Tariffs and customs duties, often an afterthought in sourcing decisions and business case models, should move to the top of your company’s watchlist. There are many moving pieces in this arena given the current state of national security concerns, economic policy priorities, and campaign commitments across a wide range of political agendas and private and public negotiating stances. As a result, the entire manufacturing value chain is being pushed and pulled by myriad positive and negative forces.
It's imperative that companies identify the materials and components used and sold as far down their supply chain and as far up their customer base, as respectively possible. A company can begin to anticipate competitor, supplier, and customer responses and plan its own responses to actual and potential scenarios only by having a value chain map.
We underscore potential. Behind the headlines and sound bites lie forthcoming Congressional hearings to determine actions, deadlines, and strategic interactions that are part of a larger set of trade negotiations, such as the North American Free Trade Agreement and even industry regulations, such as the automotive Corporate Average Fuel Economy (CAFE) standards.
The world that matters is your value stream
We've written over the past several weeks about the much publicized 25 percent tariff on imported steel and 10 percent tariff on aluminum. These tariffs were driven by a U.S. Department of Commerce Section 232 investigation under the Trade Expansion Act of 1962 and went into effect on March 23, 2018. About half of steel and aluminum imports were excluded from these tariffs since imports from Canada, Mexico, the European Union, South Korea, Argentina, Australia, and Brazil were temporarily suspended.
On a national level, and on Wall Street, the headlines and reactions likely were accurate: These tariffs, by themselves, aren’t going to significantly change the trend of U.S. economic growth. However, if the steel or aluminum you're using is currently sourced through non-excluded countries, it matters to you. Maybe these materials aren't a specialized grade or an alloy, single-sourced situation that could cause a true sourcing crisis, but they still could be a low-cost source or part of a shipment allocation risk mitigation strategy that will cost you time and money to resource and revalidate. The world that matters is your value stream.
These tariffs are played out program by program, company by company, and in the case of agricultural tariffs, farm by farm.
Value stream mapping helps identify the impact
On April 2, 2018, China enacted tariffs on some agricultural commodities along with a 15 percent tariff on various seamless tubes, pipes, and hollow iron and steel profiles and a 25 percent tariff on aluminum waste and scrap. In the grand scheme of global trade or even U.S.-China trade, the dollar amounts add up to a small share of the total and a representative response to U.S. actions. But again, these tariffs are played out program by program, company by company, and in the case of agricultural tariffs, farm by farm.
This is why a value stream map of your business is so important. To truly understand the micro-level impact of each program, customer, and supplier, you need to fully understand the points of shipment and destination. In the case of the Chinese tariff response, these tariffs were immediately applied and already may have altered business cases around aluminum waste and scrap (Would U.S. domestic prices fall further if supply grows in the United States?) and customer demand forecasts (Would agricultural implement markets soften if farm exports were reduced?).
The next day, on April 3, 2018, the Office of the United States Trade Representative published a Section 301 Notice of Determination and Request for Public Comment relating to an incremental 25 percent tariff on some 1,300 items from China. This action was in response to an investigation that determined specific acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation were unreasonable, discriminatory, and/or restricted or placed a burden on U.S. commerce. (The full announcement includes the eight-digit Harmonized Tariff Schedule lines.)
Since it's your value stream that matters, companies need to carefully review the tariff schedule to identify products that might be impacted.
These tariffs were generally dismissed as part of the overall negotiation posturing. First, they applied only to an estimated $50 to $60 billion of U.S. imports — out of a total of $2.9 trillion. And second, there would be hearings, determinations, and a delay at least until June, related to when the tariffs would be put in place.
Since it's your value stream that matters, companies need to carefully review the tariff schedule to identify products that might be impacted. Here are a few that may significantly affect specific businesses, but all companies need to start thinking about implications for your specific business and what actions you can take:
- Parts of fuel-injection pumps for internal combustion engines: Review parts identified in your particular portfolio.
- Catalytic converters: Understand how broadly or narrowly the harmonized codes cover specific parts.
- Machine tools (drilling, boring, lathes, etc.): Understand your capital equipment supply chain.
- Mold bases, molding patterns, molds for injection or compression types: How would molds under development be affected?
- Alloy tool steel: Review materials used in manufacturing, not just in the product.
- Aluminum and profiles: Consider the incremental 25 percent tariff to the Section 232 10 percent tariff.
- Iron or steel helical springs: Review products for which 25 percent is a significant part of the total cost.
- Lithium primary cells and primary batteries: Identify single sources and risks of shipment allocation.
- LEDs: Flag components on key product launches and growth sectors.
- Motor vehicles: Know customer single-source dependencies, for example, the Buick Envision and Cadillac CT6 plug-in and the announced Ford Focus.
Additional actions to take
First, know your value stream — from raw material supplier to final customer.
Second, stay informed. Tariff-related news is coming rapidly from the White House, the U.S. Office of the Trade Representative, and the Departments of Commerce and Treasury. Within a seven-day period, the possibility of $100 billion more U.S. tariffs on Chinese imports, more stringent CAFE standards for vehicle imports, and the consideration of re-entering negotiations on the Trans-Pacific Partnership were reported. The U.S. Department of Commerce and the U.S. Office of the Trade Representative (USTR) websites have the most current U.S. government information.
Third, be a part of the process. After the review process outlined below, including a Congressional hearing, the USTR will issue a final determination on the Section 301 Chinese tariffs. By knowing the impact on value streams, companies can put accurate data and an “all politics is local” story behind how these tariffs will play out. Share your story with trade associations, elected officials, and directly with the USTR during public comment periods.
Don't forget that the original Section 232 steel and aluminum tariffs have an exclusion process for individual steel and aluminum specifications.
The schedule for the USTR China Section 301 determination is:
- April 23, 2018: Requests to appear and summary of expected testimony
- May 11, 2018: Due date for submission of written comments
- May 15, 2018: Section 301 Committee public hearing
- May 22, 2018: Post-hearing rebuttal comments
Last but not least, don't forget that the original Section 232 steel and aluminum tariffs have an exclusion process for individual steel and aluminum specifications. The exclusion process and proclamations on steel and aluminum may be found at the U.S. Department of Commerce website.
As always, if you have any questions, feel free to give us a call.