Don’t Go It Alone: 3 Best Strategies to Address Trade Tariffs for Manufacturers
As with any disruption, trade tariffs and trade policies impose challenges and uncertainty for most manufacturers. So, while larger companies can more easily navigate these disruptions, small businesses often find themselves overwhelmed and vulnerable to significant losses.
Meta Fab looked at sections 232 and 301 trade policies, recent trade tariffs on goods imported from China, their impacts on different manufacturers, and identified three solid planning strategies that can see companies through uncertain times.
Section 232 of the Trade Expansion Act of 1962, authorizes the President of the United States, through trade tariffs or other means, to adjust the imports of goods or materials from other countries if it deems the quantity or circumstances surrounding those imports threaten national security. President John F. Kennedy signed the Trade Expansion Act of 1962.
Section 301 of the Trade Act of 1974 allows the US government to enforce US trade rights under trade agreements where the US is deemed to have been treated unfairly. Under Section 301, as it applies to foreign acts, policies, and practices the USTR (US Trade Representative) determines to violate or be inconsistent with a trade agreement and/or are unjustifiable, burdensome or restricts US commerce.
A section 301 case can be initiated by the USTR or a complaint to the USTR, which commences a 301 investigation. As part of a 301 investigation, the USTR must work to negotiate a settlement with the foreign country involved and can ask that barriers/restrictions violating trade agreements be removed or seek compensation for the financial loss incurred because of those burdens. In prior disputes, the USTR would begin a 301 investigation, but then bring the issue to the WTO (World Trade Organization) for dispute resolution. In the case of the current trade conflict with China, the US has departed from custom by moving forward with sanctions without a determination from the WTO.
US-China Trade Relations: Where’s the Beef?
In 1992 and 1994, the US threatened to increase trade tariffs against China over intellectual property rights policies. A bilateral agreement in 1992 resulted in a settlement before trade tariffs were imposed. In 2010 and 2012, the US initiated a 301 investigation and brought concerns to the WTO for dispute resolution where the US was successful.
In March of 2018, the Trump administration introduced plans to initiate a 301 investigation citing China’s efforts to pressure technology transfers from US companies to a Chinese entity; maintain unfair licensing practices that prevent US companies from realizing IP returns; impose technology transfers to promote Chinese policy goals; and engage in cyber invasions into US networks. In addition to a 301 investigation, steps to address these violations included a WTO dispute settlement case for commercial discrimination, impose investment restrictions on Chinese efforts to illegally obtain information using cyber networks, reduce the trade deficit by $200 billion, and ensure reciprocal trade relations. In April 2018, the USTR proposed tariff hikes on $50 billion worth of imports. China responded by initiating its own WTO settlement the next day.
Though the US and China squared off with measures and counter-measures through the WTO, both countries agreed to negotiate and suspend trade sanctions. Unfortunately, negotiations failed and in May, the White House announced that it would move forward with 25% trade tariffs on imports from China, implement investment restrictions related to “industrially significant technology”, and continue its WTO case against China. In response, China stated the Administration’s terms contradicted negotiations and announced counter-sanctions that included raising trade tariffs on US goods by 5% and 10% on $60 million worth of imports and canceled trade talks. By September 2018, the US Administration announced an additional 10% tariff increase on $200 million worth of Chinese imports thereby increasing the eventual 25% tariff rate.
- Technology transfers – pressured transactions that benefit Chinese companies
- Licensing practices that prevent US companies from seeing IP returns
- Imbalanced trade relationship that benefits Chinese policy goals
- Cybersecurity violations
- Address all of the grievances above
- China to buy more US goods and services
- Broader Chinese economic reform that is essentially less predatory
- China agreed to address grievances 1-4
- Talks broke down regarding demands 2 and 3
- No WTO resolution
Cornell University Library: Repository: Susan H. Douglas Political Americana Collection, #2214 Rare & Manuscript Collections, Cornell University Library, Cornell University
Impacts on US Manufacturers
Among the objectives sought by the US Administration to promote the domestic sale of metal, manufacturers have felt some negative impacts for varying reasons.
