US-China tariffs in charts: global supply chains at risk

US tariffs that come into effect on Friday on $34bn of goods produced in China are just the first step in a long strategy meant to untangle the US manufacturing supply chain from the country that is increasingly seen as a geopolitical rival

The tariffs are designed not to affect consumer goods, for the most part. For instance, Apple’s iPhones are excluded, even though the company is almost entirely dependent on gigantic factories operated in China by Foxconn, one of the world’s largest private employers. Textiles, toys — all the things you might buy off a supermarket shelf — are supposed to stay cheap, so that US voters do not get “sticker shock”. 

But the new tariffs threaten to disrupt the semiconductor industry, whose production chains straddle the two countries. And they could derail a vision whereby a Chinese nuclear power production chain would allow new US reactors to be constructed more economically. 

Indeed, the tariffs could force manufacturers, especially equipment and component makers, to “reshore” their supply chains. Economic nationalists at the White House realise that even “Made in America” brands are heavily reliant on cheaper components sourced overseas. That, they argue, hollows out the US’s ability to mobilise as it did during either the second world war or cold war. It also leads to endemic trade deficits that President Donald Trump has vowed to reduce. 

Below is a breakdown of some of the top sectors involved, and their relative weight in exports in 2007 and in 2017:

The value and volume of the bilateral trade in electronics and machinery — two tariff categories that are especially under fire — has grown steadily, especially since the global financial crisis.

The “invisible” nature of components, or equipment and machinery that the consumer never sees, makes it harder to assess the impact of these tariffs on the full supply chain. US carmakers, for instance, appear to have little exposure. While foreign cars make up about 20 per cent of the US market, few are imported from China. General Motors imports only one model from China, the Buick Envision, accounting for about 1.5 per cent of the cars it sells. Citigroup estimates that the auto tariffs’ impact on prices would be a mere 0.1 percentage point increase in annual inflation.

But if the White House were to add in tariffs on auto parts, which are currently not taxed when imported, the picture changes significantly. Citigroup said: “While automakers could try to avoid the tariffs on cars by shifting production into the US, the tariffs focused on auto parts would be harder to elude, as the downstream industries of the auto manufacturing production process are highly integrated with global supply chains.”

“Parts are huge,” said Bill Russo, founder of Shanghai-based consultancy Automobility Ltd. China exported $9bn of auto parts to the US in 2017, according to Chinese customs figures. That figure excludes tyres, which are predominantly produced in China and account for another $2bn. 

How has this developed? China Automotive Information Net records 33 international auto parts manufacturers with factories in China. Chinese auto parts exporters also compete for the US market and some, like Wanxiang, have invested in American facilities. These investments in China were designed to service the large American car manufacturers that set up shop in the 1990s to manufacture for the world’s fastest-growing car market. The choice to produce parts such as glass, screws or switches in China benefited both the car makers and the many companies that serve them: “The global supply chain for the automotive industry has shifted to countries that can make commodities components cheaper,” Mr Russo said. 

Creating a supply chain in China to produce components that are competitive at Chinese prices can translate into a Chinese supply chain to feed production in America. To give one example, in the early 2000s Ausenco, an Australian gold mine engineering firm, worked with Chinese mining equipment suppliers to source for an Australian-owned gold mine in Guizhou Province. “It wasn’t always straightforward,” said Zimi Meka, chief executive. But the effort paid off. “We got on top of the quality and then we used a lot of that equipment around the world,” Mr Meka said. “There were substantial cost savings.”

Gradually, the long coils of the global supply chain settled into place in China. Raw materials became more available and more reliable. Huge investments in steel capacity made that input cost cheaper. Investments by companies such as ArcelorMittal in automotive steel improved the quality available to foreign manufacturers selling to both China and overseas markets. Export tariff barriers, for instance on minor metals and rare earths, encouraged specialty intermediate materials makers to move production to China from Japan and elsewhere, setting the stage for an explosion of manufacturing in high-tech displays and other new fields. 


“Reshoring” is likely to raise costs for US manufacturers. The most recent National Association of Manufacturers’ survey reflects expectations that both input prices and sales prices will rise by about 5 per cent in the next year. But Republican strategists calculate that corporate tax cuts will help offset those costs, while a stronger dollar due to corporations bringing money held in offshore tax havens back “home” will keep inflation from creeping back up. 

Companies whose supply chain exposes them to tariffs, will move sourcing somewhere else, said Jake Parker, of the US-China Business Council in Beijing: “If they can’t, they’ll pass on as much of the tariff cost as they can, or see a cut in margins.” Harley-Davidson has already declared its intention to reduce production in the US in order to maintain access to other markets. For many others, the cost advantages of an integrated production chain with low labour costs in Asia might outweigh the additional tariffs.

Can a historic displacement of global manufacturing’s centre of gravity be reversed? If the Trump administration’s effort to restore the American manufacturing machine seems quixotic, consider this: The first round of tariffs includes “wind-powered electric generating sets”, the modern day version of windmills.

Twitter: @HornbyLucy

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US-China tariffs in charts: global supply chains at risk

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