In addition to challenges Covid-19 has created in the global supply chain, retail executives find they are continuously challenged by the Trump administration’s US-China Section 301 tariff billing.
It’s been more than two months since the US rolled back some of the punitive tariffs imposed on China on February 14. In that seven-phase trade deal, the US halved the 15% tariff rates imposed on US$120 billion of Chinese imports in exchange for Beijing’s commitment to purchase substantially more US products and strengthen its intellectual property protections.
With Phase 1 completed, it’s on to Phase 2, which addresses cybersecurity issues, that executives hear the most about. The expectation is that Phase 2 will probably be rolled out “in waves” rather than in one big signing.
“There are still a lot of tariffs in place,” said Blake Harden, vice president for international trade at the Retail Industry Leaders Association (RILA).
Phase 6 calls on China to increase its purchases of US goods and services over the next two years by at least US$200 billion, including US$32 billion in agriculture. The deal also says that China will pursue financial services liberalization while committing to address allegations of forced technology transfer and currency manipulation to boost exports. The United States, however, will maintain a tariff rate of 25% for approximately US$250 billion of Chinese imports – roughly half the amount China sold to the United States in 2018.
This means that US$370 billion of Chinese goods will continue to be affected by punitive levies imposed by the US since the trade war started in July 2018. The Trump administration sees the agreement as the first part of a bigger trade deal to address longstanding US complaints over China’s economic and trade regime.
Lisa Schimmelpfenning, vice president for global trade compliance at Walmart, told a group of retail leaders at the RILA Supply Chain Conference in Dallas in late February that it takes time for low-cost retailers and providers like Walmart to react to significant changes in Section 301.
She receives little assistance from the United States Trade Representative (USTR) where she’s told, she says: “Check your twitter feed.”
With tariff changes usually announced on Fridays at 4 pm, Walmart executives have little time to react to how tariffs will impact costs, effective dates of shipments, and vessel arrivals for the upcoming week.
“It takes time for your merchants and pricing teams to do the math and know how you are going to meet margins to which you are committed,” she said. “There has been a lot of chaos. There have been importers saying, ‘You probably need to up your bond.’ Then, in addition to the increased cost of bonds, there are increases to administrative costs.”
Importers, she said, had to update their costing components and update purchase orders. “We couldn’t pump any more transactions through our system without slowing down,” she said.
Legal counsel for American Eagle Outfitters stressed how the political landscape both within the United States and internationally have made world trade volatile.
“The [Trump] administration is unpredictable,” remarked Chris Lucas, director at the company and its associate general counsel. “In regard to China, he went after the reasonable issue of intellectual property, but it has since morphed into a variety of issues. He’s big into trade deficits and does not know what’s on his full plate.”
Examples of this, he says, are the administration’s initiation of additional tariffs and duties regarding Section 232 of the Trade Expansion Act of 1962, an act that has not been used since 1986 and authorizes the president, through tariffs or other means, to adjust the imports of goods or materials from other countries if it deems the quantity or circumstances surrounding those imports to threaten national security.
Trump has doubled the amount of anti-dumping and countervailing duties, as well as backed out of or implemented the renegotiation of numerous free trade agreements.
“Specific to the supply chain are factors that are impacting that which we have not seen before or have not seen very often. And we are also encountering issues at a higher degree of frequency,” Lucas said.
Lacee Ecker, who is also director and associate general counsel at American Eagle Outfitters, expressed concern about how tariffs can impact sourcing. She emphasized the need for retailers to look at sourcing diversification. “Have contingency pricing models that are geared towards tariffs,” she said. “Have a disaster plan in place.”
Ecker added that risk should also be shared with the carrier/provider with whom they are working and seek contact protection. “Pay closer attention to taxes, tariffs and landed costs,” she said.
She emphasized the need to have a proactive sourcing strategy that emphasizes diversification. “Get dedicated buying agents who can consolidate products and components,” she said. “Tie this with contingent pricing and commissions that are volume-based. Companies should also look for substitute factories.”
Lucas stressed that making such determinations takes considerable time. In clothing manufacturing, for example, specific stitching, designing and cutting are not present in many countries. Consequently, finding the appropriate country slows the decision-making process. Then the determination must be made whether the location is viable for the long or short term.
By Karen E. Thuermer
Correspondent | Washington