How to Turn the Trump vs China Trade War To Your Advantage
There’s been a lot of talk in the news and media regarding Trump’s increased tariffs on Chinese goods, let’s take a deep dive into what this means for you and your business if you are currently importing products from China.
First of all – what is a tariff? It’s a tax on products made abroad. Governments impose tariffs to make foreign goods more expensive so that people are more likely to buy domestic goods and boost a country’s economy. The US currently has a massive trade deficit with China meaning they import far more goods than they export. In 2018 when Trump started increasing tariffs, the trade deficit between the USA and China was $419 billion.
Trade deficits aren’t necessarily a bad thing, so why is Trump doing this?
China is a country he has accused of unfair trade practices since before he became president.
Washington and Beijing have been embroiled in a trade war for about two years after the Trump administration accused China of stealing intellectual property and restricting market access to US companies.
So that’s the macro, let’s go micro and analyze what does this mean for you and your business and how can you use it to your advantage with some short, medium and long term strategies.
1. The first step is knowing what your Harmonized Tariff Schedule (HTS) code is – you should know this but if you want to double-check you can search here – https://hts.usitc.gov/. Your HTS code is also written on your Bill of Lading shipping document so you can double-check with your forwarder and input your code in the HTS website to get your latest tariff amount.
Next, you want to find out how much your tariffs have increased since Trump started turning up the heat if they have at all. Once you understand how much more you are paying to import your goods you can better understand what type of outcome you want to achieve.
2. Talk to your forwarder/shipping agent – they are moving thousands of containers in and out of China every day and have ears on the ground with what’s happening with their clients, suppliers, and local Chinese governments.
Ask your forwarder what they suggest to do with China shipments and what they see happening in the short, medium and long term and if they can offer any support. Support may come in the form of discounts, storage or inside knowledge on which countries are moving fastest to improve their manufacturing capabilities.
Seek expert advice; don’t listen to people’s advice on facebook who have no knowledge or understanding of what’s going on. By expert advice I mean if you have questions ask your suppliers, forwarders or friends who are importing a lot of goods from China and ask them what they are doing to combat these increased tariffs right now.
There’s a lot of information on the internet but the source of that information may not be from people actually importing containers from China on a daily basis. You have to very carefully audit the source of your information and that goes for all aspects of your business too.
3. If you are desperate to ship out goods so you don’t go out of stock and you are affected by increased tariffs, ask your supplier to absorb some of this cost increase with you.
For example, one approach could be, if your tariffs have increased by 21% – tell your supplier you will absorb 7%, you will charge the customer 7% (on the buying price, not the retail price remember) and the remaining 7% the supplier should pass onto you as a cost reduction.
A cost reduction is a win-win for both parties to prevent loss of sales for you and loss of orders for the supplier.
4. If you have started production and are not desperate for the stock, ask your supplier to delay your shipments and keep your goods in their warehouse until the tariff situation cools down (nobody knows how long this could be so make sure you check if your goods are perishable or have an expiry date before making such a decision).
5. Not something I recommend, but a strategy I know some companies have adopted is lowering the cost of goods on their supplier invoices, so if the goods are $20 unit price and now listed as $15 then you are only paying import duty on $15 rather than $20, therefore, dodging the tariff cost. But be warned, if you reduce the COGs on an invoice, you better have a reason for it if customs pulls you upon it.
6. One of my best selling items are backpacks, the import duty on backpacks coming into the USA was 17% then in September 2018 it was increased to 25% and now it’s at 42%. I also import backpacks into the UK, did you know the import duty on backpacks into the UK from China is 2.7%. That’s almost 40% COGs increase for the exact same product made in the same factory and exporting from the same country!!
My point is, use this tariff increase as an opportunity to supply markets not affected by the trade war. Are you only selling on Amazon USA and always considered selling in other markets? Well now would be the BEST time to do it.
Remember you and your competitors are in the same boat – no pun intended 😛 but it’s those who act smartest who will succeed through all this.
7. Talk to your suppliers to find out what they are working on – backpacks from Myanmar to the USA are 0% duty, however, I haven’t found any good backpack factories in Myanmar. In come the Chinese, talking to one of my best suppliers, I asked him what are you doing about the tariffs?
He said they are opening their own factories in Myanmar, taking Chinese workers over, training the local workers and putting in Chinese systems and processes to now manufacture and ship out of Myanmar and that factory will be ready by March 2020.
8. One thing I’ve noticed about the HTS codes is that there are so many different classifications your product can be, there are different codes and tariffs depending on the raw materials used in the production process.
By researching the HTS website you can figure out if your products can be classified as something else based on the materials used, or you can add/remove material from your product to be classified as a cheaper tariff code.
Even the biggest companies in the world are doing this; did you know that Converse All-Stars are technically slippers? Maybe you’ve noticed that your brand new pair of Chucks has a thin layer of fuzz on the sole.
