By Jamie Adams, Director, Global Trade Consulting
$75 billion. That’s the number. The total sum of customs duties doled out by U.S. importers in 2020, the vast majority of which are struggling to stay afloat in the worst economic recession in almost a century.
Since 2018, the annual duty burden for U.S. businesses has been growing dramatically with total duty collected by CBP increasing 79%, much of it related to the U.S.-China trade war. In fact, of the approximately $100 billion in duty assessed through trade remedy enforcement since 2018, $85 billion is related to Section 301 tariffs on China-origin goods alone.
For many businesses, the tariffs represent yet another cost input that gets tacked onto the final cost of goods that is downloaded onto the consumer. Those impacted have found a way to manage the additional expense albeit at the cost of being less competitive domestically and internationally.
Yet, with cautious optimism of an economic recovery in the second half of 2021, U.S. businesses are looking for some form of relief. If not an end to tariffs, then at the very least a better understanding of what to expect over the long term.
To date, the Biden administration has remained ambiguous about its plans to change the trade policies of the Trump administration and particularly that of China. The tariffs on more than $350 billion in annual China-origin goods remain in place pending a broader policy implementation with respect to China. So do tariffs on steel and aluminum tariffs, and on washing machines and solar panels.
While U.S. importers impacted by tariffs on European goods as part of Washington’s ongoing dispute with Brussels over subsidies to Boeing and Airbus were awarded a four-month reprieve, new tariffs on imports from the UK, Italy, Austria, Spain, Turkey and India are on the horizon in response to those countries’ plans to implement a digital services tax on the revenues of U.S. tech giants.
On the ground, the trade war and tariffs play a critical consideration in how U.S. firms intend to configure their future supply chains. Over the past two years, importers have shifted their sourcing away from China to neighboring marketing. Trade balance data shows that while the U.S. trade deficit with China in merchandise goods has narrowed from $419 billion in 2018 to $310 billion in 2020, the deficit with the world as a whole has grown from $872 billion to $905 billion during the same period – the highest on record.
It’s important to note that imports from the world as a whole have actually declined during that period, but exports have declined much more – partially because of reciprocal trade actions taken by U.S. trade partners whose exports are tariffed by Washington, and partially because 2020 witnessed a dramatic decline in international demand for U.S. goods due to the economic impact of the pandemic.
Nevertheless, a shift is clearly taking place. The chasm in imports and exports from Vietnam continues to grow. While export figures have barely moved since 2018 (despite the fact Vietnam was one of the first nations to recover from the pandemic), imports from Vietnam have soared 62%. Looking at annual figures, while imports from China fell by about $14 billion between 2019 and 2020, imports from Vietnam grew about $13 billion. It’s difficult to dismiss that as a coincidence.
Long-term vs. Short-term Pain
The challenge for businesses looking to de-risk their supply chains is finding the appropriate balance between customs and transport considerations. The recent blockage of the Suez Canal – while less of an issue to North American businesses than those in Europe – was yet another reminder of the volatility in international trade transport. Container shortages, semiconductor shortages, spiking freight rates and port backlogs have shaped global shipping since December 2020. All of this add to time in transit, delaying production cycles and making it more difficult for U.S. good manufacturers to meet their contractual obligations. It also means service providers can’t access the resources they need to optimize their service experiences.
Add to all of this growing discord in Asia-Pacific region – between China and Australia, between China and Taiwan, between China and India, between Beijing and Hong Kong – and the risk of geopolitical strife to further impede international transport.
Yet, all of these considerations could, after all, be temporary in nature. One or two years from now, transpacific trade could look very much as it did in 2017 before the pandemic, before the trade war, before the geopolitical conflicts. It’s difficult to forecast. Transport delays, container shortages and port congestion are predicted to last well into the summer months, but beyond that it’s anyone’s guess.
Firms considering a shift in their sourcing and supply chains are doing so because they believe these issues will continue to dog them well into the future. A recent study by Relience360 (now Everstream) shows the number one consideration for firms looking to move manufacturing is diversifying sourcing and manufacturing to reduce risk concentration while the number two reason is reducing reliance on China for essential materials. In third place was tariffs and other trade-related disruptions.
What’s an importer to do?
The question, however, becomes how and where to shift sourcing and/or production, and that’s where trade policy becomes so critical. As firms do their risk-reward analysis, they need to know whether they should expect Washington to escalate or de-escalate its trade war with China and whether or not that trade war will expand to include other countries. Will Washington restore the Generalized System of Preference to provide preferential duty rates to developing nations, many of which are in the South and Southeast Asia? Will steel and aluminum tariffs be removed to reduce production input costs to manufacturers? Will new tariffs be imposed in response to growing international adoption of digital taxes? Will new trade agreements be explored to open windows of opportunity both for exporters and importers?
If the answer is a definitive no to all these questions, the business case for shifting production closer to home (e.g., to Canada, Mexico or even South America) becomes far clearer. In fact, a recent PWC study shows 16% of U.S. chief executives are already looking at Canada for future investment and 13% are looking to Mexico. That’s an annual increase of 100% and 38% respectively.
But a wholesale shift from Asia to North America isn’t likely. In most cases, are putting in place redundancies in North America to offset production disruptions or transport delays. In some cases, the cost of labor in Mexico and Canada versus some parts of Asia detracts from a nearshoring business case. Moreover, not all skillsets and production capabilities may be available in North America.
Conversely, if the answer to all – or even some – of the questions above is a definitive yes, firms can plan for a more gradual and/or balanced approach to reconfiguring global value chains, maintaining suppliers in Asia where it makes sense to do so (e.g., for less-critical components or where labor skillsets are unavailable or too costly in North America) while shifting final production and transport of finished goods closer to home.
Unfortunately, there hasn’t been anything definitive with respect to U.S. trade policy. While the inaction of the Biden administration is likely a welcome reprieve from the knee-jerk actions and reactions that characterized the Trump administration’s trade policies, a failure to identify clear goals and objective around trade policy, leaves many businesses unsure of what the near term may hold for their global supply chains and how to plan for a future that seems to be less predictable with each passing year.
The hope is that in Q2 and Q3 a clearer picture of how the Biden administration and new United States Trade Representative Katherine Tai will approach trade relations with key trading partners. Until then U.S. businesses will be proceeding with caution with respect to their investments and so will foreign firms looking to make investments in the U.S.
Jamie Adams has extensive and diverse experience in compliance with relevant domestic and foreign import and export laws, as well as in creating and executing plans to improve global trade and international supply chain programs and systems.