskrit texts on Ayurveda, the Indian traditional medicine, detail the role of almonds and other nuts in providing health benefits. Almonds were exclusive and prestigious health supplements for the rich and royal during the Mughal rule from the 15th to the 19th century.

To this day, consuming raw almonds on a daily basis as a standalone morning chew, added to milk shakes, as oils or as a garnish to dishes, is widely prevalent in India and elsewhere on the sub-continent.

Indian consumers choose from types of almonds available in Indian street markets and grocery stores – Mamra, Gurbandi and California almonds. California almonds command a majority market share due to its wide availability and lower price. Sweeter in taste, California almonds are favored in Indian cooking and garnishing.

Tariffs could dampen California’s bumper crop

California produces 80 percent of the world’s almonds. Americans consume just over a third of California’s harvest. The remaining 67 percent is exported to other countries. California almond growers are on track for a bumper crop this year, producing a record 2.5 billion pounds of almonds, which would be a nine percent increase of over last year’s crop.

TradeVistas- Global almond production

California growers have reason to worry about access to one of their biggest export markets. The Indian government increased tariffs on U.S. shelled almonds by 20 percent and non-shelled almonds by 17 percent in June. The move came days after the Trump administration announced plans to remove India from eligibility for key trade privileges under the U.S. Generalized System of Preference (GSP) program. India was the biggest beneficiary under the GSP program, exporting $5.6 billion worth of Indian products to the United States duty-free in 2017.

The latest tariff increase by India comes on top of an increase in customs duties last year and in addition to a 12 percent tax the Indian Ministry of Finance imposes on both domestic and imported almonds. The U.S. Department of Agriculture forecasts the increased cost will cause a five percent drop in U.S. almond exports to India, impacting the 6,800 almond growers in California, who are mostly small to medium-size, family-run enterprises.

According to a study by the Almond Board of California, the almond industry generates more than 100,000 jobs in California, mostly in the Central Valley. Almond growers are California contribute about $11 billion annually to the state’s economy.

“Tomorrow Begins Today”

India has become such an important market for California almond growers that the state almond board has an office in New Delhi with a $5.5 million annual budget.

In July of 2015, the Almond Board of California launched a successful marketing campaign in India, promoting the lesser-known nutrition benefits of almonds such as heart health, weight management and diabetes management.

The campaign, called “Tomorrow Begins Today,” reached 4.05 billion broadcast impressions and is credited with helping grow the snack category by 100 percent.

TradeVistas- Export destinations for U.S. almonds

Tariffs are a tough nut to crack

In the face of new tariffs and competition from Vietnam, Hong Kong, Australia and Chile, California growers need to crack open new markets.

Unfortunately, the tariff wars are being fought in another of California’s important export markets – China. In 2018, China imposed a 50-percent retaliatory tariff on almond imports from the United States. U.S. exports declined by 33 percent from August 2018 to April 2019 compared with the same period of the prior year, according to Almond Board of California.

Higher tariffs could ultimately cost major U.S. fruit and nut industries over $2.6 billion per year in exports, according to a report by Daniel A. Sumner, an economist with the University of California Davis’ Department of Agricultural and Resource Economics. The economic blow could rise to as much as $3.3 billion because of lost market share overtaken by lower-priced alternatives from competing exporters.

Australia has taken advantage of their free trade agreement with China to expand exports. The free trade agreement between the two countries grants zero tariffs on almonds and other commodities starting January 1, 2019. Australian producers recorded a 20-fold increase in exports to China this year, according to the Australian Board of Almonds.

Nothing to celebrate

Retaliatory tariffs imposed by India will shortchange the gains hoped for by California almond growers who are expecting a bumper harvest this year, but who also face tariffs in another top export market: China.

Indian importers might look for other sources but no other global exporter can match the volume of production by California’s almond growers. As long as India’s appetite for sweet almonds continues to grow, Indian consumers will pay a higher price for U.S. almonds at their upcoming celebrations.

