How the Trade War with China is Affecting Manufacturers
Last week, MAPI hosted a virtual roundtable for manufacturing executives to discuss escalating trade tensions with China. The discussion leader, Rob Atkinson of the Information Technology and Innovation Foundation, shared an overview of the impact that the recent tariffs have had on the U.S. economy and manufacturers specifically, what measures companies can take to mitigate risk, and an over/under on an all-out trade war. Some key insights are below.
What is the U.S. stance?
According to Atkinson, the Trump administration is “using tariffs as weapons to open up markets” and take down competitive barriers. A tariff wall isn’t the end-game, but rather a tool to intimidate China and other countries to come to the bargaining table. So far, the administration has imposed duties on about $250 billion worth of Chinese goods. The U.S’s tariff strategy, targeting intermediate rather than final goods, affects corporations more than consumers and manufacturers in particular. Indeed, 26% of the intermediate goods used by manufacturing are now subject to tariffs, well above the average of 15% across all industries. According to the Cato Institute’s Dan Ikenson, “By hitting these products with tariffs at the border, the Trump administration is, in essence, imposing a tax on U.S. producers.” Here’s a list of the most affected industries and products.
What is the Chinese response?
While the U.S. has chosen a consumer-first strategy, China’s tariffs have prioritized the protection of its producers. Although China has less ammunition to respond to U.S. tariffs due to the trade imbalance, they have nonetheless responded very effectively by continuing to devalue their currency. Further, as President Xi announced last week, China is cutting tariffs on products from other countries, in hopes of dividing and conquering, effectively isolating the U.S.
What is the economic impact?
According to a survey of 219 companies by the American Chamber of Commerce in South China, over 70% of U.S. companies operating in the region are considering either delaying investment there or moving production to other countries to keep the prices of final products stable for consumers. Further, several reports predict that the trade war will be a drag on capital investment in the U.S. Ratings agency Fitch forecasts capital spending growth of just 3.0% in 2018, and negative 0.8% in 2019, partially due to uncertainty around the escalating trade war. While it’s premature to make major supply chain changes, manufacturers should assess their supply base to determine if they have over-invested in China, especially as costs in the country continue to rise.
Are companies leveraging exclusions?
The Office of the U.S. Trade Representative (USTR) has created a process for companies to apply for exclusions. As of October 29, here are the statistics for exclusion requests for aluminum and steel:
While a precise tally of exclusion requests on that initial set of $34 billion in tariffs isn’t yet available, the public comment site on Regulations.gov indicates they have received at least 2,695 and possibly as many as 6,102 requests. Finally, USTR has established an exclusion process for $16 billion worth of Chinese goods that the administration also hit with a 25% tariff. These requests are due by Dec. 18.
What happens next?
The Chinese government “has not yet fully embraced” that a line has been drawn in the sand and that the Trump administration may not back down, in contrast to prior administrations. Still, President Xi is under significant political pressure to cut some kind of deal, because the Chinese fear that tariffs will hurt their economy, especially if other countries join the U.S (to wit: an influential German trade group recently urged its members to cut their dependence on China).
According to Atkinson, in the first quarter of 2019, a trade agreement will likely be finalized between the U.S. and China. The deal might drop some of the onerous JV requirements for U.S. companies in China, include commitments to scale back IP theft, and perhaps even address industrial subsidies. However, the real issue is whether China would take these commitments seriously, or simply agree as a negotiating ploy. If a deal is made and China doesn’t comply with its terms, there’s a strong likelihood that the U.S. would put tariffs back in place, and the war would escalate.
For more information on this topic, MAPI will be hosting a virtual roundtable, The Economic Outlook for Manufacturers - MAPI Virtual Roundtable, for members only. Register today or join MAPI for access.
Rob Atkinson is founder and president of the Information Technology and Innovation Foundation, recognized as the world’s top think tank for science and technology policy. Rob and his team are at the forefront of shaping the debate around critical issues at the intersection of technological innovation and public policy. Read ITIF’s China analysis here.