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Tools of the trade war

“Importers are getting hurt” by duties meant to punish China.

   Since the beginning of the year, President Donald Trump has imposed broad global tariffs on imported solar cells and panels, washing machines, steel and aluminum and more targeted duties on about $250 billion in annual imports from China. Each instance has been met with retaliatory duties from China as well as key trading partners and military allies like the European Union, Canada, Mexico and India.
   Trump has since threatened to slap additional tariffs on as much as $267 billion more in Chinese goods — roughly equal to the combined value of all imports from China last year — and has floated the idea of increasing import taxes on cars manufactured in the European Union and Canada.
   The administration has not said how long the current and pending tariffs will remain in force. This begs the question: What can cargo owners who rely on the efficient operation of global supply chains do to mitigate the increased costs and risks associated with these tariffs and the general uncertainty surrounding U.S. trade policy?

Speaking Up. The tariffs have been staunchly opposed by Democrats in Congress and a wide variety of industry trade associations, save for those representing the specific industries the tariffs are meant to protect, like U.S. steel and aluminum producers. Opponents argue the additional duties amount to a tax on American businesses and consumers and, as such, cause more harm than good.
   Jon Gold, vice president of supply chain and customs policy at the National Retail Federation, told American Shipper the NRF and its members are “very concerned” about the administration’s use of tariffs as a negotiation tool.
   “We don’t think they work,” he said in a recent interview. “Tariffs are taxes that get passed along to the U.S. consumer and ultimately hurt the U.S. economy. We just don’t think this is the right approach.”
   Gold noted that it’s even tougher to gauge the effectiveness of tariffs as a tool without knowing the administration’s ultimate objective in imposing them.
   “It’s really unclear what the end goal is here,” he said. “We’ve heard many different areas that President Trump and other administration officials want to focus on. The president seems most focused on trade deficit issues; that’s one area. You’ve got the whole Section 301 investigation that has resulted in tariffs and is focused on things like IP theft and forced technology transfers.
   “What are we trying to achieve? What are the milepost markers that we need to reach in order to get those tariffs removed? No one has identified that. Supposedly the U.S. has put out a list of 100-plus things they want the Chinese to do. I don’t know how you get that resolved.”
   Kenneth O’Brien, chief operating officer of Gemini Shippers Group, said that although it is “about as pro free trade as you can get,” the group has also been a vocal advocate for trade policy reform, in particular with regard to how intellectual property violations are handled.
   “We’ve written and signed on to countless letters about protecting intellectual property, about having fair and balanced trade deals, so we think it’s a good thing the current administration is looking at trade deals,” he said. “There’s no doubt that these trade negotiations can lead to positive outcomes, but we’re worried and our members are worried, so we’re advocating for a more measured approach.
   “As I look at the 1,090-something HTS (Harmonized Tariff Schedule) codes that are affected, some of those are potentially legitimate national security issues, but there are also plenty where there’s no national security concern,” he said. “You’re not going to convince me that handbags are going to be a national security issue.”
   He said that eliminating the country’s trade imbalance could be a worthy cause, provided it’s with the aim of protecting and bolstering exports and not at the expense of imports.
   “Anything that helps American companies to sell overseas, we support 110 percent. On the import side, I’ve heard from many people that bringing that manufacturing back to the states is probably not feasible, even with some of these tariffs that have been put in place. So I don’t find that to be a strong argument for what we’re doing here.”
   O’Brien said he was also happy to see that intellectual property concerns were getting more attention in trade discussions, but noted that the current tariff strategy might actually run counter to the administration’s stated goal of increasing domestic employment.
   Gold warned that the United States may not have enough leverage to change China’s behavior and, worse, may have lost some of its joint negotiating power by imposing tariffs on its closest allies.
   “We all agree that those are issues that need to be resolved, but we as the U.S. alone can’t resolve those issues,” he said. “We’ve got to be working with our trading partners to get China to make some binding commitments. … Instead of working with our trading partners that could have helped to bring actual leverage on China, we’re now attacking them with these tariffs, which makes absolutely no sense.”
   Gold said his members aren’t exactly optimistic about a quick resolution.
   “I think many folks are preparing for the worst and expecting that tariffs are going to be in place for a long time,” he said. “Without any clear direction from this administration as far as what the plan is and what the ultimate goal is, you can’t plan appropriately for how long these things are going to be in place.”
   The timeline could be accelerated, however, if more members of Congress, which has broad constitutional authority on matters related to international trade, begin to speak out about the harm done by specific tariffs, Gold said.
