If you listen to politicians on a regular basis you are aware that simple slogans work well. The slogans allow different people to think about the slogan differently and somewhere along the line it is possible they intersect. One of President Trump’s slogan is I love tariffs, a tariff on everyone. Tariffs are nothing new, countries have been using them since global trade was invented going back to the Industrial Revolution. A classic case was England which was the dominate country at that time, imposed tariffs on India’ wool industry. The wool was sent to the factories of England and returned as manufactured goods. The tariff was on long as England controlled India, it was only broken with the time of Mahatma Gandhi and India’s independence.

President Trump wants to impose tariff on China and he has the right to do so. Companies affected have the expectation to do work arounds, so that a slogan may or may not be effective.

In an article by Ana Swanson of the New York Times News Service, in 2018 Arnold Kamler then the CEO of Kent International which makes bicycles. One of the things he did was shifted production to new facilities in Taiwan, Vietnam, Malaysia, Cambodia and India (notice he did not shift production to the US). All those countries were exempt from the 25% tariff had the bike been shipped from China. The effect of the tariffs because of the new factories pushed up costs meant bicycle prices at Walmart and other stores were increased.

The change in the supply system was called by Gita Gopinath, the first deputy managing director of the International Monetary Fund, was connector countries. This means when the US and China impose tariffs on each other, countries such as Mexico and Vietnam benefit. Whether this is a good thing or not is an open question.

Brad Setser, an economist and senior fellow at the Council of Foreign Relations says the tariffs reduces bilateral trade but does not impact global trade. The US trade deficit with China has fallen to $278 billion in 2023 from $417 billion in 2018. However, US trade deficits have increased with Vietnam, Taiwan, Mexico and elsewhere.

It is unclear how effective President Trump’s tariffs will be against the creativity of global companies that are driven by strong financial incentives to maintain access to the US market.

In many industries, Chinese companies have moved production from China when heavy tariffs were placed on them. One example is solar panels. Companies moved production to other Southeast Asia countries where there were no tariffs. Then US companies had to lobby Congress to include those countries or a time lag.

In China, companies such as Sailwin, Vanzbon and Tetakawi are advertising services helping Chinese companies do turnkey operations through finding factory space in Mexico and recruiting workers there, allowing them to export to the US without tariffs.

The other solution is courtesy of the large accounting firms, using accounting and tax tricks which US companies use, to make it appear that their shipments from China are lower, and thus pay fewer tariffs without making major changes to their supply chains.

Lynlee Brown, a partner in E&Y’s global trade practice said there were many strategies that companies could pursue to reduce tariffs. For example, if a part came from Vietnam, it might be reported the whole thing came from Vietnam even though the final assembly was in China and exported from China to the US.

Another lever companies could use is valuation. The companies can officially lower the value of the import by stripping out the intangible costs and recording those to other subsidiaries. By lowering the value of the import, the tariff is less.

Linking to dividend paying stocks, the reality is US based companies do the same thing as Chinese companies and that is why the slogan may not be effective as one thinks. If the government tries to stop Chinese companies, they run the risks of the lobbying efforts from the US companies who also benefit. The world can be complicated, but still moves forward.

There are more questions than answers, till the next time – to raising questions.