PBhatnagar

Pragya Bhatnagar is a Research Associate with the Hinrich Foundation where he focuses on International Trade Research. He is a Hinrich Foundation Global Trade Leader Scholar alumnus, earning his Master’s degree in International Journalism, specializing in Business and Financial Journalism, from Hong Kong Baptist University. He received his bachelor’s degree in Economics from Lucknow University, India.

This article originally appeared on TradeVistas.org. Republished with permission.

expert logistics

8 Strategies to Navigate Trade and Tariff Volatility

A steady drumbeat of tariffs, changing trade policy and an overall environment of uncertainty are leading many manufacturers to take a “wait and see” approach to investment and expansion. Companies are reassessing spending plans, finding it challenging to adjust how they do business on the fly in response to unsettled trade policies.

Manufacturers have seen the effects in the cost of raw materials, which has led customers with long-term pricing agreements to push back. Some are finding they need to negotiate changes to contract terms, while others are faced with locating new supply sources. However, these are difficult changes to make, and companies are unsure whether to push forward as uncertainty over tariff amounts, origin, timing and related retaliation persists.

As a result, manufacturers are hesitant to commit to large investments or expansion plans unless they can be certain they’ll see a long-term payoff. Whether manufacturers need to change their supply chain strategy, find alternative sourcing or re-source materials, they don’t feel confident implementing these initiatives without more evidence of stability in trade policy.

While the next round of tariffs may be out of manufacturers’ control, they can be proactive in preparing for changing trade policies by considering these steps to weather the storm:

Renegotiate rates with suppliers
Even if a manufacturer’s products aren’t direct tariff targets, they may include affected materials like steel and aluminum, resulting in higher cost of goods and materials. Now is the time to renegotiate terms with suppliers and try to lock them into long-term deals with favorable pricing. It may be easier said than done in many cases, particularly in cases where suppliers are using the assessment of new tariffs as an opportunity to raise prices. It’s critical manufacturers incorporate key protection clauses to avoid major price spikes that would be damaging to their business model when entering into an amended, extended or new supply contract.

Evaluate profit margins
With tariffs increasing the costs of goods and materials, it’s imperative for manufacturers to examine which costs they can absorb and which they’ll need to pass on to customers. This process involves understanding where a manufacturer might offset material cost increases with other efficiencies or cost rationalization, and the level of cost increase customers will tolerate. In customer contracts that have price escalation clauses or limitations, manufacturers may need to attempt to renegotiate clauses that prevent recovery of tariffs paid.

Consider free-trade zone opportunities
Too often, manufacturers overlook available opportunities provided by free-trade zones. The free-trade zone option allows companies to develop a product, then export it to a U.S. customs territory or foreign destination, potentially bypassing any tariffs on the product if it has been transformed.

Establish a dedicated trade and customs compliance group
Consider forming a trade compliance group with clear governance. Charge this group with developing strong “what-if” capabilities to understand the impact of various tariff and trade scenarios, including inventory and supply chain strategies, sourcing alternatives and modeling multiple data sources.

Take advantage of exclusion processes
When granted, exclusions apply retroactively to the date a tariff became effective. The Commerce Department reviews exclusion requests for Section 232 Steel and Aluminum tariffs, while the United States Trade Representative (USTR) provides a mechanism to request exclusions for Section 301 (China) tariffs. The Commerce Department has shown a willingness to provide exemptions in certain cases, particularly since March when the tariffs of 25 percent on steel and 10 percent on aluminum went into effect, making it all the more important for manufacturers to evaluate opportunities for exclusions.

Assess imported product classifications
Each product’s classification dictates whether or not it is included in the tariff order. Whether there is an accidental misclassification, an intentional misclassification by the overseas seller or a product that falls within a gray area, an audit of the classifications of imported goods will help manufacturers elude surprises and potential liabilities – and could even result in the avoidance of higher tariffs.

Import sooner versus later
Manufacturers with source material subject to the 10 percent tariff may want to procure more before the tariff leaps to 25 percent.

