These messages came across loud and clear in a recent webcast we held for inbound clients. Entitled US technology, policy and trade: Looking past borders, the session featured insights from leading PwC subject matter professionals on customs and international trade, tax policy and analytics. And while rising complexity was a recurrent theme, there was also agreement that the apparent risks for foreign-owned companies are offset by significant opportunities in each area.
The critical importance of recent events around tariffs and trade was highlighted right at the start. The webcast opened with an electronic poll on the question, “Is your company impacted by China tariffs or the United States-Mexico-Canada Agreement (USMCA)?” In response, almost two-thirds of the inbound attendees were either directly impacted or thought they might be.
Managing the impacts from higher tariffs is made all the more difficult by the continuing change and uncertainty surrounding them. The three lists of Chinese-produced goods already attracting US tariffs could be supplemented by a “list 4” in 2019, capturing all imports of Chinese origin. China may likely continue to retaliate. And while USMCA or “NAFTA 2.0” has been negotiated, there’s no guarantee that it will be passed by the House of Representatives – with the big question being what the Democrats might require in return.
All of this points to the potential for ongoing increases in tariffs, accompanied by continuing expansion in the types of goods they apply to. Which in turn suggests that the increasingly protectionist environment isn’t just a short-term challenge – but may likely represent the longer-term “new normal” for businesses operating across borders, including in the US.
Faced with this situation, what should foreign-owned companies operating here be doing? Their first step should be something we’ve been urging inbound corporations to do for some time: conduct an in-depth study of the current and future costs that tariffs impose on their business. The challenge is that tariff costs are generally buried deep in companies’ systems and typically can’t be extracted easily. This makes it hard to get a clear view of what tariffs represent in terms of costs along the supply chain and the cost of goods sold.
Given these constraints, businesses should take concerted action to get the data they need, interpret it, and identify their choices for minimizing the impact of rising tariffs. Potential actions revolve mainly around further consideration of the supply chain and where goods emanate from – with the possibility of switching to different sources as a way to avoid higher tariff costs.
Currently we’re seeing many inbound clients reassess their supply chains with this objective in mind. Interestingly, such reviews are not new; a few years ago, allegations of dumping by white goods manufacturers based in Asian countries outside China led the US to impose tariffs on domestic appliances imported from the region. A rethink of their existing supply chains and sourcing led at least one Asia-based player to acquire a white goods factory in the US to sidestep the new tariffs.
A similar approach – essentially responding to tariffs by making acquisitions or investments in the US – is among the tools available to foreign-owned companies today. As was highlighted during our webcast, acquisitions in the “Fourth Industrial Revolution” (4IR) space are likely to be most highly rewarded by the market at the moment. And M&A is just one strategic option open to inbounds, alongside switching to domestic sources of supply for inputs to manufacturing or assembly processes conducted in the US. A further possibility is to seek exclusion of specific products from the tariff regime – but in relation to the China tariffs, these haven’t yet been entertained by the current administration.
So, as tariffs continue to rise, what’s the overall message for inbound corporations? In my view, it’s three-fold. First, they should continually examine their supply chains and sourcing vis a vis current tariffs to see how these might apply to their situation, and explore what strategies may be available to mitigate the impact (e.g., Are applications for exclusion feasible? Have the company’s classifications of impacted products been reviewed? Can a lower customs value be established for the affected goods? or are alternative suppliers and sources available). Second, they should keep a close eye on developments coming down the line, including new rounds of tariffs and retaliatory actions. Third, they should ensure their voice is heard in Washington. With the shift in control of the House, there will be a lot of changes in the chairmanships of various House committees. Moving early to establish relationships with the new appointees before issues arise may pay dividends.
Like it or not, rising tariffs could now be a fact of life, and may remain so. It’s time for inbounds to adjust to the new reality – and take action to plot a sure-footed path through them, rather than falling victim to their effects.