Without becoming an expert economist, political guru or historian… can we get a sense of what’s happening? If so, we won’t be caught by surprise when prices fall dramatically (or increase), and when a supplier has a shortage.
Taking a spin around the news (and fake news), experts and politically driven content machines online can cause enough confusion that makes us want to turn it off.
Today we will do our best to side-step politics give you a fast view about what ‘they say….’.
What is a ‘trade war’? (and why?)
A trade war is when a country imposes tariffs or other barriers on imported products, prompting other countries to retaliate by implementing similar taxes or penalties.
Trade wars may be instigated when one country perceives another country's trading practices to be unfair or when domestic trade unions pressure politicians to make imported goods less attractive to consumers.
Current ‘trade war’ activities:
In the case of the recent China-U.S. activity, the US imposed aluminum and steel tariffs in early March in order to protect those American industries. Also announced were 25% tariffs on $50 billion to $60 billion in Chinese exports to the U.S., including aerospace, information and communication technology, and machinery. China responded by placing fees on a wide range of U.S. products, including scrap aluminum, sparkling wine and apples. The current administration then promised tariffs on about 1,300 Chinese products. Hours later, China came out with more tariffs, this time taking aim at Boeing planes. The US administration was entertaining the idea of another $100 billion in tariffs.
Or is it more about positioning?
Although the U.S. trade deficit with China reached record levels in 2017, the U.S. position relative to trade with China has improved in some respects as China becomes less focused on exports and more on internal expansion and development, according to Mario O. Moreno, senior quantitative economist, maritime research, for the maritime research and consulting firm Drewry. Mario O. Moreno also says: “Although both countries continue to ratchet up their rhetoric, several factors indicate a full-on trade war is unlikely,” Read more >
Has anyone won a ‘trade war’ in the past?
The most prominent trade war of the 20th century was ignited by the Smoot-Hawley Tariff act of 1930, which imposed steep tariffs on roughly 20,000 imported goods.
Led by Canada, America's trading partners retaliated with tariffs on US exports, which plunged 61 per cent from 1929 to 1933. The tariffs were repealed in 1934.
Historians and economists continue to debate the extent of the damage to the global economy, but there is little disagreement that Smoot-Hawley and the ensuing trade war exacerbated and prolonged the hardships of the Great Depression.
Another example is the United States steel industry, which since World War II has probably received more protection from tariffs and quotas than any other industry.
Decades of tariff protection have done little to stem the industry's decline. Domestic steel employment dropped from 135,000 in 2000 to 83,600 in 2016, according to the Bureau of Labor Statistics.
Historically, there is no winner in a tit-for-tat trade war.
Sherman Robinson, nonresident senior fellow at the Peterson Institute for International Economics, explained that a trade war usually starts out with just a few sectors and then retaliates across other sectors. He said, “Whether there will be a full-blown trade war is mostly up to what the U.S. does, because the rest of the world has to decide how to react to the U.S. efforts.”
“If we moved toward a widespread trade war, it's very possible that the result would be the U.S. withdrawing from the world's trading system, cutting both exports and imports,” Robinson said. “And if the rest of the world holds firm to the rules-based trading system in the World Trade Organization, which Trump scorns, and all the other multilateral and bilateral agreements that they're pursuing, then it would mostly hurt the U.S.”, he added.
Who wins? (or loses?)
"Our exporters would be disadvantaged. Our farmers would lose some sales. Import prices would go up for U.S. companies," said Mark Perry, scholar at The American Enterprise Institute and professor of finance and business economics at the University of Michigan-Flint. "U.S. consumers would be negatively affected with higher prices, and the U.S. workers could see some job losses."
Matt Priest, president and CEO of the Footwear Distributors and Retailers of America, a trade group, said about 70 percent of all the shoes sold in the U.S. come from China, which already has an average tax of 11 percent imposed by the U.S., nearly 10 times the average 1.3 percent duties applied to all Chinese imports.
"When there is the potential to add additional tax on Chinese goods, and rumor that those goods could include footwear," Matt Priest said. "We obviously grow very concerned because we go based on history, based on economics, based on the structure of our industry that that will be that Americans will pay more for their shoes."
“President Trump’s tweets on April 8th and 10th and most importantly President Xi’s April 10th speech did a lot to calm the nerves of investors in the US and China that no trade war was imminent. President Xi in his April 10, 2018 speech at the BOAN Conference in Hainan pledged to open China further to imports and to investment and to protect the intellectual property rights (“IPR”) of foreign companies.
In response to the Section 301 case, we can expect a round of intense negotiations between the US and China until November 18, 2018 to see if President Xi’s promises can be put into writing and the threats of a trade war averted. Although President Xi pledged to move the reform process expeditiously, the Section 301 case has external deadlines. After the May 15th hearing and final comments on May 22nd, there are still 180 days, 6 months, or until November 18, 2018 before the US takes action under Section 301.
Section 301 are usually settled with trade agreements, so the question is what will China agree to and what will be in the Agreement.”
Source - Bill Perry, Partner, Harris & Bricken. - For more than twenty years, Mr. Perry has been involved in trade litigation between the United States and China and has seen the impact of the Trade War up close.
How does a business prepare?
Small businesses that operate internationally are usually the first to be impacted by tariffs and trade wars. Unlike large corporations, small businesses usually can’t afford to absorb higher supply costs and often have to take the price that comes to them. They don’t want to raise the prices of their products in fear of losing out to the competition.
In the United States, small business account for the majority of exporters and importers. According to a study by the International Trade Administration, 98% of U.S. exporters and 97% of importers are small to medium-sized businesses. However, they only make up about one-third of the total trade value. While many small businesses participate in international trade, their operations are not high-value, making the impact of a price changes from tariffs more damaging.
Predicting what will happen in the coming months is difficult but there are some things small businesses can do to prepare for the various effects.
At this moment in time, trade threats between the U.S., China and the E.U. have yet to become reality. If they do, globalization makes it difficult for even the best economists and business leaders to predict. For small businesses, taking a few easy steps now could positively impact business even if a trade deal is reached. Read full article >
Resources for you
Reviewing the various sources online proves the Internet is difficult to wade through. The frantic reporting about ‘the end is near’ offers too few solutions.
First – Stay current. Here is the most recent Harmonized Tariff Schedule (2018 HTSA Revision 2 (Posted 03-29-18))
Second – Have your recordkeeping, financials in order. It is especially important to have accurate records if you are doing an analysis to increase prices of your products and services or invest in new equipment for better efficiency. Or team here at Accounting Solutions Partners know very well the importance of accurate record keeping and how they are essential to making difficult decisions. Contact Eric Moore here.
Third – Rely on resources and experts. For instance, the international trade community in Greater Seattle is here to help you succeed with your export activities.
As the future unfolds, worry and anxiety will have a ripple effect. Regardless of the final agreement, it makes sense to be proactive vs reactive. There may be support from the government in special cases or exceptions. If so, they will ask for records. As you take the next steps, be sure to call us to help you create accurate records to assist you in your decision making.
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