   “More members are starting to voice concerns as they see more of the economic impact of the tariffs, especially as you see the impact on specific sectors like the agricultural community,” said Gold. “There’s a lot of concern about the president moving forward with the auto investigation under [Section] 232 and the impact that’s going to have, so you see more members talking about the negative consequences of that. You’re seeing more legislation aimed at the 232 process than you’re seeing on the China stuff.”
   Gold said he thinks lawmakers, Republicans in particular, have been hesitant to challenge Trump’s decisions in part because of his popularity among conservative voters.
   “I think a lot of folks are very supportive of Trump and his trade policies, even those that are being harmed,” he said. “They want to give the president room to negotiate, but again, it’s a question of what he’s negotiating. What is that plan? If we all knew what the plan was, we could maybe get behind it, but we need more clarification from the administration on what exactly they want the Chinese to do.”
   O’Brien echoed those remarks, adding that although reports of individual constituents and companies being harmed might ramp up pressure to rethink the tariff strategy, any new trade deals could then end up acting as a release valve for that pressure, especially if they result in the elimination of certain tariffs or country-specific exclusions.
   Both Gold and O’Brien said even though NRF, Gemini and countless other groups like them are doing all they can in terms of advocating on the Hill, it is incumbent on shippers and other affected parties to get in front of Congress and the administration and tell their stories.
   “As an association, we speak for a lot of companies, but there’s nothing better than when an importer or manufacturer gets up and talks,” said O’Brien. “If I’m going to use all the arrows in my quiver, one is definitely to get my opinion out in front of the people making these decisions.”
   He cited the example of U.S. ports having limited options for purchasing cargo-handling cranes, the vast majority of which are manufactured in China and could be included in the next list of products targeted for additional duties.
   “Who are we helping or hurting if we can’t have expansion in our ports or it’s going to cost all these ports more to be productive?” he said. “I don’t think this was the intended outcome of the people who made these decisions and these policies, so it’s really important for importers looking to mitigate their risk to speak up. We have to tell the government how it’s really going to affect us and bring some real-life examples to them.
   “That’s a big part of what we’re telling these companies: Write those letters, tell your Congressman, tell the USTR. Tell your story, and hopefully they’ll listen.”

Legal Loopholes. In addition to speaking out, O’Brien said the two main pieces of advice he’s giving Gemini members are to thoroughly examine alternative sourcing options and to take advantage of the tariff product exclusion process with USTR.
   Even so, O’Brien said he realizes that both are likely easier said than done.
   “Knowing that supply chain and sourcing changes are not quick — if you’re going to change your sourcing pattern or your complete supply chain, we’re talking year-plus time horizons — even if we give people that advice, there’s an immediacy that’s not there,” he said. “Your long-term play certainly is to spread your risk and look at your sourcing. We’re suggesting that even for companies already doing this, there should be a more formalized process for that if it doesn’t exist already.”
   Amy Magnus, president of the board of directors for the National Customs Brokers & Forwarders Association of America, agreed.
   “It’s easy to say, ‘Change your sourcing,’ but a lot of these relationships and business arrangements have been in place for years,” she said. “You can’t always just flip a switch and suddenly change your sourcing from China to Taiwan. You have to have the factories and facilities, and all of these things that go into manufacturing a product may have to be completely rebuilt or restructured, which will usually cost more than the extra 25 percent duty. These importers are getting hurt either way.”
   O’Brien said the long timeline for major sourcing and supply chain changes is the primary reason Gemini is advising shippers to submit product exclusion requests to USTR.
   “In the short term, nothing tells me this is going to change in the next 90 days, so I have to advise companies to plan accordingly,” he added. “We’re telling our members that they should be looking at this exclusion process. There is some cost there, but my sense from listening to some of the people on the [USTR] panels was that reasonable cases as to why an exclusion should be granted will be looked at. If these companies are really striving for holistic risk management, there is a significant potential return on filling out some paperwork that could exempt their HTS from the tariff because we don’t know how long this is going to last.”
   Magnus said another potential workaround for those affected by the tariffs on Chinese goods is to tweak the certain manufacturing inputs to bring the imported product under a different tariff heading that might not be subject to the additional duties.
   Sue Welch, founder and CEO of Bamboo Rose, provider of a multi-enterprise platform that connects retailers, suppliers, financial institutions and the extended supply chain community with the aim of increasing speed to market and driving down costs, said that in some cases it only takes a small tweak to change a product’s tariff heading.
   “We’re seeing a lot of examples of retailers redesigning product, either relative to its tariff — but then they might be worried that the tariffs could change again by the time it actually ships — or to drive down the cost of the product to absorb the increase of the tariff,” she said, pointing to apparel that’s been treated with coating to be waterproof as one example of such a product.
