Pacific NW Trade eNews

Vol. 2, Issue 1

Tariffs: Impact, Likely Outcome, and

Where Opportunity Persists

A Sunday evening Tweet nearly caused us to cancel last Thursday's event shown above. The originally planned program involved helping attendees take advantage of the new US-China trade deal that appeared to be just over the horizon.

On Friday, May 3, however, China sent a significantly edited version of the 150-page deal draft to DC. President Trump responded to it by tweeting up tariffs on $200 billion from 10 to 25%, and everything had changed.

Just as we were considering calling off the event, a message came in from Man Wang at our co-sponsoring partner organization, the Washington State China Relations Council. Effectively, what she said about our planned topic was, “Yes, great idea! We need to let people know what's going on with the tariffs . . . now more than ever!”

“Agreed” was our response. She was right.

Although many regional businesses and farmers have been hit hard, the average person hasn’t felt the impact . . . yet.

This edition covers the tariff-related portion of our May 30 event for those who missed it.

The Ms. Christine Kelley of the US Commercial Services Seattle also gave an informative presentation on utilizing the US Commercial Service’s export assistance services as well as helpful tips on doing business in China. See coverage on our Facebook page .

We hope you enjoy and find this letter useful. Please feel free to share your thoughts with us!

Sincerely,

Michael Fowler

Senior Trade Consultant

This Financial Times article offers a timeline and overview of how we got to where we are today.

The effect on regional firms has been largely negative

Anecdotes aboun d, but examples of regional companies that have benefited are relatively rare. We learned this firsthand from several companies and the State of Washington Department of Commerce at our March 13 joint event . Dennis Frett, Executive VP of Toray Composite Materials America explained the challenges presented by China’s retaliatory tariffs. John Melin, President and COO of Brown & Haley and Amy Paulose, President of AMES International, discussed the challenges they are facing due to hampered China-market access and the uncertainties of our trade relationship.

A recent AP article on the effect on Washington firms , however, covered at least one firm that believes it will benefit: REC Silicon of Moses Lake. The other three enterprises mentioned, however, were likewise facing serious, and in some cases, existential challenges.

It is third-country companies that are picking up the business lost by Chinese firms due to our tariffs.

A United National Conference on Trade and Development study projected that US firms will pick up only 6% of the business lost by Chinese firms effected by the 10% tariff placed on $110 billion in imports. Third-country suppliers will capture about 82%.

The above UNCTAD study goes further to demonstrate how

Europe, Mexico, Japan, and Canada will be the primary beneficiaries of a US-China Trade War.

Yet another finding was that although tariffs not effective for economic development, they are very effective at reducing trade with the targeted economy. More specifically,

the 25% tariffs will move the US economy in the direction of decoupling from China's economy.

According to a study by the Federal Reserve Bank of New York . however, this will come at a substantial cost. The study suggests that on June 1,

the increase in tariffs from 10% to 25% will cost each US family the equivalent of an annual tax of $831/year.

It follows that this could more than double if the President's threat to levy 25% on an additional $325 billion of imports is carried out.

Likewise, according to government data

each weekly 5% tariff increment on goods from Mexico scheduled to start next Monday will cost US families $17 billion.

Where does the Trade War go from here?

What intensification looks like:

The US puts tariffs on an additional $325 billion in Chinese imports
China implements non-tariff measures (embargoes, slowdowns, and "investigations"). This has begun with China starting a list of “unreliable entities,” delays at customs, investigation into FedEx, and China continuing to prioritize Airbus over Boeing.
The US Blacklists Huawei with some European firms following suit, leading to the development of two separate technical spheres for 5G. (Note that there are varying degrees of concern about the US’s alternative suppliers, Nokia, Erickson, and Samsung, being behind and more expensive than Huawei.)
China could boycott the export of rare earth minerals disrupting US high-tech manufacturing
Although even less likely, China could sell off US Treasury Bonds. It is widely understood that this would be damaging to the PRC as well.

What de-escalation and resolution might look like:

Negotiations go behind the scenes and publicity playing into China's sensitivities having to do with sovereignty and the “Century of humiliation" are avoided.
Movement away from unilateral actions and reactions with the US focusing more on cooperation and coordination with Japan and the EU, which share grievances on IP protection, market access, and state support of enterprises.
Effective use of the WTO to reinforce the system of trade largely developed by the US and from which it has benefited.
Recognition of China’s having surpassed the US in 5G technology as a Sputnik Moment prompting the US to focus resources on R&D in this and other key technologies.
Economic pain on both sides prompts realism to enter into negotiations with regard to what both sides are demanding in relation to Chinese economic structural changes and enforcement mechanisms

Near-term Likelihood: A New Status Quo

This recent China Briefing article posits a new status quo in the near term as the most likely outcome. One that involves resumption of trade without tariffs, but a re-assessment of over-reliance on China by US companies.

Where will opportunity persist and grow?

https://www.statista.com/statistics/379046/worldwide-retail-e-commerce-sales/

Opportunity is where there are surging middle classes

China: 4% to 75% in under 25 years

In 2000, just four percent of urban Chinese household incomes were 60,000 to 229,000 renminbi ($9,000 to $34,000) a year according to McKinsey and Company research . In 2022, however, more than 75 percent of China’s urban consumers will earn this amount.

India: 50 million to 583 million in 20 years

According to McKinsey Global Institute research , India’s middle class ($3,606 to $18,031 annually) has grown from 50 million people in 2005 to 250 million in 2015, and will more than double to 583 million by 2025.

Indonesia, Nigeria, and Philippines follow suit

Similar trends can be found in Indonesia, Nigeria, the Philippines , and other markets.

Those in this surging middle-class want to upgrade what they own to made-in-USA products due to the assurance of quality, safety, new-to-the-market availability, and prestigious brands. Here is a sample of what they are looking for and why.

E-Commerce Purchase Categories and Motivations

WTC Tacoma Export Store

A quick, easy, and affordable way to become export-ready and put your product or service on the global market.

Low-cost exposure to 155 markets
Well-recognized World Trade Center branding
12-language accessibility
Individual showcase - up to 25 products
Advanced search engine optimization
1000 Average daily views*
Filtered queries - receive only qualified leads
Ongoing guidance & support
Affordable annual subscriptions for members-from $1495
Professional website design and search engine optimization
Counseling on international trade

* average for 2019 (January-June)

For more information inquire here .