Answers to China Tariffs: Strategy for Protecting Your Product Costs

China Tariffs

In January of 2018, President Donald Trump effectively started a trading war with the impending imposition with a series of tariffs on selective products and components produced outside the United States. These tariffs included:

  • Section 232 Tariffs authorizing the President to impose tariffs on any goods which can impair the national security.
  • Section 301 Tariffs which authorize the President to impose penalties on any country or commodity based on “unjustified, unreasonable or discriminatory trade practices.”

These tariffs offer the potential for increasing employment in a select number of U.S. aluminum and steel mills. However, with these tariffs having gone into effect on trade with Mexico, Canada and countries in the European Union, they bring a negative downside that will certainly radiate to many industries and have already alienated some of the U.S.’s closest allies.

The Chinese Tariff Trap

In particular, components and products imported from China have been narrowly targeted for penalties under Section 301 tariffs. List 1 tariffs under Section 301 (covering 818 HTS codes) affect commodities such as boilers, generators, turbines, aircraft components and machinery at an estimated annual trading value of $34 billion. List 2 tariffs (284 HTS codes) cover chemicals, machinery, and certain fuel and commodity-holding large shipping containers at an estimated annual trading value of $16 billion.

The Trump administration is preparing (or threatening) to impose Section 301, List 3 tariffs, which would have an enormous negative impact on businesses relying on components imported from China. List 3 tariffs affect approximately $150 billion in products for the electronics, telecom, lighting, automotive, and construction industries, among others.

Companies serving these industries are understandably skittish about continuing to source their components from China. These tariffs have the real potential for crippling margins and causing slowdowns in growth and employment in various industries. For these companies, there is an alternative to China sourcing that can protect their margins and continue to position them for business growth.

An Economic Alternative: India Sourcing

Many MES customers are entrenched in the lighting, telecom, electronics, automotive and agricultural industries. Fortunately, they are not locked into China as their only outsourcing strategy. In fact, most are directing us to source from India, Vietnam or other countries where trading is outside the scope of the Trump Administration’s tariff policies.

In most cases, the best alternative to China sourcing is to shift production to India. And there are two reasons why.

First, with the Trump administration’s tariff policies as currently imposed or projected, sourcing from India can avoid all the Section 301 tariffs.
And the second reason is the “Made in India” initiative being driven by India’s Prime Minister, Mr. Narendra Modi.  This initiative has provided for fundamental economic policy changes that have dramatically improved the business climate in India. These include infrastructure improvements, better rates for electricity and Indian investments in domestic digital technologies.

This initiative is encouraging Indian companies to invest aggressively, expanding both production capacity and manufacturing capabilities. Automotive, housing and agricultural markets in India are also growing at a torrid pace, encouraging an investment boost that has enhanced India’s business growth prospects.
Now is the time to leverage manufacturing opportunities in India. And with the imposition of the Section 301 tariffs on Chinese imports, those opportunities become even more attractive.

India Supply Chain: No Compromise in Quality or Delivery

By nurturing a diverse spectrum of offshore manufacturing sources, MES is strategically positioned to provide manufacturing and supply chain options to help its global customers mitigate disruptive tariff policies.  We are in the process of building dozens of tools in India to relocate manufacturing and sourcing from China.
MES started sourcing in India as far back as 2012. We now have developed unique capabilities with engineers in three out of five key manufacturing clusters, including the south region (Chennai, Coimbatore, Bangalore), the western region (Gujarat and Jamnagar, the “brass capital of the world”) and the highly industrialized Northern Sector (Delhi, Faridabad, Gurgaon).

MES has audited nearly 160 Indian suppliers for commodities that include aluminum die castings, steel forgings, steel investment castings, stainless steel castings, and rubber-engineered automotive products. MES currently does business with 18 Indian suppliers and is ready to expand its supplier roster to meet growing demands and to protect our clients’ supply chains.

Supplier diversity is the key to prevailing despite an escalating tariff policy.