   “If it’s truly waterproof, it has a much lower duty rate,” said Welch. “Someone could easily add an additional layer of coating and that product then becomes a waterproof item taxed at a lower rate. So they’re looking at things like that or if they change the fabric content or if they change the style slightly, can it then go from being classified as a tunic to a top.
   “Retailers are really doing a lot as far as looking at the design of products to see if they change it slightly, can they get it under a different classification. And even if that classification has another 25 percent tariff on it, if they’re starting from a point of 8 percent as opposed to 18 percent, they can at least mitigate that impact,” she said.
   Magnus said she also found it more than a little puzzling that the Trump administration is looking to punish China with tariffs, but left a “loophole as wide as the state of Montana” in the form of the United States’ unusually high de minimis shipment level.
   “The stated reason for these [Section 301] duties was to punish China for what the United States perceives to be unfair trading practices, and yet at the same time, the United States is allowing goods coming from China that are subject to 301 duties to come in tariff-free if valued under $800,” said Magnus. “Some of the products in the current Chinese list and, more importantly, in the next list are goods that lend themselves to smaller packages, and clever parties may very well be calculating ways of bringing these things into the country in smaller packages and may be shipping directly to buyers in quantities that fall under the de minimis value.
   “It incentivizes clever importers to look at the possibility of bringing goods in value under $800 when they could avoid a 25 percent duty rate. There was already a robust increase in goods valued under $800 before we were looking at a 25 percent duty.
   “I think it’s beyond bizarre that we would allow that based on the alleged purpose of these duties,” she added. “And of course, should someone in the United States try to ship something valued under $800 to China, they certainly wouldn’t be afforded the same luxury as we are affording to Chinese goods coming into the United States.”
   The higher volume of small parcels also causes inspection issues at the border, Magnus said.
   “Small packages and low value do not equate to low risk,” she said. “When you look at trucks that come across the border that are filled with a thousand little packages all crammed into the back, the [CBP] officer at the front line is not going to pull that truck over to examine it. It’s just not possible to unload that truck and truly verify what was in each of those packages even if you had all day.
   “So we don’t know if there are goods in there that are subject to antidumping and countervailing duties. We don’t know if there’s fraudulent medical devices in there or knockoff ladies’ handbags that are IPR violative. You just can’t inspect something to that degree.”
   According to Magnus, this kind of trade had already begun to grow prior to the de minimis increase thanks to e-commerce, but has since accelerated and the escalating China tariffs will only serve to “turbocharge the deluge of small packages coming into the United States.”
   “It just makes sense, and more importantly, it can be done legally,” she said. “It’s only an illegal practice if it was a shipment that was purposefully divided up to avoid the duties. But if I go online and order $500 worth of a product that comes straight to my door from China, that transaction is in no way illegal, and I’m not going to have paid a penny in duties even though that same good would be subject to a 25 percent duty if it was a container load.”

Shared Intelligence. Although they offer different services, the NRF, Gemini and NCBFAA all have seen a marked increase in interest in their services since the announcement of the first round of tariffs in early 2018.
   O’Brien said interest in Gemini, which in addition to its efforts in Washington essentially functions as a third-party logistics provider by booking space on behalf of its shipper members at a previously agreed-upon fixed rate, has gone “through the roof” in the last 90 days.
   “Companies that historically were 100 percent NVO or 100 percent contracting are now showing lots of interest just from a risk management, rate management, procurement management perspective. They need to try to lock in prices, but they also want to give themselves the flexibility to interchange carriers, which are some of the core tenets of what we do.
   “Situations like this make people look for information that on a normal day they wouldn’t need right away,” he added. “Whereas before it was, ‘That’s fine if I get the information tomorrow,’ now it’s, ‘I need to know how many bookings didn’t make it. I can’t wait to get a report three days later; I need to know the day of.’”
   Likewise, 3PLs and customs brokers are experiencing a similar uptick in demand, especially when it comes to data analytics tools.
   Bobby Harris, CEO of BlueGrace Logistics, said that as tariffs escalate, the most basic advice he can give shippers is to get more certainty into their supply chains as quickly as possible.
   “Make sure you’re looking ahead not just the next couple months, but the next six months, the next year,” he said. “Look at who your suppliers and vendors are. Who can you count on to help you through the added complexity? There are a lot of good 3PLs out there, a lot of good supply chain experts, and if people don’t have them in house, they should get some people in there that can review their contracts, review their supply chain programs, look at their vendors to make sure they have access to capacity.”
   But shippers in today’s market aren’t satisfied with basic rate and capacity offerings. They also want guidance, said Harris.
