Surviving Chinese Tariffs: How to Diversify Your Supply Chain
The trade war between the U.S. and China and rising labor costs has some supply chain professionals concerned. Here’s how to mitigate the costs.
Chinese tariffs have the potential to make a significant impact on your bottom line, especially if you operate in an industry with thin profit margins. According to Investopedia, the industries most disrupted by Chinese tariffs are automobiles, technology and agriculture, but supply chain professionals and organisations that depend of Chinese manufacturing are seeing impacted bottom lines.
While some organisations are bearing the raised costs, others are moving manufacturing out of China and diversifying their supply chains to avoid Chinese tariffs, and to take advantage of the varying labor and material costs in other Southeast Asian countries.
What are tariffs, and how do they impact supply chains?
Tariffs are taxes put on an imported product at a port or border. Historically, America has imposed tariffs to generate revenue, finance wars or protect domestic industries. In America’s current protectionist tariff environment, the goal is to bolster American manufacturing and other domestic industries, while discouraging Americans from buying goods produced in other countries.
The economic impact of tariffs in the U.S.
As of January 2020, the U.S. has imposed tariffs on $550 billion dollars worth of Chinese products. In retaliation, China has imposed tariffs on $185 billion worth of U.S. goods.
According to Trading Economics, China has been the world’s largest exporter at $2.12 trillion worth of goods exported in 2019. America is the world’s largest importer at $2.8 trillion worth of goods imported in 2019.
In the past years, the American government has imposed tariffs on a variety of products and countries beyond Chinese imports, including steel, solar panels, washing machines and aluminum. American tariffs were met with retaliatory tariffs from Canada, China, Europe, India and Mexico (some have since been lifted).
In December of 2019, the U.S. and China reached a “phase one” agreement on their ongoing trade war, which is the start of incremental removal of some of the tariffs on $360 billion worth of Chinese goods.
U.S. consumers have paid more than $42 billion for the tariffs. According to the National Bureau of Economic Research (NBER), American consumers and importers have paid for “approximately 100%” of the tariffs.
Chinese GDP growth slows
Chinese GDP growth dropped from 9.6% in 2009 to 6.6% in 2018, but some experts claim this drop would have occurred with or without the tariffs. China’s lack of unskilled workers for factory work and an over-emphasis on the manufacturing sector are major factors in the dip in GDP growth, and these factors were a concern long before the trade war.
Over the same time frame, the U.S. GDP growth rate went from 2.53% growth in 2009 to 2.1% growth in 2019.
How do Chinese tariffs affect supply chains?
The U.S. tariffs imposed on China have disproportionately affected the manufacturing sector, and will continue to affect the profit margins of corporations. Though the “List 4” tariffs (affecting $300 billion of goods) are set at 10%, and it covers materials that are crucial to manufacturing and supply chains. The materials that are subject to the tariffs include 437 metals, 303 machines and 133 chemicals, which account for $77.7 billion in imports.
A sharp rise in manufacturing costs affects the supply chain as a whole, and can impact the bottom lines of organisations that rely on Chinese imports. Many supply chain models operate on thin profit margins to begin with, with high labor and transportation costs. In some cases, a 10% tariff on goods and services can mean the difference between a sustainable business model and going into the red.
Labor costs in manufacturing countries
Part of the reason countries were moving manufacturing out of China before the trade war is the rising cost of labor in China. The hourly labor rate in China has risen from $4.99 to roughly $6.50 (a 30% increase) since 2016, and global supply chains are shifting manufacturing to more affordable countries, like Vietnam, Bangladesh and the Philippines. As of January 2020, U.S. manufacturing wages are exponentially higher than Southeast Asian countries, and the Institute for Supply Management reports the lowest index score since 2009. The high cost of labor is exacerbated by tariffs, and more supply chain professionals are diversifying their product sourcing to more affordable options throughout Southeast Asia.
The benefits of supply chain diversification:
Just as diversifying your personal investment portfolio insulates you from fluctuations in the stock market, diversifying a supply chain mitigates the costs of manufacturing, transportation, inventory and materials.
As opposed to relying on one sole manufacturing nation (China, for example), organisations can choose more affordable options in other countries without sacrificing the quality of their products. The increased flexibility in goods and services means organisations can mitigate monetary and non-monetary losses, such as damage from natural disasters or excess humidity.
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How to diversify your supply chain
Diversifying your supply chain can be incredibly complicated, and requires a thorough understanding of the cost of doing business with multiple countries. Factors that need to be considered for supply chain diversification include:
- Product costs
- Labor costs
- Packaging costs
- Production speed
- Service costs
- Packaging durability
- Raw material availability
- Product and packaging weight
- Transportation costs
- Regulatory policies
- Import/export costs
- Quality standards
- Environmental hazards
- Ethical standards
Even with a thorough understanding of these variables, diversifying your supply chain will not happen overnight. With all of these considerations in mind, you will likely need to work with professionals that specialise in diversifying supply chains to ensure you avoid potential risks and unnecessary costs.
Work with packaging optimisation experts to diversify your supply chain
To effectively diversify your supply chain, you will need to work with experts that are familiar with the dynamic Southeast Asian supply chain environment. There are numerous opportunities for cost savings through optimisation, right-sizing, weight reduction and customer-centric packaging design. At Billerud, we work with a wide network of suppliers in Southeast Asia to simplify the packaging portion of your supply chain to a single point of contact.
Contact us today to discover cost savings throughout your supply chain.