More Trade War Tariffs, Now what?
What's with all these changes in import taxes, duties, tariffs?
I get asked this all the time, not only by my customers, but by friends and family that want to understand what is in the news, why it is important, and how it affects them.
Why am I qualified to talk about this, because it’s what I do. I’m the Product Guy #productguy I manufacture goods for companies around the world working to give them a competitive edge by producing well, quickly, cost effectively and navigating the geopolitics markets to get the best total cost.
So a brief explanation as to what everything means.
Duties and tariffs are the same thing. They are taxes and fees you pay at import for goods made outside the country. The primary goal is to do 3 things
- Promote & protect the domestic manufacturing industry
- Allow for Expanded or Reduced trade relationships with other economies
- Create Revenue for the Republic
How does it work?
The USTR (Office of the United States Trade Representative) is responsible for trade agreements between the USA and other economies. They use what are called HTS (Harmonized Tariff Schedule) to categorize every good or commodity traded around the world.
Each HTS code is assigned a duty rate, that is the same for every economy, except for exception economies, and sanctioned economies. (Sanctioned economies are on the naughty list)
The CBP (Customs and Border Patrol) is responsible for enforcing these laws, collecting the taxes, and dispersing them back to the Federal Government.
So what is happening now?
The trade war with the USA is a geopolitical one. With many opinions, and complex issues that have to be worked out. The goal is to reform policies, come up with an agreement as to how the two countries will work together in the future and enforce any trade disputes in the future.
Economic trade is one facet and it is the face of the trade war, because the POTUS, Donald Trunp, has decided to negotiate with an economic platform. He believes that taking a tough stance on China and hurting them in their wallet is the most effective way to have them negotiate in good faith.
Stated simply, the POTUS is dealing a heavy tax burden on products that were manufactured in China. This tax is above and beyond the already set in place tariff and identified by the HTS Code for the commodity. The taxes have also, for the most part, been targeting volatile industries in China and State owned entities, reducing cash flow and hurting business owners.
So how do tariffs Work?
Let’s provide a practical example on how the Tariffs work using a Back Pack.
Backpacks are generally made of “Man-Made fibers", Polyester, Nylon, etc.
The HTS code for them is: 4202.12.89 and they are generally taxed at 17.6%
So assuming a backpack was purchased from a factory in China at $20 it would have been taxed $3.52 at the port in the USA + any port fees.
$20 x 0.176 = $3.52
The tariffs being assessed on China have nothing to do with this current tax rate.
It does however add a second tax on top of this one previously at 25% and now at 30% with the retaliatory tariffs announced August 23rd, 2019.
So the new equation looks like this:
Bag +(Bag*Duty rate)+(Bag*retaliatory rate) = Taxed Purchase Price
$20+($20*0.176)+($20*0.30)= $29.52
A cost increase of $9.52
If the markup on that item was 3x (some companies charge more, some less. 3 times markup has been selected for this exercise only) the bag would have been sold for $60
COGS*3 = Retail Price
Pre penalty tax: 20*3=60
Post penalty tax: 29.57x3= $88.56
Essentially increasing the cost of the good to the end consumer, YOU, $28.5. that is why economists hate the trade war, hate import taxes, and support a “Free Market” economy. I also believe a free market system is best. It provides more competition and drives costs down, driving quality and productivity up, while building more robust customer centric supply lines. But that’s besides the point.
Your stuff is more expensive, because it was made in China.
So What happens now, we the people foot the bill for this?
Yes and no. Worst response ever, but yes we will pay more until either
- China and the USA can work out their differences and the additional tariffs go away
- Businesses move their production out of China so the goods aren’t subject to the additional tax.
Sounds simple enough, just hug it out, come to terms, move on and enjoy the worlds strongest economy ever…Well not really every time the trade officials take a step forward they have taken 2 or 3 steps backwards, actually leaving the negotiating table several times.
So the next most likely solution is to move production out of the PRC (People’s Republic of China) most multi nationals have worked hard to diversify their supply lines and have suppliers and factories around the world. Most are moving to South East Asia and Central America.
Economies like Thailand, Vietnam, Indonesia, India, and Bangladesh are candidates in South East Asia while Mexico, Honduras, Dominican Republic, Brazil, and EL Salvador are performing well in South & Central America.
So what will it take to get my favorite backpack on sale again?
It will take skilled procurement people working hard, foreign investments, and time. Lots of time.
Moving production to a new factory within the same country is already quite difficult. It’s extremely demanding and risky. Moving it to another country with a new language, work ethics, management structure, time zones, holidays, access to materials, etc becomes extremely complex and puts a lot of strain on the sourcing and procurement teams to get right.
Well managed sourcing teams will focus on their Star products and on “easy" switches (low tech, low labor, high automation manufacturing)
Eventually they will create a new corporate supply map that avoids the duties in China, which is bad for China, and for which China is working very hard to prevent a mass Exodus.
Unfortunately for them many companies have left, and will never return.
The damage is simply irreparable.
Is there hope?
Absolutely! There is a lot to be optimistic about, I certainly am. Brands and businesses will diversify, they will find new ways of making goods, new materials, provide work in developing nations that desperately need it. But, knowing where to go is very difficult for brands and countries.
I thought you said they were going in South East Asia and Central America?
I did, but now more companies are hesitant to move their production as some other countries have faced threat of heavy taxation. Vietnam and Thailand have both been floated around as being potential targets.
I personally don’t believe them to be. Many companies and brands used questionable practices to avoid the tariffs like shipping containers from port to port to declare the goods as manufactured in Vietnam instead of China, when they were actually manufactured in China.
Others have tried to deceive the government and say the goods were made in Vietnam when only a small transformation was made, not enough to declare the good “Made in Vietnam"
Punishment for crimes like this can be extremely steep and can involve jail time, surrendering goods, and heavy fines. It’s not worth it really.
These practices led to the stern warning that Vietnam and Thailand could be next on the chopping block. The quarrel is less with those two economies and more specifically with China.
Should we support the Trade War or not?
We should support our leaders, and our leaders believe this is important. Again taxes aren’t healthy for the global economy, but this is about more than where goods are made.
I love China, and I love the people. I strongly believe that China needs to change their ways a little and work with the USA and other countries to &find a healthy mutually beneficial relationship.
We the USA can also change some practices like lifetime of patents, their administration and visas for international workers and specialists.
So China is wrong?
It’s not a right and wrong thing, but more of a what’s the best way to proceed with two radically different perspectives from two very large and powerful countries.
Figuring this out, and coming to an agreement is of great importance for the next generation. In the mean time, our “stuff" will cost a little more.
Small businesses, of which I own several, will suffer most for this. It will be most difficult for them to retool and move manufacturing. In turn importers will pass on the costs to their customers which will pay and bear a heavier tax responsibility.
Maybe the POTUS can start to pay down the countries debt with his added cash…
