I thought it would be a little unfair if we imposed Trumps tariff charges without a little more explanation as to what, why, and how this affects US citizens as a whole.
Allow me to give you my analysis on China’s trade relations as someone with a genuine interest in China as an economy, community and business region. I love China and many of my friends are Chinese. My family and I have been importing goods from China and around the world for over 5 years and we’ve had some of the best and worst relationships that can possibly happen in the international trade sector.
Why the tarrifs came about
Though this issue seems very recent, it actually began a very long time ago in the USTR (US Trade Relations department). Over a year ago, the USTR audited the trade deficit between China and the USA and noticed that there is a 350Bn deficit in trade between China and the USA. 500Bn of goods from China are imported into the USA with just 150Bn of goods from USA are imported to China.
Once the audit was complete, the USTR suggested a 25% duty charge on just 50Bn of those goods. This suggestion was open for input and any business could notify the USTR why they were for or against it. Many businesses had public meetings with the officials of USTR. Due to the disliking of the tax by US businesses, the 25% duty was levied upon just 16Bn of goods from China instead of the originally suggested 50Bn, this went into effect earlier this year 2018.
China did the bad thing (in my opinion) by retaliating instead of improving their trade relations with the rest of the world. Note, it’s difficult for all countries to enter China, not just the USA. China retaliated with 50Bn of taxes on US products inbound to China.
Obviously feeling like this was a smack in the face (and with multiple unfruitful meetings with the trade representatives from both countries) the USTR reinstated the original 50Bn of goods going into China, and, as playground rules go, ‘tit for tat’ ensued. China further retaliated on US goods, and now here we are with the USTR imposing a 10% tax on 200Bn of Chinese goods.
Difference between Duty and VAT
There are two different types of taxes on imports of goods when it enters a country.
VAT and Duty.
Some goods will have none of them, one of them or, a combination of the two.
VAT serves to protect the manufacturing economy of the importing country, obviously jobs can’t get swept away as easy if importers have to pay a charge on import. This hurts smaller and foreign businesses entering the USA market, but not so much medium sized businesses, as VAT can be claimed back quarterly or annually if you have a domestic, VAT registered company. So if you’re a US company of a decent size, VAT only temporarily hurts cash flow and nothing more.
Duty however, serves to be a barrier against specific countries. No one can claim it back. It goes to the government in its entirety. For example, in our case, the USTR has added a 10% duty against 200Bn of Chinese goods, not, VAT. This means that they specifically will be putting pressure on China as a country. The more duty, the more the importing country wants to protect itself from the exporting country. The USTR could impose duty on just China and no one else, slowing down China as a whole.
The problem with China
The problem with China is that it’s a VERY closed off country. Typically, any western company trying to make it big in China either:
a) Gets their brand ripped off with little to no repercussions
b) Face a lot of barriers to Chinese entry such as:
a. It is near impossible to become a citizen of China, you can extend your VISA and continue to stay, but they won’t ever consider you Chinese, even if you marry, which is very different to the US for example, where if you marry a US citizen, there’s the path to becoming a US citizen that awaits. In China, there is no path, Married or not.
b. Setting up a business requires a lot of scrutiny from the Chinese government, hence why you don’t really hear of anyone ‘Making it Big’ in China. If you set up a business there, you need to give part of your business away to a Chinese person, you can not own 100%. How do you set up a business there, if you don’t know anyone there? Difficult.
c. Trading goods into China. China has extremely difficult trade laws. For example, you need certain I.D’s to be able to send products to China. Once the value of the is over a certain amount, it gets very restricted and there’s a zillion more hoops to jump through, they’re just not as set up for it. Your goods often get stuck in customs or painstakingly returned. For any small business, this can be a show stopper.
d. China has much higher taxes on imports, in a lot of ways, they don’t want goods coming in.
The problem with the USA
The problem with the USA is that it’s for the most part, moved on to become a service economy instead of a manufacturing economy.
What trump is trying to do during the term of his presidency:
a) Bring back a lot of jobs that have gone overseas
b) Decrease the taxes across the board for low income and high income businesses and residents
You must remember, all countries run like a business, it’s not just the USA. They must get their money from somewhere. So, if trump cuts taxes, that effectively means the US isn’t making as much money for things like progress, research and infrastructure. However, by adding this tax on China, the US recoups the lost money in taxes from the duty charges I mentioned earlier. In a perfect world, this should have net 0 effect on consumers as they pay out less in tax but the cost of the products they buy go higher. But, as we all know too well, this isn’t a perfect world and business don’t always play fair on their consumers in terms of how they are affected. Some businesses will take a big hit on the jobs they can supply within the US and others will get a great benefit due to not having to compete as hard with China’s alternative labour. The issue here is that Trumps budget deficit is growing enormously, and the manufacturing economy of the US just isn’t ready for it like it was when Detroit was manufacturing heaven for many great US businesses, the appetite for US manufacturing just isn’t there anymore.
Where does that leave us?
We’ve implemented a 6% increase on our products being shipped to the USA. We are working on routes around this and we hope to solve this within the next 4 months. To confirm, only US shipments are affected by the USTR duty tax. We still love, and we’re working hard to circumvent the taxes as best possible. A further update will be with you soon.