In early May, The Trump administration responded to a breakdown in talks with Chinese officials by increasing U.S. tariffs from 10% to 25% on $200 billion worth of Chinese goods. These actions were met by additional Chinese tariffs on $60 billion worth of U.S. products. China also announced an investigation into shipping providers like FedEx for allegedly diverting certain inbound shipments, which has raised further fears over supply chain disruptions. Given that 20% of the world’s manufacturing output is driven through China , the impact of these developments has been severe.
With U.S. tariffs now covering $250 billion of Chinese goods and Chinese tariffs reaching $110 billion worth of U.S. products, research estimates that the Chinese and U.S. trade conflict has already cost U.S. businesses and consumers $3 billion through higher prices, and another $1.4 billion in lost efficiency (i.e. delayed or interrupted shipments). And still the conflict drags on.
In conjunction with Chinese trade conflict, the U.S. just recently announced the potential for new tariffs on Mexican imports unless an agreement on immigration can be reached. Although the immediate threat of tariffs appears to have been staved off in recent days, there is no telling what developments will occur over the next several months. As the first half of 2019 has shown, trade disputes can escalate quickly. Now, with numerous businesses having just turned to Mexico as an alternative supply route to avoid Chinese conflict, these connections are already in jeopardy. The result? Even more costs, additional supply chain restructuring, and an utter logistics nightmare.
Repercussions for U.S. businesses
As trade conflicts continue to escalate, the U.S. may soon have higher tariffs on imported goods than practically any other country in the world. Subsequently, U.S. businesses with suppliers in China and now also in Mexico face significant challenges regarding where their inventory is developed, how much it costs, how long it takes to inbound, and where it is ultimately stored.
For large companies with the appropriate funding and personnel, the primary strategy has been to establish entirely new supply routes. It is no surprise then to find that while U.S. imports from China fell significantly in Q1 2019, U.S. imports from Vietnam rose by 38%, from Taiwan by 22%, and from Korea by 17%. However, while this strategy is more easily achievable for larger firms, small and mid-sized businesses rarely possess the resources to quickly restructure their supply chains in this fashion. And as time passes, the costs accrue.
As the escalation of trade conflicts continues, it is often small and mid-sized businesses that lack the capacity to cope with rising inventory costs and supply disruptions. They also lack the funding and expertise to effectively redirect their supply routes, either through new countries or entirely different regions, to circumvent tariffs. As opposed to larger businesses, it can take months or even years for smaller businesses to identify new suppliers, complete the necessary due diligence, and establish alternative shipping routes. This wastes valuable time and creates further delays. And as profit margins are sliced and costs increase, companies are forced into laying off staff, reducing inventory levels, and delaying new growth projects just to maintain daily operations. Such is the case with Roger Alves, the owner of a small, California-based consumer electronics company.
Roger’s company, Scosche Industries, has for decades maintained several major suppliers in China. However, the past year has seen Roger’s business directly impacted by regional trade conflicts. Just within the past 12 months, Scosche Industries has paid more than $2 million in tariffs. This has forced the 40-year-old company to lay off numerous workers and indefinitely delay new investment initiatives.
As the China-U.S. conflict drags on, Scosche is now looking to establish supply centers in Vietnam to replace Chinese partners, a strategy many businesses are considering with Mexico’s viability in jeopardy. But rerouting supplies from Vietnam requires intensive analysis, investment, and logistics specialization. Inbound inventory must be completely redirected from new suppliers, additional compliance documentation is required, and operations are in many ways restarted from scratch. It’s a laborious process that takes time to implement, and all the while Alves continues to eat the cost of rising tariffs. But what else is there to do?