Futility of applying bilateral tariffs in a global economy increasingly apparent, as large firms side-step intended impact and small firms endure steady beating Go back »

2019-12-09 | All chapters

Futility of applying bilateral tariffs in a global economy increasingly apparent, as large firms side-step intended impact and small firms endure steady beating

Background: From 12th– 20th September 2019, the European Union Chamber of Commerce in China surveyed its member companies to better determine how they are being affected by the ongoing US-China trade war. The survey was a follow-up to questions asked in a dedicated survey in September 2018, with further questions included in the annual European Business in China Business Confidence Survey 2019, which collected responses in January 2019. A total of 174 responses were collected in September 2019, in comparison to the 585 collected during the annual Business Confidence Survey.

 

Larger firms have options to avoid the US-China ‘border’

Many European companies have accepted the lasting nature of the US-China trade war and have effectively side-stepped the steep tariffs at the US-China trade ‘border’ through such strategies as rejigging their supply chains and leveraging their global corporate networks. Unlike unilaterally imposed tariffs on all imports irrespective of origin, bilateral tariffs are proving relatively simple for larger firms to avoid, albeit not without cost. Pre-trade war supply chains were set up to be as efficient as possible, so making any changes to them is costly, however this strategy is still far cheaper than the 25 per cent tariffs that would otherwise be faced. Some multinationals with a global footprint have simply rerouted the origins and destinations of US- or China-bound goods to avoid the ‘border’, rendering the bilateral tariffs ineffective.

Smaller firms at the mercy of supply and demand elasticity

Meanwhile smaller European firms are generally experiencing one of several different effects, largely based on the relative elasticity of supply and/or demand. There is an advantage to producing extremely high- quality goods, as is common for European firms, in that they are often irreplaceable to customers who are unwilling to accept anything less. This puts some in a position, when exporting from China to the US, that allows them to keep prices the same, passing the tariff cost along to Americans downstream.

The disadvantage to producing such high-quality goods has an equal and opposite reaction: in scenarios where European firms in China only have suppliers in the US that can produce what they need, American firms can pass the cost along in China.

European companies importing highly elastic goods into China have the option of dodging tariffs simply by changing supplier, while exporters to the US that face global competition must either eat the cost of US tariffs or lose market share.

The tariff’s intended goals are not materialising, SMEs pay the highest price

The reality of the situation is that larger firms are forced to pick up marginal costs for outmanoeuvring the tariffs, while smaller firms end up either passing costs along, eating costs themselves, or changing suppliers (if this option is even available). Is this meeting the intended goal of driving investors—particularly larger companies—from the Chinese market back to the US? Clearly not.

Many companies are moving relevant production out of China (mostly to Southeast Asia and India), and just as many are increasing their investments into China to onshore their supply chains to hedge against future uncertainty. The only way the US-China trade war could be considered a success is if its goal was to disrupt global supply chains at a modest cost to large corporations, while delivering a steady beating to unlucky China- and US-based SMEs on the wrong side of a supply chain. 

“That European companies in China have effectively negated tariff effects in a relatively short space of time only serves to highlight the futility of bilateral tariffs in a global marketplace,” said Joerg Wuttke, president of the European Union Chamber of the Commerce in China. “China certainly needs timely and wide-ranging reforms, and the right amount of strategic pressure can help move things in the right direction, but repetitive swings of the tariff hammer have proven anything but strategic.”

Download the survey analysis below.

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Yichi Zhang

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