China trade war: What's the impact for consumer products?
INSIGHT ARTICLE |
How are trade frictions between the United States and China affecting consumer products companies? Carol Lapidus, RSM national consumer products industry leader, asked Joe Brusuelas, RSM chief economist, for his insights in the following Q/A.
The U.S. tariff list was just published. It does not contain specific consumer products, but rather machinery and equipment used to manufacture these products. What effect do you think these tariffs will have on U.S. consumer products companies?
Joe Brusuelas: I expect a series of mostly indirect effects on the U.S. consumer product space. The indirect impact will be felt on brick-and-mortar retailers in the form of higher costs for product display, shelving and storage due to higher costs of basic metals and industrial products. These higher costs could lead to retailers seeking cuts in other areas, including lower prices paid for products they sell to customers. The first round of the tit-for-tat tariff retaliation largely spared the U.S. consumer products industry.
China retaliated by sending out its own tariff list. How might China's tariffs impact RSM consumer products clients?
Joe: At this time, it appears the impact of China’s retaliation will not materially impact RSM’s consumer products clients. But there is risk this intensifying trade spat has the possibility of turning into a trade war. Once tariff engagements begin, they are difficult to stop and they tend to spread to other areas of the economy, as successive rounds of tit-for-tat tariff retaliation. The Chinese are well aware of the vulnerability of the U.S. consumer space in general, and retail, in particular. Should things begin to spin out of control, consumer products could be the target in successive rounds.
How do you think this environment will impact U.S. companies looking to grow their global revenue by selling to the increasing number of middle class Chinese consumers?
Joe: Trade spats and trade wars are the ultimate conflicts of choice. They are easy to start, difficult to end and tend to produce no winners. The trade friction that is rapidly moving toward a trade war will make it much more difficult for U.S. companies to engage in growth strategies using China’s export market. Typically, once economies begin to engage in trading tariffs, nontariff barriers tend to spring up and classical protectionist measures such as increasing paperwork, idiosyncratic rules governing entry of goods into markets and outright graft almost always follow in such a way that they disrupt economic relationships.
What are your thoughts on potential changes to the North American Free Trade Agreement (NAFTA)?
Joe: The NAFTA modernization talks appear to be moving toward a successful conclusion. The three economies involved in the first seven rounds of talks essentially leveraged the modernization framework embedded in the Trans Pacific Partnership that the Trump administration decided not to join. They used it to cover both manufacturing and services, including technology and life sciences areas of commerce that did not exist when the agreement went into force in 1995. The two outstanding areas of concern are dispute settlement and quantitative requirements on auto contents. On qualitative requirements, the Trump administration has given way in recent days clearing the way for a compromise. And at this point the Canadians and the Mexicans are ready to accept a U.S. exit from the dispute settlement in the framework, which will leave U.S.-based firms without recourse. My sense is that the Trump administration will retreat on this issue during the upcoming eighth round of talks and conditions will be created to converge on an agreement over the next four to six weeks. It is critical that an agreement is in place before the Mexican election in July and is ready for ratification in the Mexican Senate prior to the new Mexican president taking office in early December. This should be a relief for U.S. consumer products companies buying and selling their products cross border to Canada and Mexico.
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It has been nearly 90 years since the trade wars of the 1930’s, so there is little memory of what a trade war looks like.