The Impact of Tariffs on Supply Chains

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Table of Contents

Introduction
The Significance of Trade between China and the USA
Chinese Manufacturers Exporting to USA
Transferring Production Overseas
USA Importer of Chinese Products
Conclusion
Recommendations
Reference List

Introduction

Since the establishment of diplomatic relations between the PRC and the United States, trade and economic ties have developed rapidly, revealing a high degree of complementarity and mutual benefit. The development of bilateral trade relations is in the fundamental interests of both the Chinese and American people. However, over the past five years, U.S.-China trade and economic cooperation have not been fruitful. The reason for this is a trade war that has international repercussions. For a long time, both countries have tried to impose restrictive measures that, as a result, have proved disadvantageous to both. The unresolved situation has been the subject of many scholarly discussions and still raises pertinent questions.

Therefore, this assignment aims to determine the interconnectedness of the economies and the possibility of reorienting production in other regions. The paper will analyze mutual trade (exports and imports of goods and services), demonstrating the close economic ties between the United States and China. It is correspondingly essential to assess the pros and cons of alternative approaches to trade and their viability. The U.S.’s desire to protect national security interests and strengthen its position in important global economic sectors has pushed to challenge China’s fast-growing economy. However, the ability of the two countries to reduce trade could harm both countries.

The Significance of Trade between China and the USA

For the last thirty years, China has been the world leader in terms of industrial and financial growth, the owner of the second-largest economy in the world. It is the globe’s largest exporter, creditor, and consumer of raw materials, with the most extensive gold and foreign currency reserves, the future planet’s account currency, the world’s largest population, and army (Chong and Li, 2019). Global processes in which China plays an increasing role significantly impact the formation of the unique world order.

China’s relations with the leading players of world politics and, above all, with the U.S. are of great importance for the further development of the global order. Exports account for 36.6% of China’s economy, and 20% of Chinese exports go to the United States (Chong and Li, 2019). The economies of China and the United States become increasingly interdependent every year. The United States is one of China’s most prominent investors, with U.S. investment in 59,000 Chinese projects totaling $115 billion (Chong and Li, 2019). Despite increasing trade turnover, significant differences remain between the two countries.

The U.S. has expressed concerns about some aspects of China’s trade policy. They include the export restrictions on commodities, the RMB undervaluing by about 40% against the dollar, artificially creating a competitive advantage for Chinese manufacturers and preventing the U.S. from reducing its negative trade balance (Itakura, 2020). Chinese claims concern the removal of restrictions on exports to China of high-tech products, the politicization of trade and economic issues, anti-dumping investigations, and the creation of a level playing field for Chinese companies to invest in the United States.

For years, all Chinese products exported to the United States or other countries were labor-intensive, low-value-added outcomes (toys, clothes, shoes). Over the past few years, however, China’s exports have changed considerably, with more technologically sophisticated products now being supplied to the U.S. (Itakura, 2020). market. Nevertheless, it is worth noting that numerous U.S. MNC corporations moved their production to the PRC to reduce production costs, which affected the structural changes in China’s exports to the United States. Between 2018 and January 2020, the top categories of U.S. imports from China were computers, cell phones, and shoes (Evenet, 2019). Most of these goods are commodities U.S. manufacturers send to China for low-cost assembly costs.

Consequently, they are considered imported goods once shipped back to the U.S. The most significant U.S. imports into China are civilian aircraft, soybeans, and automobiles. In 2018. China canceled soybean imports after U.S. President Donald Trump launched a trade war – he imposed duties on Chinese exports of steel and many other goods (Evenet, 2019). It created an imbalance in bilateral trade between the U.S. and China in favor of the PRC, but this has not prevented the development of further marketing and economic relations, characterized by a reasonably high interdependence.

China produces labor-intensive products that meet America’s growing demand, and as a result, the U.S. economy is restructuring. The U.S., in turn, represents one of China’s largest and most important markets for commodity products. Consequently, the U.S. has a stable demand for Chinese goods, and China, at the same time, can build up its foreign exchange reserves. Through the operation of U.S. companies in China, the country gets a source of modern technology that contributes to the further development of the Chinese economy. All of the above allows asserting that a new stage in trade and economic relations between the U.S. and China has begun.

Chinese Manufacturers Exporting to USA

The U.S. and Chinese economies are the two most robust economies in the world, and they cannot help but have an impact on world trade. Therefore, a trade war between the two countries has implications for the entire world and becomes a reason to search for new sales opportunities. Firstly, the trade confrontation between the two countries will lead to a mutual reduction in the demand for goods (Iqbal et al., 2019). Moreover, the imposed tariffs do not allow trade to function correctly. In this case, two options can be offered to Chinese exporters, and the first is the search for new markets. Even though the EU and the United States have always been ideologically close, unilateral measures by the United States may lead their former allies, despite their ideological affinity, to move closer to China in trade, which will ultimately contribute to a closer partnership between China and the EU.