Seek out alternative sources of supply
Manufacturers should explore alternate supply sources to shield their business from the disruption caused by tariffs. They should be prepared to onboard new supply partners quickly – a process that might include partner profiles, legacy systems, custom coding and new systems to securely exchange order, invoicing, shipping and payment data.

Time will tell the extent to which new tariffs and trade policy will impact the manufacturing industry. Regardless of today’s uncertainty, manufacturers should take steps now to prepare and protect their business interests amid the shifting trade environment.

Russia

U.S. HITS RUSSIA & VENEZUELA WITH TOUGHER SANCTIONS

The Trump Administration on Aug. 2 imposed a second round of sanctions on Russia in response to Moscow’s 2018 use of chemical weapons in the United Kingdom to poison a former Russian spy. Three days later, the White House intensified pressure on the administration of Nicolás Maduro by imposing broad economic sanctions against the Government of Venezuela, a move that could escalate existing tensions with China and … wait for it … Russia!

So much for collusion.

For the seed that planted the intensified economic pressure on the Kremlin, you have to go back to March 2018, when former Russian double agent Sergei Skripal (a British national) and his daughter were poisoned with Novichok, a military-grade nerve agent developed in the Soviet Union, at their home in Salisbury, England. 

The UK determined that the Russian government was responsible for the attacks and, in response, the U.S. expelled Russian officials, closed the Russian consulate in Seattle and, in August 2018, announced sanctions that impacted arms sales and foreign assistance to Russia. The second round of sanctions concern restricted export licensing and loans and other financial assistance from U.S. banks and international financial institutions to Russia. 

As was the case with Russia, the Venezuela sanctions came as a result of a late-night Executive Order by President Donald Trump, who blocked all property, and interests in property, of the South American country’s government that are within the jurisdiction of the U.S. The Secretary of the Treasury is also authorized to impose secondary sanctions on non-U.S. persons who materially support or provide goods or services to the Venezuelan government. 

Trump’s order accuses the Maduro regime of “human rights abuses,” “interference with freedom of expression” and “ongoing attempts to undermine Interim President Juan Guaidó and the Venezuelan National Assembly’s exercise of legitimate authority in Venezuela.”

2019 Technology Drivers Revealed in Dynamic EMS Report

A recent report from UK’s Dynamic EMS highlights the ups and downs within the supply chain and component manufacturing during 2018. From consistent acquisitions and mergers to an evergreen political environment and increased technology, the report confirms 2018 consisted of more positive than negative outcomes and predicts trends to look out for during 2019.

A key factor identified in 2018 that will impact 2019 is the  involvement with three Chinese companies, YMTC, Innotron (Hefei Chang Xin) and JHICC’s trial production of DRAMs and NAND flash. It’s reported mass production to China’s first domestic chip will occur well into the first half of the year.

EMS landscaping was confirmed with a 5 percent growth in the European regions, based on the 2017 numbers. Dynamic EMS confirmed a total of 6 percent growth in revenue paired with consistent development and customer market wins.

Technology such as Fintech, IOT, BIOT, Augmented Reality, AI, and other automation initiatives are predicted to continue demanding increased development and advancement for operations. Additionally, the company outlined 3D component printing and trade tariffs with China on the forefront for the future of 2019. More specifically, the company will carefully watch China’s involvement as a component supplier.

Source: Dynamic EMS

 

 

How Smaller Businesses Are Impacted By The New Tariffs

The US Government announced higher tariffs on certain goods imported from China in May 2018. One of the stated objectives was to assist the aluminum and steel industries that had been hit hard by cheaper Chinese imports and facilitate an increase in domestic production. Bloomberg has recently reported that as a result of the tariffs, US companies paid an additional $1 billion on technology products in October than the year earlier.  Not surprisingly, there has been a significant reaction to the increased costs resulting from the tariffs. The primary focus of experts has been the tariffs’ impact on larger businesses, such as Caterpillar, Harley Davison and the auto industry; however, smaller businesses that account for a significant amount of commercial transactions have also been impacted. It is essential to understand the impact of the tariffs on these smaller businesses.

