Increasing tariffs and the threat of a global trade war is something that all senior-level financial executives need to consider when planning for their organization’s financial future. But how can you do that when policies seem to change daily?
We speak with Philip Sutter -- Director of U.S. Regulatory Affairs of global trade broker Livingston International – regarding his advice to clients when it comes to the global disruption in tariffs and trade.
A transcript of the conversation appears below the podcast player.
Chris Westfall: Is the US in a trade war and is it in a trade war with everyone or just a few people?
Philip Sutter: Certainly there are various negotiations going on like the NAFTA renegotiation (North American Free Trade Agreement) the KORUS renegotiation (U.S. - Korea Free Trade Agreement) that was completed, and there's of course the trade remedies that have happened, or will happen and the countermeasures that have taken place. But, there are upcoming negotiations, discussions, NAFTA renegotiations will resume at the end of the month. I believe some trade envoys from China and Europe will be in Washington as well soon.
So, when I say it's too soon, it's like some of these are in place, some of them are coming. Could they be stopped? Yes. Both the ones that are coming and the ones that are in place. They could turn it around just as quickly as they came in. Some of these/most of these have not been in play for very long, all mostly happened in just the months of this year so far. And things have been changing pretty rapidly. Just today, there was another new Section 232 investigation that was opened up on uranium. So there are a number of things pending, but I guess I would just in general hesitate to call it a trade war at this point.
Westfall: When do you think the consensus is, "Okay, we're in a trade war." Or do you never get there?
Sutter: When you look at the numbers, various trade actions that are, trade remedies that are in play, they are more than encompassed by what may yet come. Section 301 for example, there's $34 billion dollars of imports that are affected by a 25% tariff that started on July 6th. There's another $16 billion that may come into play next month, and another $200 billion that could come into play sometime around September. But if you add up all the things that have happened so far that Section 201, the 232 steel aluminum, they don't even add up to that $200 billion.
I guess at some point you'd have to call it a trade war, but there's still relatively smaller numbers, like China for example, there's $34 billion in play right now, but total imports from China is more than $500 billion. If it ramps up all the way, we could potentially have everything covered at some point.
Westfall: Is there any precedence for the type of tariffs, the type of back and forth we're seeing right now and just in the overall amount of disputes going?
Sutter: Well I don't think anything in my career span, it doesn't go back 50 or 100 years. But these actions, 232 and 301, there have been 232 and 301 actions in the past. Not in groups like this, in quick succession. I guess if you went back in history, you'd look at the Smoot–Hawley Trade Act of 1930. That significantly raised tariffs and 20,000 imported goods. And that, as I understand that was like the second largest tariff act. There was one 100 years previous to that, the so-called tariff of 1828 which was known as the Tariff of Abomination. So it had a big impact on the southern states. That put a 38% tariff on just virtually everything, that was imported at the time.
To answer your question, I haven't seen anything and it’s been awhile, since we've seen anything like that.
Westfall: So you don't there's sort of a playbook as US companies manage these trade disputes.
Sutter: Well, I don't think, like I haven't seen these things, in this kind of volume. So I imagine, most have not as well. There is a large learning curve to understand how to comply and deal with these things. Within a company's supply chain.
Westfall: Which industries do you see that are being impacted most now, and ones you think are going really be hit in the near future?
Sutter: Yeah like I said earlier, there's been certain targeted ones, like the very first one that would talk about it, it's like Section 201, which affected back in February, solar cells and washing machines that accounted for about $10 billion dollars of imports. And then there was the Section 232 that came in, I guess I'd call it in various stages, because there were initially country exemptions, which for the most part have been peeled back. But that affected the steel and aluminum imports. And then the other one that's in play right now, active is the Section 301, I'll call it List One, which is more broad than those other ones, industrially significant technology. So your high level machines and apparatus. And that's only on China. The other ones were on, across the board.
It's pretty targeted with the exception of China, because if the $200 billion, which I would refer to List Three, you're going to get into all kinds of different products. Agriculture products, chemicals, fuel, wood paper, building products, and then additional higher level products. Tools, engines, machines, automatic data processing, all kind of electronics, auto parts. Like I mentioned, if they do that remedy, and then China continues to retaliate, just about everything from China will be covered. What else, from other countries? Right now, it's just limited to those things. The one thing that would be broader, I would say that might potentially happen is, whatever happens with the NAFTA renegotiation. So that's kind of a wildcard, right?
Westfall: Are supply chains being affected right now?
Sutter: Definitely the supply chains are affected. I guess I would say even if you are not an importer, you're affected. The inputs that you buy, these supply chains are deep and if you're building something that contains steel and aluminum. But the odds are that somewhere up downstream, or upstream I should say, it has an imported steel or aluminum in it. So it's going be affected. That's one of the challenges I think for financial executives is to be aware, to be cognizant of that. How have they structured their purchase orders to account for that? Are they liable for those price increases, to compensate their suppliers for the duty that they may be occurring?
Westfall: How are you talking to CFOs, and others, and anybody in the industry about planning, future planning for this?