If the trade and economic confrontation continue, China will presumably be able to take advantage of the European Union as a market for its products. The European Union is China’s largest trade partner. For the EU, on the other hand, China is its second-largest trading partner after the United States, but the difference between the two is rapidly narrowing. When China joined the WTO in December 2001, its exporters benefited from tariff reductions due to the obligation of most-favored-nation treatment (Iqbal et al., 2019). Moreover, uncertainty about trade policy was significantly reduced. Therefore, the main advantage of this way is favorable conditions and an already familiar market.

Chinese exporters do not have to lose money selling to the EU, while at the same time, the union can cover the trade deficit. However, the EU’s trade deficit with the PRC is much lower than that of the U.S. with the PRC. This method alone is not enough to significantly reduce trade with the U.S. However, it is essential to note that the EU deficit is more significant than reported by Eurostat. Thus, according to Comtrade, Germany has a trade deficit of $16 billion with China, while Eurostat data show a positive balance for Germany (Iqbal et al., 2019). The difference in value-added figures between goods exported by the EU to China and goods exported by China to the EU used to be so large that estimates of the trade deficit in gross terms would be grossly overstated compared to the actual debt measured through value-added figures. This fact has recently become less relevant as China has risen in the hierarchy of chains, and the value-added component of PRC exports has increased.

The second option is more radical and involves not producing certain goods and services. Among its advantages are the reduction of costs and the end of the need to cover tariff costs. Moreover, the U.S. need for Chinese goods is likely to lead to a reduction in requirements and an end to severe trade restrictions. However, this measure will entail a decrease in the aggregate welfare of society as a whole. Commodity-exporting countries will be affected, as the demand for raw materials to produce these same commodities will be reduced because of the refusal to deliver goods (Li, 2018). There is also the possibility of the opposite: the U.S. may impose retaliatory sanctions, and thus, Chinese exporters will find themselves in an even less favorable position. In either case, a trade war between countries significantly complicates international trade.

Transferring Production Overseas

Proximity to markets or individual customers increasingly requires relocating parts of production or even unique production functions to other countries. Although exporting to the U.S. has long been quite profitable, tariff commitments and government measures make it necessary to find solutions to unexplored production strategies. It is essential to understand that each country has its specifics, and even geographic proximity is not a guarantee of success. Before relocating production, it is crucial to consider several factors and assess which option will be most profitable. Manufacturing, which depends heavily on technology and the use of equipment, is unlikely to save on labor costs. However, comparing the extent to which they can be partially offset by investment and logistics costs is essential. Moreover, the history and current situation of companies and their environment is critical, and planning and goals should be as recognizable as possible.

Thus, it is vital to obtain cost reductions, which must be compared with investment and transfer costs, as well as the estimated logistical factors and risks arising from the move. Costs are always only one side of the coin, which can change due to future events, especially concerning currency conversion. The main risk is that foreign countries have laws and tax systems, and these details need to be considered (Kashyap and Bolthra, 2019). There are also political risks, such as conflicts and threats related to developing the country’s economy. These factors should form the basis for the choice of countries for production.

One of the main options is Vietnam due to its clear advantages over other regions. Vietnam is close to China, which allows for spending minimal resources on the relocation of production. Moreover, the Vietnamese government is friendly to foreign business owners with the same rights as Vietnamese entrepreneurs. Despite the many advantages, it is dangerous to move manufacturing to Vietnam precisely because of anti-Chinese sentiment and politics (Kashyap and Bolthra, 2019). It is not uncommon for workers to go on strike and for shipments and production to be delayed.

The main advantages of working with Thailand are the inexpensive labor force and the accommodating nature of local manufacturers, who are not spoiled by wholesale buyers from abroad and are willing to lower purchase prices in favor of customers. Working with Thai companies can be done without intermediaries (Lau, 2019). Numerous local producers, in an effort to increase export volumes, translate their websites into English and try to rank high in Google search results. Logistical issues with Thailand are sometimes even more straightforward to solve than with China. All Thai manufacturers use the international rules “Incoterms,” which determine who pays for shipping and insurance and is responsible for the goods (Lau, 2019). Thailand is more democratic concerning Chinese manufacturers, but this country likewise has its disadvantages as higher logistic costs. Therefore, choosing the land of production is a long process, requiring detailed research and considering the final decision.

USA Importer of Chinese Products

It is generally accepted that the supply of products from China has much more significant advantages than the United States. However, this information is inconsistent because each country’s stores have advantages and disadvantages. Every entrepreneur should comprehend that it is essential to balance low costs and the quality of products for production (Lau, 2019). It is from these categories that the success of the business depends, and therefore the choice of the supplier should be competent and balanced. The major disadvantage of supplying products from the U.S. is that the cost of raw materials is much higher than in China or other countries (Yu and Zhang, 2019). Moreover, the cost of producing goods in other states is much lower due to the cheapness of labor and its skills. Large production forces are located outside the United States, and it is these that allow the life cycle of a product to be completed in a short time and at an affordable cost.

