How Do American Tariffs On China Impact Supply Chains?
Supply chains are the lifeblood of modern corporate operations. When tariffs on Chinese imports suddenly became part of the business landscape in 2019, it created major disruptions that roiled the globalized, interconnected economic system. How exactly did increased tariffs affect the many companies, from small businesses to essentially global organizations, that rely on Chinese imports?
Tariffs
The basic definition of tariffs is duties charged and collected on imported goods. The goal of American tariffs is to make domestic production more competitive by essentially increasing the cost of internationally produced products. The result is a protective trade policy that incentivizes production at home and increases the cost of overseas imports.
Types and Levels of Tariffs
The trade war between the US and China has resulted in four different types of tariffs, implemented at various levels.
First, there is the Section 301 Tariff of 25 percent, applied to non-technology imports from China. This tariff also applies to products that are exported to the US from all other countries as a result of Year Two, the Section 301 “List 4A” Tariff, which affects $300 billion worth of imports per year.
Second, the Section 232 Tariff is a 25 percent tariff on steel imports from China and a 10 percent tariff on Chinese aluminum imports.
Third, the Section 201 Tariff of 25 percent, mainly affects solar panel and washing machine imports from China.
Finally,there isthe Section 232 “List 4B” Tariff, aimed at Chinese imports that were not impacted by the Section 301 Tariff.
The Impact of Tariffs on China Imports and Supply Chains
Companies that rely on imports to China for their supply chains have been significantly impacted by the US tariffs. The dollar value of the US’s annual imports from China decreased by over $103 billion between 2018 and 2019 due to tariffs. Many companies have had to relocate manufacturing outside of China, often to the US or where labor costs and manufacturing fees are significantly lower. This has had significant impacts on both production times and costs. The number of goods subject to the tariffs has increased significantly, creating across-the-board price increases for customers that buy products with imported components.
These investments are forcing companies to reassess their sourcing strategies. While some companies have attempted to increase their domestic production, reducing their reliance on China, others have tried to diversify by partnering with existing suppliers in different parts of the world. Depending on the needs of their business and the type of products they make, organizations must carefully consider their options.
The Impact on Small Businesses
The American tariffs on China are especially challenging for small businesses, which often depend more heavily on Chinese imports than large companies. For many small businesses, reduced Chinese imports has meant struggling to source the same quality products for their customers, at the same prices. Small businesses often lack the resources to make the investments needed to shift their supply chains away from China. Even when they do, products from other countries may be higher in cost and/or inferior in quality to their Chinese counterparts. Furthermore, small businesses may not have the systems in place or access to the finance to hedge against currency fluctuations. As a result, they may be subject to higher expenses in the long-term.
Effect on Consumer Prices
On a consumer level, the tariffs have led to higher prices for imported goods. Products that are produced in China with Chinese materials are more expensive because companies must pass the cost of the tariffs on to their customers. In addition, extra expenses like shipping, storage, and customs fees add up, resulting in higher prices for consumers. This is especially true for apparel and electronics, as two of the biggest imports from China.
Opportunities and Challenges
Despite the challenges posed by the tariffs, not all the news is negative. The tariffs have opened up opportunities for a variety of industries in the US and other countries. The tariffs have particularly benefited the US textile industry. In addition, companies in Southeast Asian countries, including Vietnam, Thailand, and Laos, have been able to increase their market share due to the lower cost of their goods.
All in all, the tariffs on China have presented both significant challenges and potential opportunities for businesses. Companies have implemented cost-cutting strategies, particularly in the areas of labor, sourcing, and logistics. Companies have also had to navigate the cost and quality of goods from other countries, particularly in Southeast Asia. It remains to be seen how the situation with China and the US will ultimately play out. In the meantime, US businesses must adjust their supply chain strategies to make sure they remain competitive regardless of the outcome.
