Can Tariffs on Components Imported from China Force Companies to Focus on Local Manufacturing?

trumpEconomists are closely watching the tariffs scenario in the United States as Trump Government has recently announced new taxes on Chinese imports. The list of new goods includes multiple items from manufacturing materials to consumer goods. By January 1, 2019, the administration plans to raise the taxes on these items to 25 percent.

Fulfilling the promises made to the voters

Even before taking over the president’s office, Trump had promised voters that he would act against China’s unfair trade practices that have eaten up local jobs and industries. Dependence of American companies on cheap Chinese imports is helping CEOs and top executives to take home hefty paychecks, but American jobs are diminishing since the last decade. As one of the crucial steps towards fulfilling his promise, the government imposed a 25 percent tariff on aluminum, steel imported from China. Now, the recent move to impose taxes on additional Chinese products is set to escalate the trade tensions between the US and China.

As the Asian giant warned the US regarding its plan to impose more tariffs on American products, Trump showed even more ammunition in the form of another idea that involves imposing duties on another list of products worth $267 billion. Currently, almost half of the imports from the Asian giant already face additional taxes.

There is nothing much that China can do. The US imports goods worth $505 billion while on the other hand, China buys $130 billion worth of products every year.

Treasury Secretary Steven Mnuchin had discussed the possibility of talks between China and the US trade officials to resolve the trade imbalance issue. But, the introduction of new duties has once again derailed the chance of conversations at least for a few days more. Now, Gao Feng, the Chinese Commerce Ministry spokesperson said the country plans to introduce counter-tariffs.

“My administration will act whenever the interests of farmers, businesses, ranchers, and working men and women will be at stake,” said Trump while justifying the need to impose tariffs on Chinese products.

Can request for exclusion of certain items from additional duties

As the previous and current list of products under new taxes includes goods and components used in consumer goods, customers might see a rise in the prices for certain products. Costs for such items would probably reduce once companies start manufacturing the components in the US.

Left-minded journalists, columnists, and lobbyists working for corporate companies are indulged in planting stories about how tariffs may not prove to be the right option. They are worried about how American companies would absorb the rising expenses resulted due to taxes without passing it on the customers. However, what they are unwilling to discuss and debate is the fact that Trump administration has allowed companies to file tariffs exclusion requests. Companies can approach the administration with the list of imported components that should be exempted from additional taxes. Items can be excluded from tariffs only if they are not manufactured and available in the desired quantity from American suppliers.

In September, Apple had written to Robert Lighthizer, the U.S. Trade Representative, urging the government to reconsider its plan to impose tariffs as a wide-range of its products would be impacted. The company had not disclosed the list of products that may get affected. As per information released by the U.S. Trade Representative Office, some of Apple’s components and products (including Apple Watch) that it gets manufactured from China would be spared from the list of items facing the new taxes.

Trouble was expected for Apple, in fact, before few months, Chinese Communist Party-linked newspaper had pointed out that it was Apple that would get badly impacted in case of a trade war between China and the US. The Cupertino, California-based tech firm designs products in the US but gets them manufactured from China due to the availability of cheap labor driven manufacturing units. Specific accessories for iPad, adapters, chargers, Apple Pencil stylus, and some smart Watch components are imported from China.

Even chip maker Intel had come out in support of Apple saying phone and computer makers have manufacturing units in China. So, tariffs will harm the US’s dominance on telecommunications technology as well.

Stocks of tech companies are showing a lot of volatility due to the possibility of an increase in production costs as a result of new taxes on imported components.

Trump might agree to negotiate after winning the mid-term polls

Kate Warne works as an investment strategist at Edward Jones. She believes, investors will closely monitor the tariffs. Prices of some items would increase, and growth rate would reduce. Experts are also concerned about its impact on the upcoming mid-term elections in the US.

Peterson Institute for International Economics’s researcher Gary Hufbauer feels Chinese leadership won’t be positive about the Mnuchin dialogue. He suggests that Trump may not feel compelled to get involved in a fully fledged trade war before the mid-term elections. Even the recently announced duties on specific components would require time for implementation. The trade war might not help the president during the midterm polls as per Hufbauer.

George Washington University’s professor of economics, Michael O. Moore also shared a similar opinion. He said both sides would probably reach some negotiations after feeling the pain caused due to tariffs. There won’t be any quick solution for this issue, and this is the reason businesses are afraid.

Experts believe that the Chinese side cannot do much when it comes to imposing tariffs on American products coming into the country as there are not many items. However, the Asian giant can create new problems for American companies operating in China, put restrictions on the US’s investments. It can even act notoriously and go to the extent of slowing down the customs procedure resulting in a delay for American products entering the country. If you buy or sell the Chinese currency, Renminbi, you should surely use the index indicator to uncover market insights during the next few months.

The situation is surely not as bad as left-minded journalists portray it to be. New jobs are being generated; the unemployment rate has gone down. Trump has been urging companies to start producing their components in the US as they did during the early 90s. His point makes sense; big companies can quickly build new plants and start manufacturing parts in the US which would ultimately result in more employment. For components that are not readily available on the required scale, companies can file a tariffs exclusion request.

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