The U.S. and China trade war escalation continues with new tariffs of 10% on $200 billion of Chinese imports starting yesterday.
Let’s rewind back to March. President Trump tweeted that “trade wars are good, and easy to win”. Trump’s invite to this trade war was about unfair Chinese trade practices, including American companies being forced to surrender their trade secrets to obtain access to the Chinese market and cybertheft of U.S. technology. Many industry groups and both political parties would agree that China is at least partially guilty of such violations, but this unfolds a greater economic impact.
On July 6, the U.S. began to apply $50 billion worth of tariffs on Chinese products with China retaliating in kind. These tariffs hit several products with “industrially significant technology” that didn’t directly impact many consumers. The threat of new tariffs has been looming for the past few months and are set to increase to 25% sometime next year. Then to make matters worse, Trump indicated that he is considering implementing tariffs on another $267 billion in imports which would essentially cover all imports from China. Last week, China retaliated with tariffs on $60 billion in US exports to China.
What does this mean for your business? At this moment if you purchase goods from China that are hit by this 10% tariff, the impact is quite minimal. The RMB has devalued about 7.5% this year which translates to lower USD prices (not 7.5% but a good portion). That coupled with supply chains ability to absorb some price reductions and China’s increase of some export tax rebates, most companies and consumers should not expect any meaningful impact on product pricing.
Going forward there is definitely cause for concern, this trade war has created an environment of uncertainty. If your business purchases products manufactured in China, there is the growing threat that your costs will increase. In a worst-case scenario, things could heat up even more resulting in large price increases throughout supply chains. On the other hand, there are indications or hints from the Trump administration that they are willing to make a deal and this trade war will dissipate. However, it is very unclear what the acceptable terms are to such a deal.
Uncertainty is bad for business. Companies trying to react to this unfolding “trade war” can find that it is hard to know what actions to take. Supply chains take a long time to set up and cannot be changed on short notice. Depending on what happens next, a company can be punished for acting or not acting to make major supply chain changes. For example, if a company sees that 25% tariffs are going to happen, then they may move their supply chain to another country or the U.S. If then after six months, those tariffs went back down to zero, they would find themselves at a competitive disadvantage to their competition. On the other hand, if those tariffs end up going to 100%, they would be happy with changing their supply chain location.
While there is uncertainty, we believe cooler heads will prevail. That being said, things may get worse before they get better, but sometimes you need to go up to the edge of a cliff to realize how far the fall down is.
At Genimex, we are a contract manufacturing company that specializes in design, engineering and production. With 45+ years of experience in China, we have endured the positives and negatives growing a family business overseas. Every business has its growing pains but having a successful supply chain in China has allowed us to endure and maintain a competitive offering to our client’s business growth.