It looks like it’s going to be a long, tough ride for Utah companies looking to survive the trade war between the United States and China.
“The growing uncertainty affects everybody,” said Miles Hansen, president and CEO of World Trade Center Utah. “It impacts the broader economy as well.”
Despite sharing this news Tuesday, Kirton McConkie and World Trade Center Utah experts reassured local companies during their “Stategies for Surviving the U.S.-China Trade War” event that while the future is bleak, there are some tried-and-true approaches to minimize the trade war’s impact.
Barbara Bagnasacco, corporate and international lawyer at Kirton McConkie, explained to the gathered business representatives in Salt Lake City’s Key Bank Tower that there are a few key reasons behind the trade war with China. The U.S. has a $376 billion trade deficit with China, China is not using fair trade policies, forces U.S. companies to transfer technology when using Chinese manufacturers and offers inadequate intellectual property protection for companies working within that nation.
The trade war is also fueled because the U.S. and China both politically want to be the technological superpower within the world. To that end, in 2015 China instituted its Made in China 2025 program — a plan for China to become a major competitor in advanced technology, replacing foreign technology with China-made components. This strategy potentially will help China’s economy, but is projected to come at the expense of other trading partners.
Bagnasacco warned companies that economic experts expect the trade war to continue into late 2019, and it will hurt U.S. companies. She suggested that Utah companies should expect some changes to their supply chains and must be adaptive and flexible in their businesses over the next few months.
“I don’t see this trade war ending any time soon,” added Joseph Brubaker, shareholder at Kirton McConkie.
He shared the following five suggestions for surviving the bumpy ride ahead:
1. Request an exclusion. Utah companies can submit an application to the federal customs offices asking to be excluded from the tariffs. The most defendable reasons, Brubaker said, are an explanation of the uniqueness of the company’s product within its trading industry, details about how the company would go bankrupt due to the tariff costs, how the product is only available in China, or arguing that the product does not fall under the Made in China 2025 technology push. Brubaker said companies that utilize tariffed components on the two federal lists released this summer have until Oct. 9 to make these requests.
2. Tariff Engineering. Brubaker explained that some companies have successfully changed their products enough in order to move into different, less expensive sections under the tariff code. Marketing also comes into play in this situation, he said, using the example that Christmas lights are tariffed at a different rate than string patio decorative lights.
3. Move business operations to a new country. Utah companies that rely on Chinese manufacturing can sometimes move to a facility in a neighboring country, like Taiwan. They can still use some Chinese components, but by incorporating the other country’s manufacturing, the finished product has a new country of origin. It is not subject to the full tariffs.
David Kizer, VP of operations at Owlet Baby Care in Lehi, said his company already started this process of relocating their China operations to other countries. It’s very complicated, though, because the current system took them years to set up, and reinventing it has been difficult, he said.
4. Re-valuate the product. Brubaker explained that some companies, if they work with cooperative manufacturers and distributors, can trace the price they pay for their product back to the manufacturer’s cost. They can then declare this price to customs, thus lowering the overall tariff they must pay.
5. Manufacture within a foreign trade zone. Brubaker explained that certain cities, like Salt Lake City, are designated foreign trade zones, and manufacturing a finished product in these zones avoids some tariffs. For Utah County or Weber County companies, they can qualify as being in this zone if they are located within about a 60-mile radius of Salt Lake City.
Brubaker acknowledged all of these suggestions require serious effort, documentation, restructuring, time, money and planning for local businesses, and they won’t work for every business. The industries currently most impacted by the tariffs are those utilizing metals, those targeted by the Made in China 2025 program and agriculture. If the trade war continues, even more companies will feel the pinch.
Bagnasacco explained that the current trade war is part of a larger federal trade strategy, in which “unilateral tariffs are favored over multilateral agreements.” Whereas his predecessors favored trade agreements and partnerships with multiple companies, President Donald Trump pulled the U.S. out of the Trans-Pacific Partnership, is renegotiating NAFTA without Canada and has mentioned possibly exiting the World Trade Organization.