A large focal point of President Trump’s political agenda during his 2016 campaign was focused on trade with the United States and its impact on the U.S. economy. In turn, it began to shed light on U.S. trade relationships with Mexico and China. While renegotiations Mexico and Canada have resulted in a revised trilateral trade agreement (USMCA), trade with China is still under significant pressure.
Section 301 of the Trade Act of 1974 allows the United States the authority to enforce trade agreements and address unfair acts, policies, and practices. Section 301 allows the United States to impose sanctions on foreign countries that violate trade agreements or engage in other unfair practices. If negotiating does not produce a result that is found fair, the U.S. is allowed to raise import duties on the said foreign country’s products, which is the mechanism currently being used against China. As such, tariffs on Chinese goods and imports have increased, making manufacturing costs in China more uncertain.
As mentioned earlier, China is currently being targeted by the Trump administration with regard to broad-based tariffs. Being that more than half of the United States’ global trade deficit, which is currently close to $600 billion, is with China, it makes them the obvious target. Trade deficits, however, are not always a bad thing.
The economic theory behind free trade is to enable businesses to purchase goods and services from countries that can offer them at the lowest cost. This strategy can help bolster consumer spending, which in turn grows the economy and creates jobs.
In China’s case, it is able to produce many of the manufactured products Americans want and need at much lower costs than U.S. suppliers can produce them domestically. By spending less on manufactured products, Americans have more money to spend in other areas, such as eating out, cable television and vacations, which is why the U.S. economy has shifted from a manufacturing to a service economy. As such, the U.S. tends to run trade deficits with most of its trading partners. Some policymakers feel that countries without a strong manufacturing base are at great economic risk; however, the U.S. has thrived over the last 30 years, all while its manufacturing contribution has dwindled from 35% down to 12% of GDP.
Free trade, however, is not a perfect system. The World Trade Organization was developed to help monitor and enforce free trade rules and regulations among member countries but it is not always successful. Government intervention can disrupt an otherwise “stable” system by subsidizing the domestic production of certain products. One example is China’s steel industry, which is primarily state (government) owned. China is notorious for producing low-cost steel and “dumping” it into foreign markets to force its global competition out of business. Being that the Chinese government owns these businesses, they can afford to sell the steel for a period of time below their cost to produce it. While this practice was supposed to stop after China was accepted into the World Trade Organization, there is evidence it still happens.
Due to the numerous and uncontrollable variables that can impact manufacturers around the world, the best solution to mitigate their risk is to diversify their manufacturing footprint. By having factories in different countries, manufacturers can shift production from one to the other, depending on the lowest total cost to produce their products. While this strategy carries its own set of challenges and risks, which include capital investment, overcapacity, cultural differences, and knowledge transfer capabilities (training), it is being implemented by many manufacturers in the United States and other developed countries.
North American Production Sharing, Inc. is the leading expert in helping manufacturers from around the world expand to Mexico. Please contact us for more information about Manufacturing in Mexico or to speak with one of our executive managers.
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