- Metal suppliers were to benefit/metal purchasers are struggling with higher costs.
- Larger metal purchasers are better able to navigate trade tariffs than small businesses.
- Domestic metal prices are higher than foreign so US purchasers of metal must strategize around meeting the cost of domestic supply.
- Domestic metal suppliers did not have the capacity to meet the demand, which has delayed production of US goods, particularly in the automotive industry.
- Trade tariffs impose uncertainty on the market that can halt hiring and investments.
Because of #2 above, the US has seen some investment and hiring gains among large manufacturers, however, smaller companies have laid off workers and suspended investments in equipment. For some small manufacturers, costs have increased by more than 25% and according to Trade Partnership Worldwide, LLC steel and aluminum trade tariffs would result in a net loss of 470,000 US jobs, which if anything, demonstrates the power of small businesses on the US economy. It should be noted that job loss figures (several sources report similar figures) are 2018 speculations and no actual job loss count exists for 2019.
The Good Stuff: How Do Manufacturers Strategize Around Trade Tariffs
There are obvious answers to addressing increased costs, such as shifting some of the burdens to customers. This strategy, however, can and often does lead to lost relationships and opportunity to grow. At this point, I must acknowledge the following suggestions are outlined by Marie Gallanar, Account Executive for Parker, Smith & Feek (see link below) accompanied by my own comments/analysis.
- Streamline! Lean processes are very effective at managing costs whether through best hiring practices, inventory management and/or more efficient operations. The Oregon Manufacturing Extension Partnership (OMEP) can assist companies to implement lean strategies.
- Be Prepared! Stay abreast of policies to better anticipate changes that impact your company. This strategy is as true for other policy changes at OSHA or the Department of Labor as they are for trade. Don’t wait for the policy to impact you, inform yourself and stay ahead of it.
- Don’t Go It Alone! Hire a freight forwarder to handle bonding and a customs broker to navigate trade tariffs. There are affordable, local professionals who can remove the burden of navigating trade policies and offer advice. I would also recommend contacting the US Department of Commerce and your state/local economic development department to see if your business qualifies for financial assistance to hire trade professionals. It’s often surprising how many nonprofits have been granted money specifically to support small manufacturers.
While the above are straightforward methods for addressing the impact of trade tariffs, some companies have appealed to US Customs and Border Protection to have their businesses re-classified. Reclassification is often denied and companies who reclassify on their own or intentionally misclassify themselves risk facing stiff penalties.
Force Majeure is a legal clause that allows one party out of a contract due to an “act of God”. Therefore, some suppliers might rely on force majeure to seek exemption from contractual obligations to their customers. However, these cases frequently fail in court and can harm a company’s relationships and reputation.
Consequently, challenges arise every day from local labor shortages and natural disasters to new local, state and federal policies. It is important to understand how vulnerable your business is to these changes. Integrate protective measures into your business plan. The biggest take away from this article is to know you’re not alone and help is available. Identify appropriate and cost-effective assistance by getting involved with local trade associations and stay connected with economic development departments.
Wayne M. Morrison, “Enforcing U.S. Trade Laws: Section 301 and China,” Congressional Research Service (April 8, 2019)
Marie Gallanar, “Manufacturers’ Strategies to Deal with Tariffs,” Puget Sound Journal (October 15, 2018)
Jim Zarroli, “From Mills to Manufacturers, Steel Tariffs Produce Winners and Losers,” NPR News (August 10, 2018)
“Suppliers Look for Ways Around Tariffs – Some Pushing Legal Boundaries,” Automotive News (August 13, 2018)
Rajesh Kumar Singh, “As Trump’s Tariffs Bite, Small Manufacturers Begin to Tap the Breaks,” Reuters (May 4, 2018)
Lenny Feldman, “The Art of the Trade Deal – Top Five Strategies to Avoid or Reduce Section 232 and 301 Duty Increases,” Sandler, Travis & Rosenberg, PA (July 11, 2018)
Stuart Anderson, “Tariffs are Costing Job: A Look at How Many,” Forbes (September 24, 2018)
Author: Aimee Sukol