We spoke with several small to medium-size businesses who’s supply ranges from retail to construction, providing home goods, pet supplies, and plumbing to name a few, many of which are being hit by the tariffs.  Note that none of them deal with wholly steel or aluminum goods, but are hit indirectly through parts, that play a large part in the goods they manufacture and/or distribute.

One of the most consistent comments from these businesses was the lack of notice in regards to timing and costs. The majority of the businesses had goods on the water when the tariffs were imposed; often these Items were being shipped to complete fixed-price purchase orders. Overnight these companies were hit with a 10% incremental cost, which could not be recovered through price increases.  Because goods had to be released from port for shipment, these companies could not take the risk of delay and therefore had to pay the increased price. Many of these businesses had a tight gross profit margin, and the unanticipated cost increases resulted in a declination in their gross profit margins.

So how much of the tariff was passed onto the customer? We were expecting to hear that the large retailers would refuse to accept price increases, or perhaps begin working with other suppliers.  Surprisingly, the majority of these companies have been strongly supported by their customers; many of whom have had long relationships with their customers; however one must not forget that alternative suppliers may be willing to undercut the products’ price points to gain market share. Because retail has its own struggles, their customers may find alternative sourcing at reduced price points enticing.

Startup businesses are struggling the most because typically they have little-negotiating power and desperately need sales to sustain themselves.  One company, a start-up, advised that it is actively looking for US vendors to produce their products to avoid the price increases that have had a devastating effect on their business.  Whether or not they can effectuate price hikes, their gross profit margins will be reduced. Overall, as expected, the consumer will take the fall.

Many companies have taken steps to secure their products from alternative countries, which has proven to be difficult and expensive. Additional costs included multiple trips, to find the right supplier who can duplicate the Chinese manufacturers’ attention to detail. And since so many competitors are seeking alternative sources of supply, factories can closely vet new customers. Larger businesses are attempting to identify alternative supply sources and the smaller firms, are winning this battle.  Larger businesses are placing larger orders and don’t have the need for separate packing requirements. Small businesses feel more effort is being made, and higher costs are being realized to develop alternative sources for the production of their product. Establishing these new relationships are eating into profits.

Currently, Indonesia, Vietnam, Cambodia, and Thailand are the “go to” locations. Many manufacturers in these countries offer less expensive products than China, but have longer lead times and a lack of skilled labor resulting in quality control issues. Manufacturers in these countries cannot produce at the same speed, and quality as China with many commenting that although final assembly is being diverted, the source of raw materials is likely from China, especially in the apparel industry.

To add more concerns, logistic infrastructures of these countries struggle in contrast to the Chinese.. Ports cannot cope with the expected increase in freight shipments and the extended fulfillment time frames increase the cash cycle timeline.

We asked those we spoke with, “what keeps you awake at night?” to which many responded that it is the fear of the unknown. While many companies remain optimistic, they cannot sit back and wait to see how the trade imbroglio unfolds as it is their livelihood.  If a treaty between the US and China is not consummated and more tariffs are imposed, some companies will have no choice but to close their businesses. And the imposition of, or changes relating to tariffs can change quickly and not always for the better.

The reduction in orders and the inability to purchase inventory is affecting workloads, margins and eventually on staffing.  Some of these businesses cannot sustain their employment levels and may have to make staff reductions.  We know that nobody wants to lay off staff, but to a small business, the pain of doing this gets personal, especially in companies with few employees.

While the future is a bit unknown in regards to how tariffs will impact small and medium-sized businesses many companies are adjusting and making hard decisions that can seem to change day-by-day.

Tom Novembrino and Mark Polinsky are Principals at Gateway Trade Funding specializing purchase order/trade finance for small and medium-sized businesses, typically by providing letters of credit to domestic and international suppliers (or paying against documents), so our clients can fulfill large orders from creditworthy customers. Tom can be reach at (714) 671-0999 or email
tom@gatewaytradefunding.com and Mark can be reached at (847) 612-9817 or email mpolinsky@gatewaytradefunding.com.