Global Suppliers May Have To Adopt US+Many Strategy

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The US government is certainly working hard towards long term improvements in global supply chains. The recent moves by the US – starting with opting out of the TPP, trying to opt out of NAFTA and then reworking NAFTA, and the more recent – imposing sweeping tariffs on Chinese goods, reimposing sanctions on Iran and trying to force the rest of the world to tow the line – are all disrupting trade, but in the short to mid term.

It's these disruptive policies that will eventually help the supply chains to function more efficiently, and to move towards some of the largest markets in the world today – China and India. These developments could well push the manufacturing countries out of their inertia of depending on the US as a market that will always be around.

These recent developments will also make the BRI more imperative, as a means of efficiently reaching some of the biggest markets in Asia today.

US imposes tariffs on textile raw materials from China

Economic superpower US wants to revive its manufacturing industry. And has put in place a number of tariffs on Chinese inputs needed for its manufacturing sector. At present, apparel remains outside the purview of these tariffs, but many textile raw materials will attract an import duty of 25%, making these inputs expensive for the US manufacturers. In turn, it defeats the purpose of these duties.

Moreover, the US sanctions on Iran and indirectly on anyone trading with Iran, could restrict imports of many inputs into the US, making it harder for US manufacturing sector, while of course helping to balance the US trade deficit.

The US is trying to force every nation to stop oil purchases from Iran. China, and possibly India, to some extent, will continue their oil imports, being the two largest consuming nations today. Iran will be looking to supply its oil, and chances are China and India could benefit from Iran's lower oil prices. But this scenario will unfold after some months.

In which case, India's trade with the US could get impacted. So, while higher tariffs on Chinese goods could've opened up trade opportunities for other countries, Iran sanctions could be a damper.

Iran's handmade carpet industry has of course been impacted due to the current sanctions.

China is the world's factory

China is the world's factory, and runs a trade surplus with a large number of its trading partners. The US is the largest market for China. China, Canada, Mexico are the top three markets for US goods. The tit-for-tat tariffs being imposed by the US and China would probably hurt the US as much as it would hurt China. At present, China's tariffs on US goods are not of much consequence to its local industry. However, some of the US tariffs on Chinese goods could hurt the US industry.

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On August 8, USTR finalised a proposal to extend the 25% that the United States imposed on July 6 on US$ 34 billion worth of mainland Chinese goods to an additional US$ 16 billion worth of imports from the mainland. The final list contains 279 of the original 284 tariff lines that were included in the June proposal, reflecting the removal of the following items:

  • HTSUS 3913.10.00 – alginic acid and its salts and esters in primary forms;
  • HTSUS 8465.96.00 – splitting, slicing or paring machines for working wood, cork, bone, hard rubber, hard plastics or similar hard materials;
  • HTSUS 8609.00.00 – containers (including containers for transport of fluids) specially designed and equipped for carriage by one or more modes of transport;
  • HTSUS 8905.90.10 – floating docks; and
  • HTSUS 9027.90.20 – microtomes.
  • CBP will begin collecting additional duties on these products on 23 August.

Many of the products included in the final list are classified in Chapters 39, 84 and 85, but various products in Chapters 27, 34, 38, 70, 73, 76, 86, 87, 89 and 90 are also included. Changes to the list were made after USTR and the inter-agency Section 301 Committee sought and received input and testimony during a two-day public hearing last month.

Once this action enters into force, the United States will have imposed additional duties on some US$ 50 billion worth of imports from mainland China. In addition, a separate proposal currently under consideration would establish an additional 25% tariff on US$ 200 billion worth of goods from the mainland. Beijing has vowed to impose additional duties of its own on a tit-for-tat basis in retaliation for each of these actions.

The US proposal targets a range of products of special commercial importance for China, including, among others, various travel goods of heading 4202; leather products of heading 4203; plastic products of Chapter 39; tyres of heading 4011; textile products of Chapters 50 through 60; headwear of Chapter 65; furniture of heading 9403; lamps of heading 9405; certain printed circuit assemblies classified under HTSUS 8473.30.11; and, perhaps most notably, machines for the reception, conversion and transmission or regeneration of voice, images or other data, including switching and routing apparatus, classified under HTSUS 8517.62.00.

