"Should I Stay or Should I Go"​ - The US Sourcing Company's Dilemma in China - Trade War Thoughts (part 2)

in #trade6 years ago

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The Trade War is the hottest topic around as the latest round of tariffs just went into affect, I thought I would share some thoughts based on some conversations I have had in the past week. I wrote six months ago on the topic, so will try to not repeat myself - can read that here:
https://steemit.com/cn/@feedmytwi/my-thoughts-on-de-escalating-sino-american-trade-tension

  • Why should the US consumer care and what type of outcry are we likely to see?

Consumers will start to see the price of their every day items go up and we will start to see more and more negative public opinion regarding latest move towards higher tariff rates. The questions is when will this truly start to affect the checkbooks of Main Street.

When you have a 25-50% increase on products that affect safety (baby strollers / replacement seatbelts or brakes / medical devices) people will be less likely to buy these products or wait longer to buy them which will lead to more accidents which will drive negative public opinion.

  • Higher prices -> Less consumption -> less trade -> less work -> less jobs -> less disposable income -> less consumption (cyclical) = GDP negatively affected --- assuming we do "win" this trade war and US exports and domestically produced consumables become more market competitive when will we see the actual numbers to reflect this GDP growth / trade deficit balancing?

Believe everyone is cognizant of the fact that a.) job market in US is STRONG! There is a shortage of people to fill the manual labor jobs in my industry i.e. truck drivers, warehouse workers, technicians, fork lifters drivers, etc. we can't find people now to do those jobs b.) just like the production line jobs of the past, most of these jobs will automated anyways when the price of automation becomes price competitive. There is an idea for you, why not put tariffs on automation machinery and software (the future) to make sure it is made in America to continue to drive that innovation that will drive future outputs and most important EFFICIENCY.

  • What is the cost of the soft power lost in the past 2 years?

As mentioned in my previous article, one of my major concerns is loss of US soft power. I don't pretend to be able to quantify the effects of these "tough" negotiations however America desperately needs export customers, think EU / Japan / Canada / Australia and of course China - protectionism will cause these countries to look elsewhere for their imports or even increase their domestic innovation which all doesn't bode well for American brands.

Take pork as a prime example. The Swine Flu has hit China hard in the past few months which causes a huge demand for imported pork. States like Georgia who export primarily the 7 P's (Pork, Paper, Poultry, Pecans, Peanuts, Peaches, forgot the last one) desperately want foreign buyers and would be primed to send their pork to China however the adverse effects of the import trade war has seen China retaliate against US products like...Pork which has been hit by two rounds of tariffs and is now not market competitive.

In 2009, "According to statistics from China’s Ministry of Commerce, US accounts for 42.6% of global cultural market while China only has 1.5% market share." Fast forward 10 years and most likely that "culture" market has not changed a whole lot BUT the consumers of those cultural products have. Whether it be Nike, the NBA, The Avengers, Harvard or KFC, China has garnered much more leverage if it decided to swing the opposite way and control market access with even tighter restrictions.

  • As a US importer of Chinese made goods, should I apply for exemptions from the 301 tariffs?

Yes, but don't hold your breath on it working. As per my knowledge, not one exemption has been granted as often some US manufacturer will come forward and say "I can make that product here" which negates the argument of "my product cannot be made in the US". Writing letters and applying for exemptions can at least show your supplier base and employees that you are doing what you can do to show your discontent with this whole matter.

  • Should I adjust my HS code or try to transship via another country?

NO!!! You will be putting yourself at great risk and compliance should be followed. Getting a red flag by ANY customs agency puts yourself at risk for all future shipments causing delays and increased scrutiny in past shipments. There is a 5 year statute of limitations from a customs infringement legal standpoint. The US CBP may not have the most significant AI out there, but I don't doubt for a second that they have a system to flag any unknown origin shipper who used to ship from China to the same consignee.

  1. How long is this going to last? 2 months, 2 years, 20 years (Jack Ma's prediction)? We don't really know so it is time to start reevaluating your supply chain. Is Mexico the answer? India?

