This month our resident advice columnist answers questions about tariffs and nearshoring.
Dear Ahab, I’ve been reading a lot about “nearshoring” in the news lately. As someone who imports most of their products from China, should I be looking to try and move some of my manufacturing base from China to somewhere closer to the United States? — Otto Opportunist
Hi Otto, the answer is complicated, but it really depends on what you’re importing. While tariffs are steeper on imports from China than from anywhere else — and the Biden administration has floated the idea of increasing some of them, including the tariff on steel and electric vehicles — you’ll blow some of your tariff savings on shipping costs. Mexico, for example, has a growing cross-border trucking industry, but that trucking is still a few thousand dollars more expensive on average, per-shipment, than sea shipping from China.
Ultimately, there are many factors, other than cost, that should go into your decision. However, when it comes to cost, it all depends how much each container of your cargo worth. If one container of it is worth $100,000, the difference between a 25% tariff and a 7.5% tariff is vastly significant. However, if the cost per container is $15,000 then you’d be better off just paying the tariff and keeping your base in China. It all depends on your situation.
Dear Ahab, I’m getting run ragged by tariffs on imports from China, but I don’t think I can move all of my operations out of the country and into a new place, such as Mexico or Indonesia. Could I theoretically open a manufacturing operation in one of those countries and assemble products there to avoid tariffs? Patti Problem-Solver
Well, Patti, this one is really a question of where your parts come from. U.S. Customs & Border Patrol typically requires a certain percentage of parts & labor that went into making a product to be from the country listed as the country of origin, and it’s on you to prove that percentage. So, let’s say you open a garment manufacturing facility in Mexico using fabric you import from China. In the eyes of U.S. Customs, it doesn’t matter if your garment manufacturing facility cuts, sews, embroiders, irons, folds and packages those garments in Mexico, because the fabric is from China. Now, there are 97 chapters in the U.S. Harmonized Tariff Schedule, and all of them are full of loopholes, so the best advice I can offer would be to work with your customs brokerage advisor and figure out a manufacturing and shipping plan that makes sense for your business.
Dear Ahab, I was considering trying to nearshore my business, but I just don’t see the point if it’s going to be so much more expensive to ship products by truck from Mexico than by boat from China. Why do I see so many companies doing this if they’re going to pay more in shipping? – Color me Confused.
Well, CMC, there are three reasons. First off, the tariffs on imports from Mexico are less steep than the tariffs on imports from China. Second, a lot of American companies remember how slow business was during the pandemic, when the Chinese manufacturing and supply chain was operating at a limited capacity, and the companies realize they need multiple sources for products as a sort of insurance policy in case another hundred-year event like COVID happens.
The third factor is the tense trade relationship between the U.S. and China, which escalated with the introduction of Trump-administration tariffs. The Biden administration increased some tariffs in May, and tariffs on Chinese imports already generated between $70 million and $80 billion annually. When Biden first took office he talked about rolling back those tariffs, so the fact that he reversed course seems to indicate that importing from China is going to get more expensive regardless of who wins the presidency in November, forcing companies to reconsider their options.
In anticipation of that increase in tariffs, some companies, like Apple, determined that moving some manufacturing out of China made sense. While it depends on your circumstance and what you can afford, I think it is clear that the U.S. government is highly encouraging companies of all sizes to diversify their manufacturing to other parts of the globe.
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