What A Trade War With China Could Mean For U.S. Manufacturers

Manufacturers have been waiting for the next moves since President Trump announced on March 22 tariffs on roughly $50 billion worth of Chinese goods, and Beijing has responded by increasing tariffs by up to 25 percent on 128 U.S. products.

The growing tensions have the potential to put U.S. manufacturers in the middle.

While the Wall Street Journal had released a report that the two countries were quietly negotiating behind closed doors, China announced Monday that it will be imposing a 25 percent tariff on products including U.S. pork and aluminum scrap and 15 percent tariffs on products including sparkling wine, steel pipe and foods including grapes, apples and walnuts.

Meanwhile, the Trump administration is preparing to unveil a list later this week of Chinese tech products that will be targeted for tariffs in retaliation for its technology transfer policies.

It could be a bumpy ride in the coming months as China is an important market for U.S. manufacturers. The new tariff announcements from Beijing reinforce a Chinese embassy statement released on March 23 that said it is “not afraid of and will not recoil from a trade war.” It said that the country is capable of facing any challenge and that if a trade war were initiated by the U.S., it would “fight to the end to defend its own legitimate interested with all necessary measures.”

China is a critical market for many U.S. manufacturers and tariffs on U.S. imports there would almost certainly impact demand. Apple earned more than 20 percent of its total sales from China in the most recent quarter. Other companies with a big presence in the Chinese market include Texas Instruments, Intel, 3M, Qualcomm and Nike.

“While China may negotiate, some analysts aren’t sure the country may be able to concede on all demands..”

Boeing announced a $37 billion order for 300 planes from China last year and said in a forecast in September that the country will buy as much as $1 trillion worth of aircraft in the next two decades. Boeing CEO Dennis Muilenburg told CNBC in mid-February that he wanted a “balanced approach to China.” “We need fair trade, fair competition. But as you look at the China market from an airplane standpoint…those 41,000 new airplanes, more than 7,000 are in China. It’s becoming the world’s biggest airplane market,” Muilenburg said.

More than two dozen American brands also wrote a letter to the president on March 19 expressing concern about the negative impacts from the Section 301 of the Trade Act. It said that if the investigation were to result in broadly applied tariff on imports from China, it would tax American families with higher prices on household basic such as clothing, shoes, home goods and electronics. Another letter from the Footwear Distributors and Retailers of America echoed similar sentiments.

Treasury Secretary Steven Mnuchin said in an interview with Fox News that the administration is not afraid of a trade war although “that’s not our objective.” Mnuchin said the U.S. will proceed with tariffs and investment restrictions while also negotiating to try to reach an agreement with the Chinese.

One thing the U.S. wants is for China to eliminate rules that require foreign companies to set up joint ventures with Chinese firms. An even bigger concern is intellectual property theft which was identified as the main reason for the tariffs.

While China may negotiate, some analysts aren’t sure the country may be able to concede on all demands. Mark Williams, Chief Asia Economist at Capital Economics said in a note to clients in late-market that while China may be able to reduce the bilateral trade imbalance, it won’t be by $100 billion as Trump has demanded. He also expressed doubt that the Chinese would make substantial changes to its practices on intellectual property as they have been a key element to developing the economy.

It remains to be seen if it would impact U.S. manufacturers that rely on Chinese supply imports, because many of those are already going to other countries such as India and Vietnam. Bloomberg noted that a wider U.S. China trade war could accelerate the transition as U.S. Companies that relay in Chinese imports would have to redesign their supply chains around the tariffs. “Multinationals and their suppliers would look for alternative facilities outside China, some would probably decamp from the mainland altogether for cheaper climes,” Bloomberg said.

Jay Timmons, President and CEO of the National Association of Manufacturers, said in a statement that while China’s unfair practices remain a threat to U.S. manufacturers’ competitiveness, any actions must be “well crafted.” Tariffs run the risk of providing China to take further destructive actions against American manufacturing, Timmons said. “The only way we’ll truly make lasting progress is through a strategic approach that uses both carrots and sticks to accelerate changes to Chinese policies,” Timmons said.