Donald TrumpMassive Chinese prices are in break. The media debated. Wall Street is delighted. Many of my clients have sigh of relief. The great retailers jumped for joy. But for how long?
To start, The prices This has not been stopped – a 10% levy on all Chinese products, plus a 20% bonus tax that relates to fentanyl, are still in place. When you take into account the existing prices on steel of the previous Trump and Biden administrations, the effective rate rate on Chinese products is in fact closer to 40%, according to an analysis carried out by the Wall Street Journal.
This is a large number. Maybe that will not dissuade people from buying underwear from Target. But for companies that depend on steel and aluminum, semiconductors, synthetic fabrics, plastics, minerals, coverings and solvents as well as certain bearings, engines, pumps and parts, an increase of 30 to 40% is a major impact on their margins, which will affect their expenses and their investments. In the end, the costs of end products that use these materials will also increase as companies simply transmit them.
Just as important, Trump’s animosity towards China – without foundation or not – will not disappear as if by magic. He is called the Chinese Trichers, polluters and thieves. And its past actions – in particular in its first administration – do not increase well for a rapid resolution of this problem.
In 2018The Trump administration not only imposed expensive prices on China, but has also published very severe requirements to resolve negotiation problems with its nearest economic rival.
There were specific quotas to limit our trade deficit. Requests have been made to reduce the Chinese requirement forcing American companies to share or transfer technologies with their Chinese counterparts. There were rules aimed at arresting the alleged flight (ha, ha) of data and intellectual property by the Chinese.
The problem is that none of this has happened. What happened – shortly after the negotiations start – was cocovated. Then 2020 and a new administration. But don’t think Trump will no longer increase these problems. He will, and when it will happen, we will be back in the same place that we have started: excessive prices and a trade war with China.
This does not mean that companies are completely stuck. Many – those who have the funds – use the price suspension to buy China products as it is a fire sale at Costco Le Black Friday. Others contract with warehouses and storage installations in conjunction in free trade areas to accept products which are temporarily without a price, hoping that when they draw materials from these storage units, these prices have dropped.
I have customers who are aggressively looking for alternative suppliers. I have others that bring back their assembly and their manufacture to the United States. Those who are unable to do this type of investment try to determine how and how much they can change the prices and what the market will take. Some have already created special line articles on their invoices to separate the price load in order to say: “Hey, don’t blame me for this kind of thing!”
My smartest clients have started to do this kind of thing the day after Trump’s election. They listened to what he said in the previous two years. They read the writing on the wall. Now they are ahead of the game. Good for them.
Companies that have not done this – in particular small businesses which have fewer resources and which depend more than one supplier or two – are in difficulty, especially if they buy in China. For any business that still depends on Chinese suppliers and markets, this break will not last as long as you think. There will be much more to come in this trade war – and hope that it does not turn into a real war. The perspectives are precarious and risky. Trump is volatile and emotional and has a story to hit China. Plan accordingly.