   “In times of uncertainty, people want more information and they want it more rapidly,” he said. “You used to be able to do a quarterly business review looking back at the last 90 days. Now they need to know what they’re doing every day, every week. The business intelligence tools that these decision-makers and companies are using need to be accurate, they need to be easy to get and they need it to be valid. You give them guidance on what to look for, give them the access to that information and give them ways to control it — all in one place.
   “Although there’s a lot of sophistication needed to run the most effective supply chain for each company, we want to make it very digestible to them,” he added. “We guide them by instituting our TMS and then back it up with the tens of thousands of relationships we have and customize it for each of our clients.”
   In terms of specific tools, Welch said Bamboo Rose’s platform has a capability they simply call “what if” costing that has become quite popular in recent months. 
   A company importing from China can use “what if” costing to find out what would happen to the cost of materials, labor, shipping and all the other variables that go into an item’s total landed cost if, for example, the company switched production to Vietnam. The importer then can compare the difference in cost caused by an additional 25 percent tariff with that of moving production to another country in real time.
   “With most disasters, you can do either some preparation or post-disaster planning,” she said. “But what we’re seeing here with the president tweeting on trade, sometimes multiple times a day, is a situation that has become so chaotic you can’t anticipate it and you can’t plan for it. So the only thing we can do is react at lightning speed, and that’s what everybody is looking for. When tariffs get announced, they need to know instantaneously which codes are affected, which suppliers and orders are going to be impacted so that they can very quickly either adjust the costing or the sale price or look at other areas like supplier financing to see if they can offset some of the cost of the tariff increase via another efficiency.
   “Retailers could be dealing with thousands or even tens of thousands of items in any one season, so that’s why we say it’s not good enough to be fast. This has to be instantaneous, it has to be lightning speed. You have to be able to look across some 10,000 items that you’re going to bring in for this season, figure out which ones are subject to the new tariffs and then see if there are alternatives.”
   Another example of how “what if” costing could help is if a product is slated to get hit with additional duties as of a certain date, importers could calculate what the difference in cost would be to accelerate production and expedite shipping to get their goods to the U.S. ahead of the imposition of those tariffs.
   “Because we’ve got everybody operating on one platform, we understand not only how they execute, but we can anticipate based on past behavior and factor that behavior into the landed cost,” said Welch. “You really need to understand their past behavior so you’re not moving production from one place to another and overloading a new supplier who then can’t deliver.”
   Douglas Surrett, chief product strategist at supply chain software provider BluJay Solutions, said data-driven solutions like a global trade management platform, which takes into account everything from transportation planning to customs clearances and denied party screening, can help increase both the velocity and the certainty with which shippers can make decisions in the face of escalating tariffs.
   “You really need all of those parts to have the best chance of solving a problem in an intelligent way,” he said. “It might make sense strictly from a tariff perspective to move an operation from China to another country, but if the transportation cost goes up by 30 percent, then you’ve just wiped out all the savings you gained by moving to avoid the tariff.
   “That kind of uncertainty creates an environment where it’s nearly impossible for any complex supply chain to operate without some help from technology. A human just can’t solve the problem fast enough to actually be able to react and implement the changes that are needed. Rather than manually solving problems, an optimization solution can quickly turn out a more well-informed answer.”
   O’Brien agreed that technology can be invaluable in helping shippers get their arms around all of the variables involved in sourcing decisions.
   “Pulling all those disparate data sources into one place seems like a basic thing, but it’s not there for everybody,” he said. “And for those companies using these kinds of tools, all of a sudden they’re making better decisions, and it’s not because they’re smarter or they negotiated harder, it’s because they leverage the information available to them.
   “Shippers with more information they can leverage have a better chance of reacting favorably to something like this tariff situation than the ones that have to ask if their stuff is even made in China.”
   Added Surrett, “The market is just too complex. And every time Trump tweets about tariffs, it further accentuates to shippers that they need a solution.”
   According to O’Brien, many shippers are willing to put up with a little bit of short-term pain in the interest of the common good. “Our members are here to be good Americans, but it does them no good to get to a great end state if they’re already out of business by the time we get there.” 
   Surrett said he’s bullish on global trade in the long term in part because of the potential to combine human knowledge and experience with intelligence tools being built into modern logistics operations.
   “We know from experience that there are a lot of really smart people out there, and whatever’s going on in the world, those people will find ways to deal with the new reality,” he said. “And supply chains are no different. They will evolve around whatever barriers and constraints are erected. If some of these tariffs remain permanent, the supply chains are going to evolve around them. They’ll find alternatives.
   “Fundamentally, this is what supply chain people do. We solve problems. We might have a whole bunch of problems to solve in the short term, but in the end, we’re going to evolve into something even better.”