The Mid-Sized Manufacturers' Guide to Chinese Tariffs
The dark cloud hovering over the manufacturing industry
Tariffs are not a new issue for manufacturers, but they certainly have become a growing concern during the ongoing trade disputes, particularly regarding China, and other countries.
Upcoming Announced Tariffs
Two sets of tariffs or tariff increases are pending:
October 15: The current 25% tariff on an estimated $250 billion in Chinese goods is scheduled to increase to 30%. This increase was originally scheduled for October 1, however the Trump administration moved the date to October 15. The products affected by this tariff are categorized as intermediate and capital products. Because these two product categories are used in the manufacturing process, the tariffs have a lesser direct impact on consumers but do have a significant effect on manufacturers.
Manufacturers have three options: absorb the cost of these tariffs, search for other cost savings, or pass the costs along to their customers.
December 15: A 15% tariff will be added to approximately $160 billion in primarily consumer goods imported from China. These tariffs were announced in August as a package of 10% tariffs on $300 billion in Chinese products originally scheduled to take effect on September 1. A portion of the plan was delayed preventing impacts on the holiday shopping season.
After China announced retaliatory tariffs on U.S. imports, the original tariffs were increased to 15% (along with the 5% increase effective October 1). Tariffs were added to $112 billion of Chinese imports on September 1. Though the original package was announced at $300 billion, analysis after the full list of products was announced dropped the total to $272 billion.
The products in these two rounds are more likely to have a direct impact on consumers as retailers and ecommerce companies don't have much wiggle room to avoid passing along the increased costs.
The Tax Foundation says the effect of all tariffs planned and currently implemented, will reduce the overall GDP by 0.25% ($62.5 billion), cut wages by 0.16%, and eliminate 193,649 full-time equivalent jobs.
When all of the retaliatory tariffs imposed and threatened by other countries are factored in, the full hit to the U.S. economy amounts to a 0.67% ($167.75 billion) reduction in GDP, a 0.42% drop in wages, and loss of 519,978 jobs, according to the Tax Foundation's calculations.
The 2019 China Business Report released this week by the American Chamber of Commerce Shanghai showed a definite erosion in confidence among manufacturers doing business in China. Along with trying to improve the U.S.'s bargaining position to get a trade deal with China, another goal of the tariffs is to encourage manufacturers to bring jobs back to the United States.
The American Chamber of Commerce survey detailed that 22% of companies plan to decrease their investment in China, with most of those companies planning to move their investments to low-wage countries, such as Vietnam, Thailand, and even Mexico.
Moreover, while nearly two-thirds of respondents in the China survey expect the trade tensions to continue for more than a year, including 16.9% who believe these tensions will continue indefinitely.
Because both countries have imposed tariffs, both importers and exporters must develop a path forward to maintain productivity and margins.
Real Impact of Tariffs on Mid-Sized Manufacturers and Food Processors
The degree of the impact is different for each business, depending on how much of your product or source material is coming from China.
Most companies who have sourced offshore have, at one time or another, experienced challenges with lead times, shortages, quality problems, and supply chain transparency issues. The tariffs increase the costs to manufacture and package products, squeeze margins, and amplify competitive pressures to keep prices to customers low.
This impact on profitability and competitiveness signal that this is an excellent time to reevaluate how products are made and how the supply chain is optimized.
How Can Manufacturers Respond?
In responding to the increased pressures placed by these tariffs, manufacturers have the following options:
Stay the Course
If your company can’t pass along the increased costs, or is in a position to manage a lower profit margin for the short term, staying the course without raising prices could keep customers happy. The downside is that you will have less cash flow for your day-to-day, expansion, and investments.
Increase Prices
Ultimately, most companies will be forced to increase prices or risk going out of business. Asking customers to pay more is difficult in a hyper-competitive environment. The upcoming tariff increases may be the tipping point for companies that have been able to hold the line on prices to their customer. Companies will need to walk a fine line to find the price point that keeps customers loyal.
Shift Away from China
For some manufacturers, the trade war has sped up their shift away from China. More than a quarter of respondents to the recent survey said they were shifting expected investments away from China in 2019. However, the cost of building infrastructure and finding qualified labor in other countries is a challenge.
Mid-size manufacturers who decide to shift their business to offshore alternatives must apply resources to identify and vet the suppliers, then reestablish mechanisms for oversight. This ongoing due diligence is critical to ensuring any savings are not erased by products with long lead times, shortages, and quality issues.
Rethink your Supply Chain
In addition to the Chinese tariffs, there are other tariffs that need attention and are already disrupting current business practices for many mid-sized manufacturers. Now is the time to rethink how supplies are sources and products are packaged.
Packaging is undoubtedly an area where manufacturers can save. Depending on the industry, manufacturers, and processors are spending anywhere from 2 to10% of their total cost of product on packaging – this is before the tariffs come into effect.
Manufacturers and processors who want better control and management of their packaging requirements are turning to packaging management programs to mitigate the operational, financial, and customer satisfaction challenges associated with offshore sourcing.
A Packaging Management Program (PMP) streamlines supply chain management through a single point of contact, while uncovering and providing strategies to address the hidden costs in a manufacturer's packaging and packaging management processes.
Partnering with a packaging management supplier with manufacturing capabilities, vast, global distribution relationships, and services takes cost out of the supply chain, ensures lead times are in check, minimizes shortages, and adds security and consistent visibility into the supply chain.
Global supplier relationships allow the Packaging Management partner to source competitively domestically, offshore, and with suppliers in Mexico, for example – a NAFTA (now referred to as the United States-Mexico-Canada Agreement) country with land transit. This approach positions manufacturers and processors for increased competitiveness, enhanced efficiencies, savings, and cash flow improvements.
However your company reacts to the increasing tariffs, you should consider this an opportunity to evaluate your supply chain for improved efficiency, savings, and greater cash flow.
This is the ideal time to build toward a future where you are prepared to deal with the uncertainties of the global markets.
By Dave Whitney, Senior Vice President General Packaging
SupplyOne provides manufacturing, packaging supplies, services to streamline your packaging supply chain, and packaging automation - all from a single point of contact. We have a proven track record of helping companies reduce costs, improve efficiencies and cash flow, and we guarantee your savings in writing. To learn how SupplyOne can help you mitigate the tariff related challenges and become part of your high-growth strategy, call us at 484-582-5005, or visit us at www.supplyone.com.