According to a patent filed in 2002, Converse says that the felt is there for ‘increased slip resistance and quieter usage’.
Here’s the kicker, the only reason that Converse puts hairy bottoms on their signature sneakers is so they can be classified as house slippers. Why? Tariff rates for importing shoes into the US can be as high as 37.5% and vary widely based on the material used, but classifying the shoe as a slipper guarantees the rate at 3%. Chucks are not slippers, they just found a clever way to slip the system – the fuzz is not permanent and completely rubs off after about a month of being worn!
9. If your product can be produced in other countries consider finding other suppliers in Asia: Vietnam, Myanmar, Bangladesh, etc but approach with caution and understand there is always a teething process when setting up a new manufacturer and especially if this is in a new country – always start with a trial order before committing to large orders.
Do a cost analysis of how much you will save by sourcing from another country VS the time and finances it will take to switch production e.g. visiting a new country, sampling, freight cost from a new country, starting with a trial order, testing, quality control and inspection process from the new factory.
You need to list these costs then calculate if the costs associated from sourcing from a new country are significantly less than the cost increase from the new tariffs.
As well as costs, you must also consider the scale of production (number of workers/machines), production quality and speed of production time from other countries. There’s no use sourcing from a new country at a cheaper price if they are unable to manufacture at the speed and scale of which you require.
Unfortunately, nobody knows how long this will last for, it could be over tomorrow or last another 2 years. Making a decision to source from a new country is not an easy one considering everything could go back to normal tomorrow, but it doesn’t hurt to have a back-up in place in case the situation gets worse or the COGs from China continues to increase.
10. If you don’t want to go all the way and switch your production to another country, you can consider sending unfinished goods to another country.
For example, if you are making towels, you can ship the towels and the labels separately to another country such as Bangladesh, they then ‘finish’ the goods by sewing the label onto the towel and then ship out from Bangladesh at their much lesser tariff rate. But you need to consider – do you have a partner in that country you can trust to carry this out for you.
11. Another approach could be doing a cost analysis of shipping your goods to Canada and fulfilling your items from Canada to your customers. This may or may not work for you depending on the tariff difference between countries and fulfillment costs to your customer from the new location.
12. One final strategy you can implement right away to your advantage is getting a cost reduction on your order by bringing up the exchange rates with your suppliers. China just devalued its currency to the lowest point it’s ever been in a decade! They’ve done this to counter against the increased tariffs on Chinese goods imposed by Trump. What is the impact of a weaker yuan?
A weaker yuan makes Chinese exports more competitive, or cheaper to buy with foreign currencies. You can use the website – www.xe.com to chart the exchange rate fluctuations between the dollar and yuan.
In May 2018, 1USD = 6.25RMB and 6 months later in November 2018, 1USD = 6.95, a difference of .70 which is more than a 10% increase. That means if you paid your supplier $50,000 for order in May and another $50,000 for order in November, then they have just made an extra $5,000 on the exchange rate alone.
Instead of trying to get a cost-saving by reducing the quality of your product, try charting the exchange rate based on when you made your last payments to your supplier and show them how much more they have made from the exchange rate and ask them to pass this saving back onto you.
This goes back to what I was saying about working in partnership with your supplier – you will pass this saving onto your customer resulting in more sales and more orders for the supplier. You won’t be successful if you word it in a way that you want a piece of their profits.
They may not give you the full 10% saving as they make up reasons why their cost of goods has increased but you may be able to get at least 5%. The best time to ask for this discount is right before you need to pay the remaining balance on the order.
The supplier will just want to get paid and if you ask earlier in the production process they have plenty of time to make up reasons why they need to raise the cost of your order (raw material costs have increased, labor costs have increased, etc).
With all this, be aware that things can change at any moment. It’s a constant negotiation between countries. I want to put as many options on the table for you; everyone’s situation will be different based on their products, order quantities and rate of repeated orders. Use this information above to figure out the best way to have the situation play into your own advantage.
In summary, here are the bullet point actionable tips:
- Know your HTS code
- Seek expert advice – talk to your forwarder
- Ask your supplier to absorb a portion of the tariff increase
- Delay your shipments and keep in your supplier’s warehouse
- Cost of goods on your invoice
- Use this as an opportunity to enter new markets
- Ask your supplier what are their long-term strategies on reducing cost
- Add or remove a material from your product to be classified as a cheaper tariff code
- Do a cost analysis of manufacturing from another country
- Consider shipping ‘unfinished’ goods if you have reliable partners
- Consider shipping to another country and fulfilling from there
- Get a cost reduction using the devalued yuan currency
Kian Golzari is one of the world’s leading product development and sourcing experts having lived and worked in China for more than 10 years developing over 2,500 products for global brands and visited over 500 factories. He has a free Facebook group called Sourcing with Kian answering China-related questions helping Amazon sellers achieve better terms, products, prices or factories. To see how Kian helps Amazon sellers, click here.