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China trade

There Will Be No Exemptions: Trump May Force U.S. Companies To Upend Supply Chains

The President is perhaps more serious than anyone imagined about actually attempting to rewrite the history of global trade and commerce

While China is busy working on a plan to implement more tariff cuts for “most” trading partners, the Trump administration is busy ensuring that no U.S. companies can escape the wrath of Peter Navarro and his lunatic protectionism.

When Trump made it official with regard to the next round of duties on $200 billion in Chinese goods (effective September 24) earlier this week, the devil was in the details.  Initially, the announcement seemed somewhat conciliatory, or at least with respect to the the initial tariff rate in the new round being set at just 10% as opposed to the 25% the administration began pondering in late July. Calling a grievous escalation “conciliatory” is obviously a misnomer, but I suppose it could have been worse.

Then again, (and as noted at the time), the fact that Trump delayed the implementation of the most punishing rate could also be construed as rather foreboding. Additionally, to the extent you’re inclined to view the relatively lenient initial rate as generous, it could well be just Trump playing politics. Here’s what we said on Monday:

The fact that he’s prepared to ratchet it up to 25% starting next year is doubly bad, both figuratively and literally. Literally in the sense that 25% is more than double 10% and figuratively because the timeline here clearly suggests that the White House doesn’t see (and perhaps doesn’t even want to see) a light at the end of this tunnel. It also appears to suggest that Trump will try and stave off a rise in consumer prices until after the midterms.

Well, on Thursday, Bloomberg reported that according to at least four sources, the administration is offering no exemptions. In fact, there isn’t even a designated process for exemptions this time around. To wit:

The Trump administration hasn’t put a process in place for companies to get exemptions from 10 percent tariffs it’s imposing on $200 billion of Chinese goods, unlike earlier rounds of the duties, four people familiar with the matter said.

The U.S has justified its decision by saying that it’s giving companies more than three months to transition their supply chains away from China before it raises tariffs to 25 percent in January, according to one of the people.

Here again, it would appear that Trump may have come to terms with the fact that this isn’t going to end anytime soon. Now, he’s embracing it. If there’s no process for exemptions, well then that means he’s effectively forcing companies to start making actual changes to their supply chains.

That, in turn, means the President is perhaps more serious than anyone imagined about actually attempting to rewrite the history of global trade and commerce. It’s one thing to use tariff threats to secure bargaining power and sure, you might have to actually implement some duties along the way just to prove you’re serious. But when it gets to the point where you’re denying exemptions in order to force management to rethink input sourcing, well that’s a whole new ballgame.

Needless to say, it isn’t possible for companies to find new suppliers in the space of three months and even if it was, the scramble to get it done in such a short time frame would invariably lead to slapdash decisions and open the door to all manner of mistakes born out of hastily construed plans.

Of course when you evaluate this, you also have to take into consideration the revisions to the list, which included some carveouts even as the composition (in terms of the breakdown between intermediate, capital, and consumer goods) remained largely consistent with the initially proposed list.

Meanwhile, Goldman was out on Thursday raising the odds of Trump going “all in” to 60%. That would entail moving forward with phase three, where the administration would slap levies on another $267 billion in Chinese goods on the way to taxing everything the U.S. imports from China.

We’ll leave you with a few excerpts and one visual from the bank’s note:

As shown in Exhibit 2, the Trump Administration has followed through with its previous informal proposals to raise tariffs following Chinese retaliation. After China imposed retaliatory tariffs on $34bn in imports on July 6, the US responded four days later by formally proposing tariffs on $200bn, which President Trump had informally proposed less than a month before. When the US imposes 10% tariffs on about $200bn in imports on September 24, we expect China to follow through with announced retaliatory tariffs at the same time, and we think the Trump Administration will likely respond – as it in did July – soon after by formally proposing tariffs on all remaining imports from China ($267bn).

Tariffs

For previous rounds and tranches of tariffs it has taken about 10-12 weeks between when the Administration has formally proposed tariffs and published an initial list before the tariffs actually take effect. The lists go through a public comment period and then are revised before being published one final time with an effective date. Following the estimated timeline above, this would suggest tariffs on remaining imports from China could be implemented in late December or, more likely, in early 2019 – right when the rate on the soon-to-be-imposed tariffs on $200bn is scheduled to be raised from 10% to 25%.

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