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On the other hand, the proposed list does not include any apparel products (Chapters 61 and 62), footwear  products (Chapter 64), or toys and games (Chapter 95).

China matches US tariffs with levy on additional US$ 16 billion of imports

China is to impose import surcharges of 25% on an additional 333 categories of US-origin goods as of 23 August. With a total value estimated at around US$ 16 billion, the goods affected include certain automobiles, medical equipment and several chemical/energy products.

This latest round of tariff hikes marks the continuing escalation of the tit-for-tat trade war initiated by the US. At present, the two sides have both taken action against US$ 50 billion worth of each other's exports.

Following the 2 August decision by the US government to raise the proposed additional tariffs on US$ 200 billion worth of Chinese goods from 10% to 25%, the Customs Tariff Commission of China's State Council had responded by announcing additional tariffs on 5,207 categories of US-origin goods with a total import trade value of approximately US$ 60 billion. The additional China-imposed tariffs range from 5% to 25%, with nearly half (2,493) at the top end of the scale:

  • Additional 25% tariffs on 2,493 categories
  • Additional 20% tariffs on 1,078 categories
  • Additional 10% tariffs on 974 categories
  • Additional 5% tariffs on 662 categories

China's import growth is higher, except in the US

Looking at China's trade figures from January-June 2018, while it is obvious that China's actual exports are higher than imports, the rates of growth of import are higher than its export growth. This implies that its exports are slowing down, but industrial and household consumption are continuing to rise.

China's imports from Asia grew 20.90%, while exports went up by 12.70%. Top Asian suppliers to China include Japan, Singapore, South Korea, Saudi Arabia, Taiwan, indicating imports of high-end, quality products.

China's imports from Africa were up 28.60% and exports went up by 8.10%, during Jan-June 2018.  China's imports from Europe were up 19.40%, exports to Europe were up 12.50%. Germany, Russia, Switzerland were important suppliers here. China's imports from Latin America grew 23%, exports to Latam were up 20%. China's imports from North America were up 14%. Exports to North America were up 13.30%. Imports from Canada were up 29.70%, while exports were up 10.6%. Imports from the US went up 11.8%, and exports by 13.5%.

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Imports from Oceanic countries was up by 11.3%. Exports to Oceania were up 12.30%. Australia is the largest supplier and the largest market for China. Imports from Australia were up 9.3%, while China's exports to Australia grew 17.20%.

A quick glance at China's exim growth in some of the BRI beneficiary countries in Central Asia reveals a similar picture.  China's imports from Afghanistan were up 565.90%, and exports were up 12%. Imports from Iran were up 20.9%, and exports were down 4%. Imports from Kazakhstan were up 37.6%, and exports were down 0.4%. Imports from Tajikistan went up 27.3%, and exports by 19%. China's imports from Turkmenistan went up 15.5% and exports went up by 26.8%. Imports from Uzbekistan were up 70%, and exports 67.3%.

This indicates trade between China and Central Asia is on the rise, and will get a further boost as the BRI progresses. While US remains the single largest market for China and India, Europe accounts for a larger percentage of trade. And China's trade with Europe will improve further with the OBOR infrastructure getting in place.

Besides, both China and India are set to become the largest consumer markets in the world by 2023. Chinese consumers' appetite for luxury goods is on the rise. India follows close behind. This means that while domestic companies will have a local market to cater to, there will be a growing demand for high end, international luxury brands, and high quality goods. As retailers in the US and Europe face market erosion, they are turning to Asia, where the consumer is. The US should come up with better solutions to control its trade deficit (by increasing exports through an increasingly efficient supply chain) rather than hiking tariffs and adopting other protectionist measures that may hurt its trading partners, but will also hurt its own industry, and consumers.

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