Trump Tariffs Impact on Sourcing

The recent set of tariff revisions to section 301 of the Trade Act of 1974 are the latest in an expanding and extensive set of the Trump Administration’s controversial tariffs. Effective July 6th, 2018 this revision added duties of 25% to select Chinese goods with the USTR announcing in the current edition of The Federal Register that additional increases (on over $200 billion worth of Chinese goods) are under proposal and awaiting comment. Moreover, while the dollar amounts of the U.S. tariffs and the Chinese counter-response are known for specific goods, the final effect of the tariffs and the overall outcome of what China calls “the largest trade war in history” is still uncertain and disputed.  

Of chief concern to many is the effect that these tariffs may have on corporate profits and sourcing. Many companies have come out against the tariffs for this reason; in fact, Walmart and other top retailers who together generate over $1.5 trillion in GDP jointly sent out a letter to President Trump this past March.  The concern has only grown with the implementation of the tariffs and a report that Walmart has recently asked its beauty suppliers if they would be able to change the sourcing of their products to a country other than China.  While the effect has, so far, been relatively small, according to their latest earnings reports companies such as Walmart have already taken hits to their current and predicted bottom lines as a result of the tariffs.  However, while some large companies such as Hasbro and Puma have announced a move away from China to other South-Asian countries, most large corporations seem to be only contemplating the possibility of changing production while they try to gauge how long these tariffs may last or if they can garner tariff exemptions for their products. Additionally, small businesses seem to have the most to fear regarding the additional section 301 tariffs and potential shifts in sourcing as 46% of small business owners have indicated that they anticipate the tariffs will have a negative impact on their businesses. 

Aside from China, this set of tariff revisions, designed to hurt China's economy due to an "unbalanced trade deficit" and "intellectual property issues," has not been without consequence to the U.S. economy. Companies such as BMW and Moog Music have announced that they may need to shift production from the U.S. to China as a result of retaliatory tariffs.   This result should not occur as a surprise. After all, after the Trump administration levied tariffs on the European Union, iconic American manufacturers such as Harley-Davidson were forced to move production to Europe from the U.S., costing certain states billions in exports and jobs.  

A recent study by the National Retail Federation indicated that American consumers stand to lose $6 billion this year as a result of the currently proposed tariffs on Chinese "furniture, travel goods, and handbags" alone. Even if American companies can successfully re-source their products to countries other than China, American consumers will likely still be worse off due to increased prices and competition in these other countries.  No figures on whose economy will be most affected are available, but initial reports seem to indicate that U.S. economic growth remains relatively stable, while China's has weakened just slightly.  Either way, what is clear is that the economic effect of the tariffs on both countries will only grow over time and companies are necessarily considering long-term strategies to minimize the hit to their bottom lines.