The high cost of tools is correspondingly a disadvantage that can significantly influence the choice of country of supply. The price of the necessary tools in China is 1/5 of the expense of tools in the U.S., and starting projects in China is a significant advantage (Yu and Zhang, 2019). It is a giant difference; not all small businesses can cover the high cost of tools. Furthermore, the production process requires modifications, which are likewise expensive in the USA, and preventive maintenance is an additional material burden. Particular attention should be paid to the mass production of goods, which is not quite profitable to produce in the USA. The peculiarities of large volumes of production imply even higher costs. At the same time, it is the number of goods that determines the competitiveness of the company and its ability to meet the needs of the market (Liu et al., 2020). Moreover, the scale of U.S. companies does not allow for an increase in output in the shortest possible time. The ability to do quickly is a plus in the direction of production in other countries.

Choosing foreign production allows business owners to turn over responsibility for production to professionals and concentrate on other areas of business development. Focusing on product development, marketing, promotions, and new deals can help business owners grow their enterprise while they have a competent team to handle quality control on their behalf. Therefore, among the main disadvantages of producing in the U.S. are the high total production costs and the inability to have a large number of products in a single cycle. Manufacturing in another country is much cheaper than production inside the state. It is worth mentioning the variability because, in the U.S., there are not enough options for producing a wide range of products with different quality options.

At the same time, there are clear advantages of manufacturing directly in the U.S. Above all, they include a more straightforward communication process with partners, and the same mentality contributes to an understanding and a stronger bond. Moreover, numerous surveys show customers are much more likely to choose domestic goods than those made in other countries (Wei, 2019). Higher labor standards contribute to a quality work environment and a positive public perception of the product. A quick order fulfillment process and the absence of long waiting periods for delivery from abroad are the pluses. Entrepreneurs can save on shipping and customs duties and pay for the order conveniently in the usual currency (Liu et al., 2020). Correspondingly, the U.S. has some of the strictest intellectual property rights protections, and manufacturing a product domestically can reduce the likelihood of theft. From the information above, it can be concluded that the supply of U.S. manufacturers has both advantages and disadvantages, and the choice of the most profitable option depends on the circumstances of a particular case.

Conclusion

After this study, it can be concluded that the U.S. and Chinese economies have been mutually dependent on each other’s exports for numerous years. However, increasing tensions in trade relations between countries against the backdrop of rising volatility of the global economy

significantly impede the free economic flow between governments. The United States and China have production and marketing alternatives, but they are not viable enough to meet the needs in the long term. Both economies are facing problems at this point, and historical analysis, along with forecasting, can be the basis for providing recommendations concerning trade issues.

Recommendations

The following recommendations can be made based on this study:

Any economic policy toward China should be evaluated using qualitative and quantitative methodology.
Countries planning to do business in China should assess how open it is for these countries.
There is no need for unilateral concessions, and countries should negotiate mutual market liberalization.
Dispute settlement should be based on WTO norms, considering China’s economic weight.
Before embarking on trade relations, domestic production capabilities and prospects should be evaluated.
An appropriate economic assessment of cooperation’s potential benefits and costs should be made.

Reference List

Chong, T. T. L., and Li, X. (2019) ‘Understanding the China–US trade war: causes, economic impact, and the worst-case scenario’, Economic and Political Studies, 7(2), pp.185-202. Web.

Evenet, S. (2019) ‘Putting the Sino-US trade war in contemporary and historical perspective’, Journal of International Economic Law, 22(4), pp.535–555. Web.

Iqbal, B. A. et al. (2019) ‘The future of global trade in the presence of the Sino-US trade war’, Economic and Political Studies, 7(2), pp.217-231. Web.

Itakura, K. (2020) ‘Evaluating the impact of the US–China trade war’, Asian Economic Policy Review, 15(1), pp.77-93. Web.

Kashyap, U., and Bothra, N. (2019) ‘Sino-US trade and trade war’, Manag Econ Res J, 5(2019), p.10173.

Lau, L. J. (2019) ‘The China–US trade war and future economic relations’, China and the World, 2(02), p. 1950012. Web.

Li, C. et al. (2018) ‘Economic impacts of the possible China–US trade war’, Emerging Markets Finance and Trade, 54(7), pp.1557-1577. Web.

Liu, L. et al. (2020) ‘Environmental and economic impacts of trade barriers: the example of China–US trade friction’, Resource and Eergy Economics, 59, p.101144. Web.

Wei, L. (2019) ‘Towards economic decoupling? Mapping Chinese discourse on the China–US trade war’, The Chinese Journal of International Politics, 12(4), pp.519-556. Web.

Yu, M., and Zhang, R. (2019) ‘Understanding the recent Sino-US trade conflict. China Economic Journal’, 12(2), pp.160-174. Web.

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