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September 18, 2018

U.S.-China Trade War Escalates With Third Round of Tariffs

By  John Corrigan

President Donald Trump announced on Monday that he will impose new tariffs on about $200 billion in Chinese goods, as the trade war between the world’s two largest economies intensifies.

The 10% tax on Chinese imports will take effect on September 24 and will rise to 25% by the end of the year. Thousands of Chinese products have been targeted, ranging from auto parts to luggage to seafood to industrial machinery, The Wall Street Journal reported. Anticipating a response, Trump threatened to impose tariffs on an additional $267 billion worth of Chinese imports if Beijing retaliated.

As expected, China has retaliated by vowing to impose tariffs on $60 billion worth of U.S. products. The taxes will range from 5% to 10% and take effect on the same day the latest U.S. penalties will kick in. More than 5,000 U.S. goods will be affected, including meat, nuts, alcoholic drinks, chemicals, clothes, machinery, furniture and auto parts, CNN reported.

Starting next week, Trump will have imposed tariffs on nearly half of the Chinese goods imported to the U.S, which last year were valued at $505 billion. The first round of tariffs went into effect in July, when the U.S. officially levied 25% taxes on $34 billion worth of Chinese goods. The second round went into effect in August, when the U.S. taxed an additional $16 billion worth of Chinese goods. If Trump follows through on his next threat, all Chinese imports to the U.S. will have been taxed.

As for China, $50 billion worth of U.S. imports have already been taxed. When adding in the new penalties, the total amount of U.S. products subject to Chinese tariffs comes out to $110 billion, which is 85% of U.S. goods that entered China last year.

Despite talks scheduled in two weeks between delegations from the U.S. Treasury Department and high-level Chinese officials, Trump has previously stated that he doesn’t expect much progress to be made. In an interview with Reuters, Trump said resolving the trade dispute with China will “take time because China’s done too well for too long, and they’ve become spoiled. They dealt with people that, frankly, didn’t know what they were doing, to allow us to get into this position.”

A prolonged trade war between the U.S. and China could prove challenging for the promotional products market, as prices on imported Chinese-made goods would increase. Industry firms – as well as retailers – would then have to decide whether to take a hit in their margins or pass the added cost on to buyers.

“We’re doing scenario planning,” Jonathan Isaacson, president of Top 40 supplier Gemline (asi/56070), told SGR in the upcoming Supplier State of the Industry. “If you aren’t planning your business, assuming something like this could happen, it could end up being very unpleasant.”

All suppliers are probably having similar conversations, says Paul Lage, president of Top 40 supplier IMAGEN Brands, parent company of Crown Products (asi/47700) and Vitronic (asi/93990). “Tariffs don’t have a significant effect right now – it’s really more about the unknown,” Lage said. “Our industry is subject to what happens in the geopolitical area. We’re starting discussions to answer ‘what ifs’ and to try and figure out what we should do.”

The International Monetary Fund (IMF) estimates the conflict between the U.S. and China would cost the world around 0.5% in gross domestic product, based on current measures and “in the worst case scenario.” The U.S. would be harder hit than other countries because a larger share of its exports will be subject to the punitive levies, according to the IMF’s calculations.

“This is a highly fluid situation making it difficult to accurately predict what comes next,” noted Joshua White, Top 40 distributor BAMKO’s (asi/131431) general counsel and senior vice president of strategic partnerships, in a white paper. “The Trump administration’s follow-through on previous threats leads one to conclude that it is serious about its intent to obtain meaningful concessions to limit China’s purported theft of American intellectual property. Should tariffs be imposed, consumers, retailers and manufacturers will all feel the pinch. The impact would disrupt global supply chains, raise input costs and consumer prices, and slow economic growth. Expect to see the financial impact start hitting consumers and retailers in the 2018 holiday season.”

White and BAMKO Vice President of Operations Max Levavi discussed the tariff proposals and how they’ll impact the promotional products industry in an exclusive podcast with Counselor in March.