Keeping a Close Eye on Tariffs

Some of the Trump administration’s tariffs went into effect earlier this month–and were met with retaliatory measures by China–and a second round was threatened just recently, affecting a wide variety of goods, ranging from food products to consumer electronics and including chemicals, materials and other components. In addition to the recent U.S.-China news, Canada, Mexico, and the European Union have retaliated against steel and aluminum tariffs levied against their countries earlier this year, as well.

The situation is casting a shadow of uncertainty over an otherwise robust economy, industry watchers say.

“What we see are a lot of potential slowdowns,” says Brian Matas, of semiconductor market research firm IC Insights, emphasizing the harmful effects of a trade war with China and others. “It all leads to higher prices for consumers, and that could have a negative impact on global business.”

Others agree. Responding to the Institute for Supply Management’s July Report on Business, some purchasing and supply managers pointed to a lack of stability emerging in the marketplace.

“U.S. tariff policy and lack of predictability, along with [the] threat of trade wars, [is] causing general business instability and [is a] drag on growth for investments,” said one respondent representing the electrical equipment, appliances and components industry.

Another manufacturing industry respondent noted: “The uncertainty of U.S. tariffs and the Canada/Mexico/E.U. retaliatory tariffs continue to cloud strategic planning efforts. Contingency planning (for tariffs) is consuming large amounts of manpower that could be used for more productive projects…”

As Matas explains, the worry is that the situation may slow things down rather than keep the steady hum of the manufacturing economy going.

“If the tariffs start having a big impact, what will companies have to do to improve or keep things from derailing too much?” he asks.

A Call to Action

The government has taken action against China due to what many recognize as that nation’s unfair business practices—an issue the manufacturing and supply channel largely agree upon. But a chorus of industry voices are criticizing the government’s actions as the wrong way to address the problem.

Jay Timmons, president and CEO of the National Association of Manufacturers, said the following after the government released its July 10 list of an additional $200 billion in Chinese goods that may be hit with tariffs: “The last thing America’s manufacturing workers need is an escalating trade war. America has China’s attention, so instead of more tariffs, the U.S. and China should immediately begin working toward a fair, bilateral, enforceable, rules-based trade agreement to end China’s market-distorting activities. We can’t afford to wait any longer.”

Some suggest the tariff tensions are a negotiating tactic designed to do just that: get China to the bargaining table. For others, the uncertainty and potential business slowdown associated with such tactics is a big risk.

“Sometimes, there’s a lot of bluster and then you pull back. That could be what’s going on here,” says Matas, agreeing with Timmons about the need for a better U.S.-China trade agreement. “The trade imbalance is a problem–but our present approach is not having the right effect. I think there are better ways to go about it than to slap on tariffs.”

The complex nature of the electronic components supply channel makes the tariff situation especially tricky, he explains. Consider the semiconductor market: Some American companies manufacture chips at facilities in China; those chips may then be packaged in Malaysia or Taiwan, shipped to a cell phone manufacturer in Korea, and brought back to the United States.

“Where do you apply the tariff? How much [do you apply]?” Matas says. “Everything is so interwoven [in the electronics industry]. For the tech sector, specifically, I think it could be more of a detriment than a benefit.”

There are similar concerns about other product categories. In a June MarketEye article, connector industry researcher Ron Bishop cautioned against the negative effects of a tariff war on that segment of the business, pointing to supply disruptions and pricing concerns, in particular.

“A ‘tariff war’ with China could have a significant negative impact on the connector industry,” Bishop wrote. “Companies may look to move their manufacturing around to avoid the tariffs, although this would be a longer-term reaction. Customer supply line[s] could be interrupted. Prices could go up.”

Such issues remained in an “uncertain” mode as of mid-July, with many hopeful of a clearer path in the months ahead. As with the previously announced tariffs, the government’s most recent proposals are subject to a notice and comment period, which ends in late August.