A manufacturer's guide to the tariff war
The trade dispute between the U.S., China and the European Union has been one of the top business stories of 2018.
But amid the noise of daily headlines, it is easy to lose track of which tariffs have been applied by which country to which products. Here is a guide to some of the recent action.
What are tariffs?
Simply put, a tariff is a tax on imports, usually charged as a percentage of the price that a buyer pays a foreign seller. Tariffs are designed to discourage imports by making them more expensive.
According to Oxford Economics, the average U.S. tariff on imports, adjusted for trade volume, is 2.4 percent, while the average for the European Union (EU) is 3 percent. Mexico and China impose an average of 4 percent.
However, tariffs can vary widely by the type of good. Canada imposes a 270 percent tariff on dairy products, for example, while the United States imposes a 168 percent levy on peanuts and a 350 percent on tobacco, according to the Chicago Tribune.
If the U.S. government decides that a product is being sold at an unfairly low price or is being subsidized by a foreign government, it may impose additional tariffs to try and level the playing field for U.S. manufacturers of the same good. This is one of President Donald Trump’s main motives for applying tariffs to items such as solar cells and many Chinese imports. He has argued that the lack of tariffs in the past has created America’s trade deficit, which reached $568 billion in 2017.
What is happening now?
The U.S. and its trading partners have been threatening and imposing tariffs for much of 2018. Here is a rundown of what has taken place so far.
The U.S. enacted tariffs on imported solar cells for a period of four years beginning Feb. 7 under Section 201 of the Trade Act of 1974. The push for the tariffs came from a petition filed by two U.S. solar manufacturers, Suniva and SolarWorld. They claimed that imported solar cells manufacturers had an unfair advantage. The tariffs start at 30 percent, declining by five percentage points each year over the four-year term.
Section 232 of the Trade Expansion Act of 1962 allows the president to impose tariffs or quotas if an investigation by the U.S. Commerce Department finds a threat to national security.
The Commerce Department found that imported steel and aluminum threaten national security because of their volume: 90 percent of the total U.S. demand for primary aluminum is satisfied from imports, while steel imports are four times the level of steel exports.
Effective June 1, the U.S. enacted a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum from all countries except South Korea, Argentina Brazil and Australia. The tariffs are expected to bring in $40 billion.
Section 301 of the Trade Act of 1974 authorizes the president to take action when the act of a foreign government burdens U.S. commerce. In 2017, the federal government initiated a Section 301 investigation that ultimately had a finding of unfair trade practices by China related to intellectual property.
When the findings were announced, the stage was set for up to three rounds of tariffs. The first, effective July 6, amounted $34 billion in tariffs on Chinese industrial goods, such as various chemical compounds, turbines and alloys.
Round 2, which took effect on Aug. 23, added an additional $16 billion in tariffs on Chinese imports. And after the third round of Section 301 tariffs took effect on Sept. 24, it meant that nearly half of all Chinese imports to the United States were affected. For the first time, this included consumer goods such as furniture and luggage.
In retaliation, China announced several rounds of their own tariffs on more than 500 goods from the United States, including computers, textiles, meat, wheat, and wine. This is on top of retaliatory tariffs from countries such as Mexico, India and the EU.
During a press release in early September, President Trump said, “We have been very clear about the type of changes that need to be made, and we have given China every opportunity to treat us more fairly. But, so far, China has been unwilling to change its practices.”
What can businesses do?
Products can be excluded from tariffs under both Section 232 and 301; however, very few exemptions are approved, according to Jane Davis, a partner at Shumaker Williams law firm in York.
“The administration is not favoring exclusions because if they granted too many it would circumvent what the tariff process is supposed to do,” said Davis. “More than 35,000 exclusion applications have been submitted to the U.S. Department of Commerce, but only 10 percent have been reviewed so far, and a little over half of those have been granted.”
The tariff dispute is likely to continue for the foreseeable future, according to Brian Simpson, Director of International Growth Services for Baker Tilly Virchow Krause, LLP.
He has three recommendations for companies looking to minimize the impact of new tariffs on their business.
No. 1: Make sure you are using the right tariff code for your product. It can mean the difference between a 5 percent and a 25 percent tariff. The codes are found in a tariff schedule used by nations around the world to identify goods. Each good has its own number.
No. 2: See if there are other countries from which you can import materials, rather than China. Or have a component from China sent to a country like Mexico, have the product assembled there, and then import it into the United States at a lower tariff.
No. 3: Sell your product abroad. Simpson and his colleagues help companies work through the process of international sales, which he says, “can be done relatively low-cost.” This may involve market research, funding a distributor abroad and hiring a new overseas sales team.
“Selling through international markets is important because relying heavily on U.S. sales can hurt during a recession. International sales can help you weather storms better,” he went on to say.
Whatever course they choose, businesses should be prepared to dig in.
“It is very difficult to predict when and if there be will a resolution to the tariff situation,” Davis said. “I wish there were more clear-cut options for people, but this is a situation we haven’t faced in quite a while, so everyone is feeling their way through.”