Sutter: Yeah, it's very difficult to be completely predictive. We kind of, discussions we've had, emphasized at least right now, short term flexibility. You don't want to jump too soon, like close down your plant in one country, and open it up somewhere else. That might be jumping too fast. Like we said, these things can change quickly. But you need to have the long term visibility, that these things might happen, and right now emphasize your short term flexibilities. What can you do to build in that kind of redundancy? Do you already have a redundancy so you can react and make some quick changes? Quick tweaks to your supply chain, and if you don't, what are you doing as part of your plan to build that in, to build in options and your supply base.
You mentioned uncertainty, certainly the three big drivers of problem, I would say, it's uncertainty, it's complexity, and then those two things driving costs. Obviously there's the cost of the tariffs, but there's also an administrative cost to try to cope with the understanding. Because there's a number of things that can go wrong with trying to deal with these issues. And I think that they, these remedies, these negotiations, renegotiations, magnify the inherent compliance ... There's always supply chain risk, and compliance risk to deal with, that's why companies like Livingston exist. It's even more important now, because it's magnified.
And that all equates to more risk, more exposure, right?
Every element of the cross border transaction that's important for compliance and accuracy and reducing risk is magnified. The classification, we've had clients that want us to look at their classifications and you've got to verify. These lists, like the Section 232 steel lists are driven by classification. So you got to get that right. Both ways. You are highly exposed if you've classified it incorrectly and you're not paying the duty, you could be subjected to penalties. And conversely, you don't want to pay it obviously if you don't owe it, you shouldn't owe it. So you got to take a look at that and check that accuracy.
With tariffs coming up to 25%, valuation is critical. So how have you structured your customs transaction. Are you accurately stating your value? Obviously, you always want to, must report the correct value, but if there's any issue with that right, what opportunities do you have to restructure your transactions to take advantage of potentially lowering that cost somehow. All of these remedies are drive by country of origin. Are you reporting that correctly? Again, these are all things that you need to report correctly to begin with, but it's magnified now.
Sutter: Going on, there's other things that really can trip you up. The Section 232 has, what are called, absolute quotas for certain countries, so Brazil, Argentina and South Korea, all have an absolute quote for steel, and Argentina has an absolute quota for aluminum. By absolute quota, that means, once a certain amount, volume of that steel category, so there's like 53 different steel categories. Once that limited is reached for the year, you can't import anymore. If it shows up at the border, if you haven't paid attention to that, and those goods arrive, they can't be imported. You could put them into a bonded warehouse or a foreign trade zone, but they'd have to sit there.
For months maybe, until the quota reopens at the beginning of 2019. Actually it'll be February I think, because I think it's one year from the date of inception. So there's things like that. And we may see more of that. Right now, Europe didn't want to make any concessions or whatever to avoid and continue their exemption that they had up through June 1st. Maybe that changes, maybe the tariffs are eliminated, but then they have to be subject to one of these absolute quotas. If you're not dealing with Brazil, Argentina and South Korea today, but you're dealing with Europe, you're avoiding that complexity of the quota. But I mean, if that comes in, imagine how complex that would be with 28 additional countries subject to an absolute quota.
other thing that comes into play, has come into play, and will continue to be an issue to watch, are the deadlines. The 232 came into play on March 23rd, it had different changes due to changing exemptions on May 1st and June 1st. The 301 came in on July 6th, so you could've avoided some of that tariff if you got your goods into the US ahead of those dates. So, you'd have to be really watching ahead.
Looking ahead there's a big 232 investigations on automobiles and auto parts.
That could be a very expensive tariff. So, as a planner, you got to really watch that and you get back to that flexibility. If you can kind of be predictive or take some calculated ... Kind of cut your losses kind of thing. Maybe bring a higher inventory into the country earlier than you normally would have, and kind of beat the clock at that point.
Westfall: Do you think financial executives are underestimating the amount of complexity or you think that everybody's got a pretty much decent idea about what's involved here.
Sutter: I think the trade, Livingston and other companies have really stepped up to provide information. Early on we saw a bit of denial, that it was happening, but now I think people realized these aren't just empty threats. They will be implemented.
If they're in conditions, are existing. So, there may be still some of that, but I think most involved in it at this point must know, especially the ones that have to flip the bill to pay these duties. If they weren't woken up before, those kind of bills will wake you up.
Westfall: How is this going end?
Sutter: Well, I think there's different negotiations going on and all these things kind of, to the outsider, kind of blend together, but I think there's certainly a China issue, and I don't think the United States is the only country that has issues with policies that China has, such as technology transfer and rules about foreign ownership and such. That didn't just start, it's just another chapter in that struggle.
We don't know exactly what's being negotiated with Europe. There were the NATO meetings, just last week. One of the issues was the EU country contributions for NATO, I think that's probably one. The tariffs that they have on our products, like the 10% tariff on autos that they have versus our 2.5%, that's part of it. So how will all of that play out? Nobody knows. Then another thread would be NAFTA renegotiation and what they want to achieve with that. There's a concern over the loss of manufacturing in the US.
So there's a number of different themes, a number of different levers in these negotiations that could change things.
Westfall: So, no end in sight, at this point.
Sutter: Well, no predicted ... I can't predict an end. It's not in the foreseeable future, but could it end quickly? Yeah it could.