Tonight’s the night. And in Trump’s baseland — the farm belt and the small to mid-sized business owner — everything is not all right.
Suffice it to say, they are in panic mode. Tariffs of 10% on some $200 billion worth of Made in China goods will go to 25% at midnight tonight. The only way tariffs do not go up is if Liu He, China’s chief trade negotiator, delivers a deal Trump cannot refuse.
Clearly, no one is betting on it. The Dow is down nearly 400 points and China’s Ashares, as represented by the CSI-300 Index, is down over 3%.
“I don’t think people really understand what is at stake,” says Alex Camera, CEO of Audio Control, a privately held, small business manufacturing audio sound equipment near Seattle, Washington. He imports electronic components from China and makes things like power amplifiers for cars. They design it and put it together in Washington. “Trump says China is paying these tariffs, but they are not. I am. U.S. companies are paying it at the port.”
Tariffs are port taxes due at the time of delivery and paid to the U.S. government. At best, companies like Audio Control can renegotiate its contract with its China supplier in order to lower — or in some cases — zero out the impacts of the current 10% port duty. But the hike to 25% is the real game changer. To say the business community, long seen as one of the key voter bases of the Republican Party, are terrified of an escalating trade war would not be an understatement.
“The 10% tariff required us to curtail some of our investments,” Camera says. “The potential of a 25% tariff from tonight would have a major impact on our investment and on our pricing. It frustrates me a little bit about how people see tariffs as an attack on the Chinese economy. Tariffs are an attack on my ability to use my cash to grow my business.”
Trump’s weekend threat to raise tariffs on China came after he was told by his top trade negotiators, led by U.S. Trade Representative Robert Lighthizer, that China reneged on earlier promises. Lighthizer warned the market this week that tariffs were going up on Friday.
Bill Adams, senior international economist for PNC Financial said the tangible and unpredictable effect will be on business investment, to which Camera’s claim serves as testimony.
“Tariff advocates have argued that they will divert investment into the United States so that businesses can maintain tariff-free access to U.S. consumers, but we haven’t seen that,” Adams says.
It hasn’t been an overnight shift, but supply chains are definitely shifting out of China. Tiffany Zarfas Williams, owner of retail firm The Luggage Shop in Lubbock, Texas says she is looking for luggage and travel bags that are not Made in China. “We are looking to shift our supply chain,” she said, begrudgingly, during a conference call with reporters on Thursday.
The China trade war is more complex than simply protecting manufacturing jobs, or reducing the trade gap between the two countries. It’s a long game. And one of the goals of the game is to force U.S. companies to look outside of China for manufacturing. Some items are only made in China. Others, like toys and consumer electronics, are dominated by China. The KitchenAid blender is made in China. Nearly everything Mattel sells is Made in China. The fancy store bags and boxes shoppers at J.Crew use are only made in China.
In some cases, like electronics components, China suppliers are still cheaper than rivals in Taiwan and South Korea even with a 25% tariff thanks to cheaper labor, lower taxes, and less stringent regulations.
China knows they are indispensable to U.S. business. It drives many in Washington crazy. The question many people are asking now is if China opts to wait out the Trump presidency and just deal with the tariffs, in hopes they do not lose too much business to the Americans. Trump said that China really prefers dealing with “weak Democrats”, calling out Obama’s vice president and presidential candidate Joe Biden in particular. He might be right. Maybe China would prefer dealing with Biden, who is currently ahead in the Democratic Party primary polls.
Laura Baughman, president of The Trade Partnership is anti-tariff. She thinks the U.S. should work with countries in the EU to apply non-tariff barriers against China. This was Obama’s tactic. He used the World Trade Organization to go after certain items coming from China.
Many American diplomats in Beijing have told me that the tactic was not enough. Most American businesses in China hate tariffs but admit that without them China would continue with its mercantilist policies and eventually railroad the U.S. economy, beating American companies in Asia.
Still, the trade war has a price for Trump.
Net job losses if tariffs go up to 25% depends on the state, but The Trade Partnership forecasts 29,000 job losses in Ohio and 32,000 in Pennsylvania. Both states voted for Trump in 2016.
“If 25% duties are eventually imposed on all China goods, and then you consider a Chinese retaliation, we estimate it would result in over 2 million jobs lost in the U.S. over the next one to three years,” Baughman says.
Global investors in China are hopeful for a deal.
This week, Nomura Securities said the likely outcome from this week’s trade talks is a 25% hike on Friday with an agreement to keep talking and signs of progress. Signs of progress could mean, in an ideal world, that tariffs retreat back to base. Tariffs are unlikely to go back to pre-trade war levels.
“Our core scenario is that we get a deal in the second quarter,” says Ed Al-Hussainy, a currency analyst for Columbia Threadneedle. “But it will lack substantive content and the threat of tariffs will remain live.”
Welles Orr, senior international trade advisor for Miller & Chevalier says the doubling of tariffs will hurt companies that serve the middle-class consumer. “Our clients that have been subject to the 10% tariffs have been able to deal with it either by passing on costs to end-users or making cuts here and there,” he says. “When it goes to 25%…that’s going to be a big deal.”
Orr thinks both sides need a deal. “It’ll be a new ball game if Trump cuts this deal. China would be acknowledging that they need to have a more predictable commerce system,” he says, adding: “I think the odds of a deal are better than 50/50.”
Indiana farmer Brent Bible is anxious.
“We are operating at a loss now. Since Trump announced the increased in tariffs on Sunday, we have seen a price reduction in our crops coming up for sale in the summer that equates to around a $50,000 loss for us,” he says. China has tariffs on U.S. soybeans. But China being China, they don’t really pay it. “Our soybeans are still going there,” he says. “They are purchased through the government so they can avoid the tariffs.”
American companies cannot avoid tariffs on China goods. Over 50,000 U.S. companies have asked for exemptions from tariffs so far. They’re still waiting for relief.