In this Supply Chain Matters Editorial Commentary we provide readers with highlights, perspectives and likely implications of this week’s announcement by the Biden Administration in imposing increased import tariffs on specific goods.

White House Announcement

Yesterday, the White House announced a series of actions there are aimed to counter what are perceived as China’s unfair trade practices, and to protect U.S. workers and ongoing industrial and supply network policy actions.  They involve the hiking of import tariffs across a number of specifically targeted industry supply networks.

According to the White House Briefing Room Fact Sheet, “President Biden is directing his U.S. Trade Representative to increase tariffs under Section 301 of the Trade Act of 1974 on $18 billion of imports from China to protect American workers and businesses.

The actions have reportedly been carefully targeted at strategic sectors—the same sectors where the U.S. is making investments to enhance domestic sourcing and production within noted strategic and economic industry sectors. That is in contrast to the former Trump Administration imposition of China import tariffs that were more across the board in trade categories.

Specifically noted in the White House announcement:

Following an in-depth review by the United States Trade Representative, President Biden is taking action to protect American workers and American companies from China’s unfair trade practices. To encourage China to eliminate its unfair trade practices regarding technology transfer, intellectual property, and innovation, the President is directing increases in tariffs across strategic sectors such as steel and aluminum, semiconductors, electric vehicles, batteries, critical minerals, solar cells, ship-to-shore cranes, and medical products.”

Biden Administration officials have specifically noted that for some of these announced tariff actions, the timing has been adjusted to allow U.S. based firms the ability to adjust their supply networks.

Summary of Industry and Tariff Actions

To aide understanding, we have below summarized the specific industry actions and have added further perspectives.

Steel and Aluminum

The tariff rate on certain steel and aluminum products under Section 301 will reportedly increase from 0–7.5 percent to 25 percent in 2024.

Specifically indicated with this action: “China’s policies and subsidies for their domestic steel and aluminum industries mean high-quality, low-emissions U.S. products are undercut by artificially low-priced Chinese alternatives produced with higher emissions. Today’s actions will shield the U.S. steel and aluminum industries from China’s unfair trade practices.”

Legacy Semiconductors

The tariff rate on semiconductors will increase from 25 percent to 50 percent by 2025.

Specifically indicated: “China’s policies in the legacy semiconductor sector have led to growing market share and rapid capacity expansion that risks driving out investment by market-driven firms. Over the next three to five years, China is expected to account for almost half of all new capacity coming online to manufacture certain legacy semiconductor wafers.”

As Supply Chain Matters pointed out in our March industry specific commentary,  both China and India have been strategically posturing to become legacy semiconductor fab production global hubs over the coming years. That is with the backdrop that existing legacy semiconductor production, such as those supplying global automotive production needs have already caught up with existing demand. We cited a published report by The Wall Street Journal that specifically indicated:  “China will add more chip-making capacity than the rest of the world combined in 2024, according to research from consulting firm Gavekal Dragonomics.”

Electric Powered Vehicles

The tariff rate on electric vehicles under Section 301 will increase from 25 percent to 100 percent in 2024.

This action is noted as advancing the Biden Administration’s investing in an agenda that includes incentivizing the development of a robust EV market through business tax credits for manufacturing of batteries, production of critical minerals, consumer tax credits for EV adoption, smart standards, federal investments in EV charging infrastructure, and grants to supply EV and battery manufacturing.

In a Supply Chain Matters industry commentary published in February, we highlighted increasing concerns raised by automotive industry interests regarding evolving component sourcing among China based suppliers within Mexico. This is believed to be a method to circumvent import tariffs directly from China based producers. This specific area has further been of subject discussion among the two U.S. Presidential candidates with each outlining added tariff enforcement or other actions.

From a geo-political global perspective, there has been increased concerns cited by a number of countries, including Europe, in respect to China’s aim to significantly increase exports of EV autos and other vehicles. In a year of major Presidential and legislative elections, the protection of strategic industries that support employment growth such as autos, serves as a voter incentive.

Batteries, Battery Components and Parts, and Critical Minerals

The tariff rate on lithium-ion EV batteries will reportedly increase from 7.5 percent to 25 percent in 2024, while the tariff rate on lithium-ion non-EV batteries will increase from 7.5 percent to 25 percent in 2026. The tariff rate on battery parts will increase from 7.5 percent to 25 percent in 2024.

The tariff rate on natural graphite and permanent magnets will increase from zero to 25% in 2026. The tariff rate for certain other critical minerals will increase from zero to 25% in 2024.

