Repeat After Me: There Will be No US-China Trade Deal, Part 2. The Tariffs are your Roadmap.

On August 24, the day after President Trump “ordered” American companies out of China, we wrote Repeat After Me: There Will be No US-China Trade Deal. In that post we wrote the following:

1.  The US-China Trade War is and will be the New Normal (reinforcing what we have been saying for a year now).
2.  The tariffs on both sides will increase costs for those who manufacture product in China for sales to the United States and vice-versa. As to who will pay those costs and what you can do to try to reduce those costs, See Who Pays the Tariffs on China Imports? President Trump vs. CNN and What YOU Can do NOW to Reduce Your China Price.
3. President Trump’s “ordering” US companies to start looking for alternatives to China shows his overriding position on China; he wants a decoupling.
4. Companies must stop believing there will be a solution to the trade war that will allow them to go back to doing business with China the way they used to do business with China. They need to instead recognize that this situation is the New Normal as between the United States and China and that, if anything, things are more likely to get worse than they are to get better.

We concluded that post by saying that our next trade war post would set out what your business should do if you manufacture your products in China for sale to the United States or even for sale anywhere else in the world.

This is that post.

Yesterday, I asked a very experienced product sourcing agent how he determines which of his clients’ products should be made in China and which should be made elsewhere. He responded by positing that the most recent US tariff decisions make for a great roadmap for what can (and probably should) be made outside China and what still must be made in China.

He has a good point.

This past Friday, the Trump administration exempted more than 400 products from tariffs and per this sourcing agent, this was done because it is nearly impossible to source these 400+ products outside China. On the flip side, the products still subject to the US tariffs against China can generally be sourced outside China and so they should be. With this recent round of decisions and with President Trump having “ordered” American companies to get out of China, the Trump Administration has made clear that if you are importing products from China that can be made outside China, you will pay a high price for choosing to have those products made in China when you could have had them made elsewhere. If you truly have no choice but to have your product made in China, there is a good chance you will escape a high tariff.

For a good article on these new tariff exemptions, check out Trump grants tariff exemptions to plastic straws, dog leashes and more from China.

We also talked about how Chinese manufacturers over the last year or so have been facing a steady and increasing onslaught of American buyers eliminating or reducing their China purchases or trying to break up their China purchases into component parts and purchasing some of those component parts outside China. We agreed that American companies moving their manufacturing out of China or looking to do so has caused Chinese manufacturers to become wary of American buyers and American buyers are paying the price for this in the following ways:

1. Chinese factories are less interested in doing business with American product buyers. Some Chinese factories will not reduce their prices for American companies, even though their costs have declined. Some Chinese factories are reducing their prices for European and Japanese buyers, but not for American buyers. Some Chinese factories are saying that “dealing with American companies has become too difficult.
2. IP theft has increased as against American companies. Chinese companies have always done a cost benefit analysis in determining whether to steal IP from their buyers. On the side of not taking IP are long term buyers, good contracts, and good reputation. On the side of taking IP are the ability to make and sell an already developed product. Companies believed to be short term buyers are at greater risk for IP theft than a company believed to be buying from China for the long-haul. American companies are widely believed to be short term buyers. For more on these new risks, check out Has Sourcing Product From China Become TOO Risky? and China Trademark Theft. It’s Baaaaaack in a Big Way. 

But what exactly should you do if you are having products made in China for sale to the United States? If your products are free from high tariffs, the odds are good that your best bet is to keep manufacturing in China, while slowly continuing to look at other options. If your made in China products are subject to high tariffs, the odds are good that you will remain subject to high tariffs and on top of that you are at great risk from your Chinese manufacturer.  You are also at great risk of having your prices undercut by your competitors who have moved or will move their manufacturing out of China. Because of all these things, you should make it a priority to move your manufacturing out of China.  If you are looking to move your manufacturing out of China, the following articles should prove helpful to you:

• Moving Your Manufacturing Out of China: The Initial Decisions
• How to Stop Manufacturing in China: Try Harder
• How to Leave China AND Survive
• Overseas Manufacturing Contracts (OEM, CM and ODM)
• Moving Manufacturing from China: Where you Gonna Run?
• Moving Supply Chains From China to Southeast Asia/South Asia: It’s Not as Easy as it Looks

What are you going to do?

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.