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Trump's Trade War Is Aimed Toward Reshoring, But Will It Work?

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Trump's Trade War Is Aimed Toward Reshoring, But Will It Work?

Trump's new tariffs are beginning to hit less like strategic targets, and more like an indiscriminate bombing campaign. The latest announcement of tariffs against China wouldn't hit until the end of August, so technically there is still room for negotiation. However, few see any such compromises occurring any time soon. While the long-term strategy seems aimed toward restructuring where good are produced and manufactured in order to reduce the import/export ratio (and thus debt), many are concerned that the tit-for-tat tariff battle is going nowhere fast.

The latest consumer products to be targeted include tuna, salmon and other fish, luggage, tires, dog leashes, handbags, toys, baseball gloves, furniture, apparel, mattresses, electric lamps and television cameras and well as components in telephones and flat panel displays, according to the Wall Street Journal. The scale of the imports subject to tariffs makes it next to impossible to discriminate which consumers it will hit.

The levies announced Tuesday, together with some $50 billion already in the works, stand to raise import prices on almost half of everything the U.S. buys from China, according to Bloomberg. Trump has threatened to put a tariff on every dollar of Chinese exports.

That's not the only front Trump is currently fighting over. "It's going to be an interesting time in the UK and certainly an interesting time with NATO," Trump said, just before departing in a helicopter. "NATO has not treated us fairly but I think we'll work something out. We pay far too much and they pay far too little. But we will work it out and all countries will be happy."

U.S. business groups have widely criticized the Trump administration for fighting with its allies over trade, rather than trying to enlist them in a trade offensive against Beijing.

"We have the potential to cement lasting change in China's unfair trade practices and policies—and it would be a shame to squander it," said Dean Garfield, chief executive of the Information Technology Industry Council. "We urge President Trump to delay this unnecessary escalation before more consumers and workers are harmed and instead make a concerted effort to build a coalition while he is in Europe this week and then negotiate with China to achieve tangible commitments."

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The National Retail Federation issued the following statement from Senior Vice President for Government Relations David French after the Senate approved a "motion to instruct" related to congressional approval of national-security designated tariffs.

"There is clearly growing bipartisan concern over the administration's reckless trade agenda as the real-world consequences of tariffs spread in communities across the country. Congress has an important role to play in protecting hardworking Americans from a trade war, and this vote is an important first step. We appreciate the leadership of Senators Corker, Toomey and Flake and hope to see this commonsense legislation continue to move forward."

The plan for additional tariffs also drew swift opposition from the National Association of Manufacturers. The group warned that more tariffs would undermine the U.S. tax and regulatory reforms that it credits with making U.S. companies more competitive in the last year and a half. "The U.S. and China should immediately begin working toward a fair, rules-based trade agreement to end China's market-distorting activities," NAM President Jay Timmons wrote.

The long-term plan behind the fighting seems to be aimed at bringing jobs back to the U.S., and to bring back a balance between imports and exports. This is a process often called reshoring. Reshoring is the act of reintroducing domestic manufacturing to a country. It is the reverse process of offshoring, where manufacturing is moved to another country where labor is cheaper.

According to the A.T. Kearney U.S. Reshoring Index, many had viewed electronics as a prime candidate for reshoring from China. In 2015, after more than a decade of high-tech manufacturing leaving the U.S. for China and other low-cost countries, U.S. domestic manufacturing increased its share in the sector relative to imports. As a result, in 2016, electronics imports from China declined by more than $7 billion. However, the 2017 data shows a return to the trend of growing imports for electronics. Part of the reversion is the lack of a supplier ecosystem in the U.S. that is big enough to support the increasing volumes. More significant still is the tightening global capacity. Substantial growth in subcomponent demand from mobile, industrial, automotive, and IoT products has consumed excess capacity at major OEMs.

However, slim margins, a potential downturn in demand, and the significant investment of capital and time required, all add up to making these manufacturers cautious. Instead, they are moving large strategic customers to the front of the waiting list for constrained subcomponents, which is making manufacturers wary of reevaluating their overall supply chain at the risk of falling to the back of the line.

High-tech imports are not the only imports that bounced back. Metals, plastics, and chemical imports from China all grew at near double-digit rates after 2016 declines. Making the picture even more complex, the traditional offshoring countries are starting to compete with American manufacturing in new areas. China is no longer only a production base for developed countries' brands, as a case in point. More products designed and marketed by Chinese companies are starting to appeal to American consumers, including Huawei's telecom products, Anker electronics, and Haier home appliances.

Also, Chinese automotive giant GAC Motor is looking to enter the U.S. market for SUVs in 2019 in a move that echoes earlier efforts by Japanese and South Korean manufacturers. If this trend continues, Chinese imports will not be purely about low cost, but also about product design and features. This poses additional challenges to U.S. manufacturers as it could attack their competitive position in the domestic market.

While things generally move in tidal patterns rather than lightning bolts when it comes to global trade, there remain many unknowns. Certainly the waters have been churned of late regarding trade policy. Companies must understand all potential futures and develop contingency plans, including reshoring strategies. Much is at stake, and many are concerned that the tough rhetoric is taking the geopolitical battle past a point of no return.

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