Every day we use products bearing the label “Made in China”, a mark that has become synonymous with the affordable mass production of countless objects that fill the American home. China is a manufacturing hub with the largest export economy in the world, exporting approximately $2.48 trillion of goods in 2018. Recently, the US Trade Representative (USTR) proposed a plan to impose tariffs as high as 25% on $200 billion of imports from China, including electronics such as smartphones and laptops. The tariffs will go into effect on June 25th unless a new deal between these economic superpowers can be negotiated.
Electronics manufacturers in particular will be hit hard. They are more likely to source components from different parts of the world, resulting in multiple rounds of exports and imports across the Pacific Ocean. In the near future, companies may be forced to raise the prices they charge consumers to cover the increase in cost. Some companies like Apple that have high profit margins may choose to absorb the increase in cost without changing prices, but other electronics companies with smaller profit margins will not have this option.
The threat of tariffs has been an ongoing subject that is causing manufacturers to consider actions to mitigate the cost of potential impending taxes on imports. A recent survey of more than 200 corporate executives by the consulting firm Bain showed that “42 percent [of respondents]… expected to get materials from a different region in the next year, and 25 percent… were redirecting investments out of China.” However, changing the supply chain can be an expensive and lengthy process.
Part of the thought process behind the trade tariffs is to encourage more manufacturing in the United States. In addition, the recent tax reform included changes such as the Foreign-Derived Intangible Income deduction that provides a 37.5% tax deduction on foreign exports (applicable to C corporations). Yet, despite the tariffs on imports and incentives for exports, data shows that while imports from China have decreased, they are being offset by increased imports from other countries rather than an increase in manufacturing in the US.
While we wait to see the outcome of these negotiations, American manufacturers will continue to consider the implications of these tariffs on their business decisions.