The obvious implication of this action is to induce the establishment of battery metals, components, packaging materials and overall production within the U.S.

Solar Cells

The tariff rate on solar cells (whether or not assembled into modules) will reportedly increase from 25 percent to 50 percent in 2024.

Specifically noted in the briefing: “The tariff increase will protect against China’s policy-driven overcapacity that depresses prices and inhibits the development of solar capacity outside of China.”

China based dominance of solar related product supply networks has been a long standing challenge that dates back to the Trump Administration’s tariff actions. However, as Reuters indicated in its recent reporting, exports to the U.S. have been subject to tariffs for more than a decade. Duties have reportedly also been imposed on several China based solar panel producers who final assemble their panels in areas of Southeast Asia.

Ship to Shore Cranes

The tariff rate on ship-to-shore cranes will reportedly increase from 0 percent to 25 percent in 2024.

The briefing document specifically observes: “This port security initiative includes bringing port crane manufacturing capabilities back to the United States to support U.S. supply chain security and encourages ports across the country and around the world to use trusted vendors when sourcing cranes or other heavy equipment.”

Medical Products

The tariff rates on syringes and needles will increase from 0 percent to 50 percent in 2024.

For certain personal protective equipment (PPE), including certain respirators and face masks, the tariff rates will increase from 0–7.5 percent to 25 percent in 2024. Tariffs on rubber medical and surgical gloves will increase from 7.5 percent to 25 percent in 2026.

According to data from the World Trade Organization, China exported an estimated $31 billion of medical related goods to the U.S. in 2022.

As a backdrop, the American Medical Manufacturers Association (AAMA) has recently warned that the emerging U.S. based production base for PPE supply risks disappearing without government intervention and private sector support via strategic purchasing commitments. While overall demand for PPE and related products is significantly down from the Covid pandemic surge, U.S. based producers reportedly have been unable to compete with lower cost foreign producers that include China.

The U.S. federal government and private sector reportedly invested upwards of $3.7 billion in the reshoring of production, but momentum has reportedly stalled as large commercial buyers including hospital and healthcare buying groups have reverted back to lowest cost, overseas suppliers.

Expected Counter or Added Actions

Reportedly, China’s Minister of Commerce has blasted the Biden Administration announcement and has indicated that the government will “take resolute actions to safeguard the country’s rights and interests.”

U.S. Treasury Secretary Janet Yellen indicated ahead of the tariff announcement that “hopefully we will not see a significant Chinese response — but that’s always a possibility.”

Global trade experts initial viewpoints would indicate that these more targeted tariffs amounting to $18 billion in trade as contrasted to upwards of $225 billion of goods trade imposed by the Trump Administration might tamper China’s response.

Other viewpoints being expressed are that these added U.S. import tariff actions may prompt European nations to add their own import tariff actions for these specific or other supply network or production areas. The climate across Europe is more focused on continued economic setbacks, employment levels and strategic growth industries.

Unclear is whether China might respond by restricting domestic market access, or increased regulatory actions, to certain high profiled U.S. companies that have an attractive market for such goods within the country. That was the playbook during the imposition of former tariffs in 2018 and 2019.

As in such actions, time will be the judge of consequent actions.

 

Implications for Multi-Industry Sourcing and Supply Chain Strategies

In their reporting of this action, both Bloomberg and The Wall Street Journal have indicated that the implication of this week’s tariff actions are that the former tariffs imposed by the Trump Administration in 2018 and 2019 will further continue. Coupled with these added tariffs, they will likely umbrella a renewed U.S. trade policy toward China.

For industry supply network teams that have already undertaken a China Plus sourcing approach, this week’s tariff actions are a further reinforcement that such strategies will need to continue to be a fabric of supply network resiliency and cost control strategies.

For industry supply network teams that continue to have a sole reliance on China based suppliers for these newly targeted components and products, the obvious implication is that sourcing strategies need to be reviewed rather quickly and expeditiously.

Business executives sometimes tend to dismiss either domestic or geo-political events as a point in time development. Over the past five years, some have done so in the belief that China will always be to go-to supply network from the sheer nature of that country’s supplier networks, production and logistics infrastructure.

In many cases, small and medium businesses and suppliers have limited resources and product margins to afford alternative sourcing of components within different geographic regions.

Developments are obviously changing with each passing year, not only in geo-political dimensions but in climate-change driven events, military conflict and other aspects.

The overall strategic direction should be one of regionalization, a strategy that matches geographic specific product demand with a regionalized set of suppliers that can support specific or multiple regional product demand from a supply resiliency and product margin perspective.

 

Bob Ferrari

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