- On 6 July US tariffs on $34 billion of Chinese imports took effect.
- China responded with equivalent measures: it was a reciprocal confrontation in which each measure invited the next.
- It is worth looking at the whole chain: what suppliers and customers buy and sell, not just the company itself.
On 6 July 2018, US tariffs on $34 billion of Chinese imports took effect, and China responded with equivalent measures. Until then, the trade contest between the world’s two largest economies had been a series of lists, warnings and negotiations. From that day on, the tariffs were collected at customs. For many businesses, that sentence amounts to moving from a theoretical risk to one more line in the income statement.
The move from threat to application changed the nature of the conflict. It was no longer a matter of seeing how markets reacted to a possible scenario, but of managing real costs, orders that had to be fulfilled and contracts that had to be reviewed. For business owners in any country with indirect trading ties to those economies, a period began in which events had to be followed more closely than ever. Following sector news and keeping an open channel with the adviser helps avoid depending on general headlines.
From threat to application
Until then the tariffs had been lists and threats; from that day they were applied. The Chinese response in equivalent terms confirmed that this was a reciprocal confrontation, in which each measure invited the next.
This dynamic of action and reaction is what makes the course of a trade conflict so hard to predict. Each side seeks to show firmness to its own public and to its adversary, and each gesture is read as an invitation to respond. Those caught in the middle, companies that buy, sell or produce for these markets, have little ability to influence events and much to decide with incomplete information. The sensible course is to document the assumptions on which decisions are made and to review them when new information arrives.
Who pays the tariffs
A tariff is formally paid by the importer, who usually passes part of the cost on to the customer or absorbs it in the margin. That is why trade wars also affect companies that do not export directly: any business with components or customers in the affected chains may feel the effect.
In practice, how the cost is shared depends on the bargaining strength of each link in the chain. A manufacturer with little competition can pass it on in the price; one with many rivals will have to absorb it, reducing its profit. Sometimes the effect does not arrive as a visible rise, but as a cut in quality, a longer lead time or an unexpected renegotiation with a supplier seeking to protect its own margin. That is why it is worth talking to suppliers before the new prices arrive.
Looking at the whole chain
For a business owner it is worth asking not only what they buy or sell, but what their suppliers and customers buy and sell. Mapping these dependencies makes it possible to anticipate when a distant tariff will end up reaching one’s own income statement, and to prepare sourcing or market alternatives in good time. The sooner the exposure is identified, the more options there are and the less costly each one is.
A good method is to ask the main suppliers directly where their materials come from and the most important customers in which markets they sell. With that information one can identify where the real exposure lies, which often does not coincide with initial intuition. A foreign-trade adviser can help assess the options and, where appropriate, design a contingency plan. Such a plan need not be extensive: it is enough to define what will be monitored, what thresholds will trigger a response and who decides.
In an interconnected economy, tariff risk rarely stops at the border.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
