More Tariffs Are on the Way—Who’s Ready?
It is unlikely the trade war between the U.S. and China will end anytime soon. Retaliatory tariffs have impaired the established trading relationship between suppliers and buyers in China, disrupting supply chains and making global markets uneasy.
New tariffs, expected to be enacted by both countries in September and October, could impact thousands of product categories—driving up costs, extending lead times, hurting cash flows and damaging customer relationships. Amidst this turmoil, other countries are also trying to position themselves as low-cost alternatives to China.
The impulse by U.S. importers to shift sourcing to another country whose products aren’t subject to high tariffs is understandable, but it could be an expensive move and one that presents substantial risk—for example, attempting to create new supply chains from scratch without time to thoroughly vet a country’s resources and infrastructure.
“Switching factories across borders requires extensive time to locate the right supplier and ramp up production,” says Mark Laufer, CEO of New York City-based Laufer Group International, a provider of logistics and service platforms for global commerce. “Buyers have spent decades building relationships with producers in China, who have intimate knowledge of the customer’s needs. They know what it takes to get goods to market on a timely basis, with high levels of quality. It’s unrealistic to assume that a similar arrangement can be quickly established in an alternative location.”
In moving production to another country, notes Laufer, importers and original equipment manufacturers (OEMs) face sharply different factory types, infrastructure, shipping patterns and labor environments. As a result, manufacturing lead times are certain to increase as producers attempt to duplicate the systems they have developed with Chinese partners over the last 40 years. “There’s no guarantee that they’ll find an equivalent source of raw materials, production capacity or trained workers,” says Laufer. “The inevitable result will be severe delays, higher costs and general confusion during this painful period of adjustment.”
Preparing for the Next Round of Tariffs
It is a tough choice—do importers stay with their well-established ties to factories within China, or do they change source countries? Either move can result in costly risks and delays. However, with the prospect of a long-term trade war, it is prudent for every company to seek out alternative countries for low-cost production and put together a basic action plan, if needed. Companies that choose to ride out the tariffs without a back-up plan in mind are taking a huge risk; these companies could be left to re-source virtually overnight when costs become impossible to bear.
U.S. importers can do several things now to protect themselves from the disruption that’s sure to result as the trade war escalates in the near future, according to Michael Van Hagen, vice president of sales and marketing for Laufer Group International, in a recent white paper. These strategies include:
• Contact your surety company and discuss how quickly, and at what cost, the valuation of your bond can be increased, and the amount of that valuation. “If your bond becomes saturated, you will no longer be able to bring product through U.S. Customs until the new bond is in place,” says Van Hagen.
• Determine how you would handle an additional tariff on your products overnight. Consider how it would impact your line of credit, cash flow, vendor payment schedule and ability to pay U.S. Customs and payroll. “Work now to reduce your receivables and improve your balance sheet in the event additional tariffs go into effect,” advises Van Hagen.
• Define your credit situation with your broker, forwarder and vendors overseas and determine if you can “surge” product volume if additional tariffs go into effect. Run through the scenarios if you have to import more product quickly, even by airfreight, to avoid tariffs.
• For duty payments, do you use your own Automated Clearinghouse (ACH) account or do you pay through Periodic Monthly Statement (PMS)? “Start the application process now so you can leverage the up-to-45-day float that Customs will give you for paying duty, as part of PMS,” says Van Hagen.
• Talk with your suppliers to see if they have excess product, either on track for production or in warehouses that can be purchased before the tariffs take effect. Ask what percentage of the tariff they are willing to absorb.
• Shipping to the U.S west coast is the fastest way to get ocean cargo to the U.S. and get it cleared, if faced with impending tariffs. Determine a west coast strategy, especially for shipping to the Midwest or east coast. Work with logistics vendors to determine the best combination of road, rail or air freight to get your products to their final destination.
• Determine a pricing structure. What is your strategy to raise prices? How will you communicate the increase to customers? How quickly can you implement the price increases? Is the sales team on board? Do you give two-tiered prices to customers, one with tariffs and one without? What’s your plan for longer-term contract obligations that preclude you from raising prices?
The U.S.-China tariff battle continues to change on almost a daily basis. On September 1, the U.S. began implementing tariffs on more than $125 billion worth of Chinese imports; China responded with its own tariffs on an array of products on a$75-billion product list. Last week, both countries agreed to meet in Washington, D.C.—the thirteenth round of high-level trade talks.
With no apparent near-term end to the trade war, “importers and OEMs need to act now, to prepare themselves for changes in the global sourcing landscape,” concludes Laufer. “Even though it is a tough road, these companies should be striving to keep their current relationships in China alive, while seeking out new ones in other countries.”