Mid-last year, the Trump administration imposed steep tariffs on certain Chinese imports. These tariffs levy an additional 10% tax on goods that benefit from the country’s misappropriation of foreign technology and other intellectual property. In a July statement, the Office of the United States Trade Representative stated that these tariffs were in response to “unfair Chinese practices” and that China’s behavior puts the U.S. economy at risk. Whether the tariffs will encourage China to change course remains to be seen. What we do know is that these Chinese tariffs are expected to have a negative impact on American manufacturers.
When the tariffs were first being considered, the Trump administration proposed to tax Chinese imports at a staggering 25%. With a promise of retaliation from President Xi, the tariffs were lowered to 10% where they remain today. These tariffs are levied on $200 billion worth of Chinese imports each year, specifically on products that benefit from China’s forced technology transfer policies. China has reportedly coerced foreign multinational corporations – including many U.S.-based businesses – to transfer valuable technology to Chinese firms in exchange for access to their markets. And once those Chinese firms grabbed hold of the intellectual property, they failed to protect it. These actions have eroded the trust between the U.S. and China, and many G-20 forum members have joined the US to rally for changes to our existing international trade doctrines.
Manufacturers at Risk
In a study performed last year at the Peterson Institute for International Economics, it was estimated that the tariffs would impact intermediate goods (like semiconductors and plastics) and capital equipment (like vehicles and pneumatic devices) almost exclusively. Only 1% of all goods taxed were anticipated to be direct to consumer. These statistics draw one compelling conclusion: that manufacturers’ production inputs are likely to become much more expensive.
To recoup some of their tax dollars, the Chinese government has raised the prices of their exported goods. This move effectively transfers the costs of the tariffs to the purchasers themselves. American manufacturers spend between 10% and 22% of their production costs on imported purchases of intermediate goods. Those on the high end of this statistic are having to pay more to meet their production needs, and their costs are skyrocketing. To alleviate the financial strain, some are researching domestic options, but domestic alternatives are not always available. These statistics draw one compelling conclusion: that manufacturers’ production practices must be reviewed closely before continuing the status quo. There is a possibility that production costs will increase significantly.
Over 700,000 Ohioans are employed in manufacturing, and most have escaped the negative effects of these new Chinese tariffs. In fact, more than 12,000 manufacturing jobs were generated between November 2017 and November 2018 in the state, but the positive outlook is not expected to last. The supply chain will soon sort out how best to distribute the price increases, and the bill will eventually make its way down to the manufacturers. If you are concerned about the tariffs and the impact they may have on your business, GBQ can help sort through the changing landscape. Our professionals can assist with financial modeling and strategic planning to ensure you are in the best position possible. For additional information call us at 614-221-1120 or click here to contact us. We look forward to speaking with you soon.