Trading Places?

Could a new trade deal rescind existing tariffs on Chinese goods and shift the balance of power between the U.S. and China?

Electrical product manufacturers and distributors alike remember well the events of March 2018, when President Trump announced the enactment of 25% and 10% tariffs on imported steel and aluminum, respectively. The move was designed to “restrict imports and allow the U.S. steel and aluminum industries to increase production, use idle capacity, and rehire workers” as well as attempt to rebalance the power in the historically one-sided trade relationship between the U.S. and China. Since then, and whether companies agree with the premise of the tariffs or not, both manufacturers and distributors have concurred that the tariffs introduced a level of price volatility and uncertainty into their sales cycle that’s been tricky for both themselves and their customers to manage.

Last December, following the tariffs he imposed on some $250 billion of goods, President Trump agreed to suspend the enactment of any additional tariffs for 90 days pending the outcome of trade talks with Chinese President Xi Jinping in early March. So, what’s the current status of any new tariffs and the relationship between the U.S. and China now?

The Current Situation

According to Alex Ayers, executive director of the Washington, D.C-based Family Business Coalition (www.familybusinesscoalition.org), “President Trump and President Xi Jinping agreed to a 90-day ‘cease-fire’ at a dinner on December 1, 2018, in order to give their negotiators time to reach a trade agreement. This 90-day ‘cease-fire’ expired on March 1, but the President announced on February 24 that he would continue to delay any new tariffs or increase in tariffs based on the progress being made in trade negotiations.”

In terms of any kind of “new deal” with China, Ayers said that negotiators have come to a basic agreement which is expected to be finalized at the end of this month in a meeting between Presidents Trump and Xi. “The current work-in-progress agreement is about 100 pages long and a large portion is dedicated to protecting U.S. intellectual property, which is a major complaint from U.S. companies, who contend that Chinese companies illegally infringe on their patents and ‘knock off’ their products,” Ayers said. “The agreement also reduces the timetable for changes to foreign ownership limitations of firms doing business in China. As an outspoken critic of how the Chinese economy protects itself from foreign imports and investment, U.S Trade Representative Robert Lighthizer has prioritized the protection of U.S. companies in these negotiations.”

While some other economic reforms sought by the U.S. weren’t included in the proposed deal, “if the deal is signed later this month, we expect that President Trump may rescind tariffs on at least $200 of the current $250 billion currently in place,” Ayers said. “In exchange, China will lift their retaliatory tariffs and increase purchases of U.S. agricultural products, natural gas, and other American-made goods.”

“Luckily, this agreement, once signed, will prevent any additional tariffs and should pull back most of the current tariffs,” Ayers continued. “The current threat to increase tariffs from 10 percent to 25 percent on $200 billion worth of imports has always been a double-edged sword, since, while an increase to 25 percent may be useful in getting negotiations going, it could also cause widespread economic harm.”

“As long as negotiations continue positively until President Xi’s visit at the end of March,” Ayers concluded, “we expect that there won’t be any new tariffs.”

Voice of the Industry

According to Jennifer Dolin, head of Government Affairs and Sustainability for LEDVANCE LLC (www.sylvania.com), the tariffs have affected players in the electrical products industry like lighting manufacturers in multiple ways.

“First, businesses are unable to unilaterally absorb the additional costs of tariffs—whether at 10% or 25%—and must pass these increases on to customers, which not only affects pricing and cost structures but adds significant administrative burden at every level,” she said. “While time and resources are redirected towards these administrative tasks each time a new round of tariffs is assessed, this becomes exponentially more cumbersome for our customers, who are dealing with multiple suppliers.”

Dolin is among the many industry professionals who hope that President Trump doesn’t double down on the tariffs. “A rise in tariffs to the 25% level would place more than just an incremental burden on businesses and the industry,” she contended. “While one intention of the tariffs is to encourage manufacturers to find sourcing options outside of China, at some point customers may start to review their own supplier options and find partners whose supply chain isn’t subject to these uncertainties. There’s significant apprehension throughout the industry, for manufacturers as well as distributors, on the topic of a rise in or the addition of new tariffs, and the question becomes ‘how much will the market accept?’”

“Tariffs on imported goods are paid by those who import them, and these added costs are passed along to the customers who buy them,” Dolin explained. “China isn’t paying these tariffs — American businesses like LEDVANCE and its distributor customers are, and these costs are ultimately passed on to end users.”

Through these uncertain times, Dolin confirmed that clear communications have been key. “Since the tariffs were first proposed in 2017, we’ve had an open dialogue with our customers, have kept our distributor customers informed well in advance of any action taken by LEDVANCE, and have worked diligently to maintain transparency when it comes to handling this ever-changing situation,” she said.

As for the future, Dolin confirmed that LEDVANCE will continue to maintain these kinds of open and timely discussions with customers so that they can plan for any changes accordingly. “This is a very current and relevant news topic, which makes it less controversial when talking with customers,” she said. “With the current environment of uncertainty and unpredictability, it’s important that we all remain flexible.”