Companies the world over watched the election results and tried to read the tea leaves on what will happen to trade policy.  President Trump ran on increasing tariffs; now that he’s won, companies think they need to prepare for those higher tariffs.

But it’s not as simple as that.

The proposals of either an across-the-board duty increase, or an increase in the existing punitive tariffs on mainland China, or some big new tariff focused on China (and maybe others too) are all possibilities. As the incoming Trump administration and the Republican Congress spend the winter tackling their critically important tax cut, there is a good chance that they will incorporate some trade remedies in that same omnibus bill, if at all possible.

It is therefore too soon to anticipate just what the tariff aspect of it will look like.

Rather than thinking of the incoming Republican majorities and what they are likely to do, consider instead the problem that they are attempting to remedy:  the ongoing migration of American manufacturing to foreign countries, primarily to Red China or to companies controlled by it.

The United States of America are still a manufacturing juggernaut; we have factories from coast to coast, and we do make everything from small appliances to industrial equipment.

But we also import far more finished goods than ever before, and even more importantly, and infinitely more dangerously, all that American-manufactured product is more dependent than ever on numerous imported components. 

So, in a way, we manufacture both more, and less, than many realize; we do have more active factories, making more American goods, then many people give us credit for. But most of those American goods are dependent upon Chinese components, meaning that a great deal of American production would shut down immediately if our supply chain with China were to shut down, due to either natural disaster or war. It is economic suicide to be this dependent on a foreign power for the building blocks of our own economy, especially when that foreign power is a saber-rattling communist nation that has made no secret of its desire for conquest.

At the Halfway Point

The first Trump administration tried to convince American manufacturing to diversify its supply base – to re-source to other countries or, hopefully, to near-shore, meaning re-sourcing to neighboring American manufacturers. It worked with many.  The combination of 7.5% and 25% additional tariffs on Chinese goods (on top of whatever the standard duty and fees already were, which varied, depending on the product), did succeed in shaking sense into many companies. America now imports more things from more other countries than it did before the first Trump administration.

But many other American companies decided to change nothing – to simply live with the 7.5% and the 25% punitive tariffs, imagining without cause that they would go away, hoping they could just absorb the hit, hoping that this was as high as they would ever go.  

So you might say we are at the halfway point today, with the first group of companies having taken advantage of the past eight years to slowly and carefully decouple from China’s grip, and far too many other companies having postponed such a change until it was absolutely necessary.

Many of these are now, suddenly, coming to grips with the fact that higher tariffs are imminent, and they are desperately rushing to take corrective measures.

Such companies would be well advised to consider some major risks:

Negotiating it away:

It’s not unusual for a buyer to try to talk his vendor into absorbing a cost increase in order to hold onto the business.  Some importers are therefore reaching out to their Chinese vendors to pressure them to lower their prices when the new tariffs are known, so the importer doesn’t have to change vendors at all.

Here we must remember that two of the U.S. government’s primary concerns with China are China’s famous tendencies to subsidize exports (known to economists as “dumping”) and to manipulate its currency. The U.S. International Trade Commission is on the watch for both, and the specific remedies for them, such as anti-dumping and countervailing duties, are far costlier to the importer than these punitive tariffs are.

Talking the Vendor into Opening a Foreign Subsidiary:  

If an American company is uncomfortable with finding alternative suppliers because it has dealt with the same Chinese vendor for so many years, the easiest solution might appear to be to simply talk his existing vendor into opening another facility of its own in a different country.  One could still deal with the same people, while getting products made in their old vendor’s new factory in Vietnam, Malaysia, Indonesia, Cambodia, etc.

Here we must remember that all Chinese companies are essentially joint ventures with the Chinese military.  This is another of our problems with China: the government steals the intellectual property (IP) of all companies, whether trademark, patent, or copyright. If you buy instead from that Chinese company’s foreign subsidiary, all your intellectual property still has the same pipeline to Beijing. What have you really accomplished?

Seeking New Foreign Vendors Without Paying Attention to Where They Get the Product.

The solution is to source from companies that have no connection to China, either here in the U.S.A. or abroad.  The challenge here is rushing the process, because you need to do your due diligence to ensure that this new vendor really does manufacture the goods himself, where he says he does.

There always has been a sizable black market for what’s known as “illegal transshipment” – the practice of shipping goods to another country, just for the purpose of repackaging and re-marking them with another country’s origin statement, to avoid import quotas or punitive tariffs at the destination.  Doing so is fraud, of course, and the U.S. government penalizes guilty importers severely for this one, too.

Importers must insist on inspecting their new vendor’s facility, vetting their supply chain, and confirming their process. If an Indian, Vietnamese or Thai business simply repackages and misleadingly relabels Chinese goods, they will eventually be caught, and proving one’s innocence in such involvement is extremely difficult. Best to make sure there’s nothing improper from the start.

The Challenges for the Second Trump Administration

Both in the interest of speed and in building the case before the American public, during the first Trump administration they relied on two little-used executive tools, the Section 301 and Section 232 tariffs.  This time, the odds are good that Congress will join in the effort, since America’s dangerous dependence on Chinese production – and therefore our need to free ourselves from it -- has become infinitely more obvious in the intervening years. That means that this year’s increases may not look like the last ones at all.

But in addition, the administration must still consider all the related issues.

It’s not just the necessities of diversifying supply and becoming self-sufficient again. It’s also about protecting American intellectual property from the Beijing politburo, and protecting the U.S. dollar, and combatting the slave labor that China still practices, and preventing the regulatory evasion of de minimis shipments, and patrolling import volumes for drug smuggling, and protecting targeted American industries from predatory dumping.

On top of all this, the administration has to forge the successful, cooperative relationship with the Republican Congress that completely eluded them the first time.  Trade policy needs to be a part of the solution, not a catalyst for a rift.

The best thing for the American business community to do, therefore, is to help solve the problem without waiting for Washington D.C. to thread this complicated needle.

The more the business community manages to become independent of China on its own, the less Washington D.C. will have to do to force the issue.

And any believer in limited government is sure to recognize the value of this particular goal as well.

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