The China+1 strategies of 5 years ago are looking pretty good at the moment. Think it is time for supply chains to be evaluated in general and this is a catalyst to make transformations happen. Suggest you evaluate your 1.) inputs (labor intensity / raw materials) 2.) your sales markets (localization) and 3.) be honest with yourself about your agility to up and move your supply base.

I would pay close attention to the negotiations going on with Mexico right now. Let's see how much they capitulate to keep those automotive / electronics assembly jobs there and what specifically are the requests from the US government. I am hearing it will some sort of cap on amount of imports, a higher minimum wage (what a joke since we don't even have that in US), and more stringent measurements of content "Made in US".

From an assembly perspective, this might be a short term bandaid. Ship products or even ask your vendors to ship products under VMI model, to Mexico - they can be sold to any Mexican customer you have and bypass any US DC, then work with your compliance department to read into the details of the deal to see how much US or Mexican content is needed to potentially not have the 301 tariffs apply. Not saying that this will work but at least (fingers crossed), you would have the inventory closer to the US for when the tariffs are removed.

On the same note, if you have Canada business, you still can ship products directly there and not get hit by 301 they just can't go through your US DC, so talk with your forwarder and Canada customers about how to make this a reality.

WRONG! Brands often sell to retailers who have to decide whether to first take the price hike which means consumers might not feel the crunch until after X-mas BUT brands, trading companies, and now Chinese suppliers shipping DDP to Amazon certainly will. Most companies don't have the luxury of margins which could afford a 10% increase in landed cost let alone a 25-35% increase. If they have to eat these tariffs without being able to pass downstream, they will be out of business before they have time to set up shop in a new origin which can be extremely capital and time intensive.

  • As mentioned in my previous post, I truly don't think this is about IP infringement as I have seen the progress that has been made in China first hand over the past 10 years.

As China files more patents, develops more national champions (think Huawei, Lenovoa, Xiaomi, Tencent, Alibaba, Qingdao Haier), they also want their IP protected. Therefore, I think this is more about market access and power. Regarding market access, the US can forget about energy, telecom, and financial sector (for the most part - can maybe hope for foreign control to raise to 25% but can forget about Morgan Stanley and Bank of America setting up WOFE's anytime soon) but I think could really make progress following Tesla's example fighting over necessity for a JV for the automotive sector in China.

As for power, this is a particular interesting question. We have seen the RMB dip significantly and there is no doubt that Chinese suppliers to US MNC's are extremely worried however Asian culture has a this idea of 'losing face' which I am worried the current White House administration is severely underestimating. I recently read Huntington's "Clash of Civilizations" and if you remember his primary worry, written in 1996, was that Japan might move over to align with its Asian neighbor China. In other words, if US can humiliate the Chinese Dragon by making them capitulate, what's to stop it from next targeting the Four Tigers, and lastly Japan. Going back 18 months, if TPP had been signed Japan and Singapore would have been hypothetically aligned with the US and would have Vietnam and Malaysia teed up to new potential Asian manufacturing centers but now I fear that all of Asia is up for grabs as we wait to see how long China can hold out.

  • Will capacity for TPEB still be tight?

Transpacific Eastbound container demand traditionally hold strong til the second week of October just because there is a last little capacity crunch for those goods that missed the end of September (pre-National Day) rush. However, with the next round of tariffs to be targeting a Jan. 1 effective dates. I would say it is game-on I imagine the sourcing companies will be hedging their bets and maximizing production capacity to produce and ship as much product as they can to get there before January 1. The next question is whether the shipping lines who had planned to pull out some capacity in October will do so. If they do continue to hold out a few lines, then demand could indeed maintain current high levels and even potentially increase. If they release that extra capacity into the market, it should simply be an extension of what we have seen in the past few weeks.

That's it for now. Look forward to hearing your comments.

Please note that these are my PERSONAL beliefs and comments which are in no way related to my employer

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