As IPC advocates for the interests of electronics manufacturers and related companies in the halls of government worldwide, one of the most challenging issue areas is international trade policy. And at the top of that list of concerns is the trade war between the world’s two largest economies: the United States and China. After almost two years of escalations and retaliations, higher tariffs are now in place on most goods traded between the U.S. and China, and they are beginning to take a toll on our industry. In fact, almost 90% of IPC members in the U.S. who responded to a recent survey  said they are troubled by the higher tariffs, and some are investing less in the U.S. and hiring fewer workers as a result. Among the survey’s top results are the following four points.
1. Higher Costs, Lower Profit Margins
Fifty-five percent of companies report they are facing higher costs as a result of higher tariffs, which are affecting, on average, about one-third of the total dollar value of the products they import. Some companies say their costs have increased more than the direct costs of the tariffs due to higher administrative and operational burdens to sort it all out. Not surprisingly, almost 70% of companies report lower profit margins as a result of increased tariffs.
2. Less Investment and Hiring
Tighter profit margins are setting off a ripple effect of negative consequences. Twenty-one percent say they are reducing investment in the U.S., and 13% say they are cutting back on planned hiring and/or reducing headcount. Some companies report they are increasing investment in automation to reduce overall costs, but this would suggest that some of the capital investment taking place in the U.S. could further reduce employment. “It seems clear that loss of profitability is impacting the ability of these companies to invest in the U.S.,” said Shawn DuBravac, IPC’s chief economist.
3. Limited Ability to Raise Prices
More than a third of companies report they cannot increase their prices to cover the cost of higher import tariffs due to various factors. An additional 25% expressed that it would take more than six months to raise prices because they are operating under long-term contracts with guaranteed prices. Other firms noted they can’t raise prices because of competitive threats and pricing from competitors not impacted by tariffs on imports from China.
4. Jobs Not Coming Back to the U.S.
Fifty-one percent of respondents said they are now sourcing from countries other than or in addition to China as a result of increased tariffs on Chinese imports. Nearly 20% report they are moving manufacturing and potentially other operations out of China. However, there is no sign that those jobs are coming back to the U.S., and there are some indications that they are going to other countries, such as Vietnam, Thailand, South Korea, Taiwan, and Mexico.
The View From the Front Line
Beyond the topline data, the survey also solicited dozens of open-ended comments from industry executives. Here are a few of those verbatim responses.
- One electronics manufacturer said, “Overall, many of the Chinese supply chains (PCBs, FR-4 material, component factories) have been established over decades. To expect that to change over a short period of time is not feasible without affecting quality or increasing pricing or lead time.”
- Another electronics manufacturer stated, “Our vendors were not initially charging the tariffs; now, they are, but each vendor does it differently. For example, one vendor charges a flat percentage rate, another just increases their cost, and another gives an arbitrary number. This causes us more work, more confusion for the customer, and decreased ordering because the tariff costs are an unknown.”
- And it’s not just about rising costs, explained one original equipment manufacturer; it’s also about access to the enormous Chinese market. “As an OEM, we have two issues: the tariffs have increased our costs by more than 15%, plus the 25% duty from China has stopped all our sales to China.”
- As one industry supplier expressed, “Our real issue is not related to higher costs on imported goods but rather higher tariffs on U.S. goods entering China and reduced consumption of our goods by our customers who export into China.”
- Another electronics manufacturer stated, “Customers are pushing us to move our business to our Mexico plant, which is not subject to the tariffs.” A similar comment was, “We have moved manufacturing from our U.S.-based operation to our Mexico facility. We are using in-bond shipping from China to Mexico to mitigate tariffs when possible.”
- One OEM said, “These tariffs will kill our European-based business in the U.S. and help more Asian imports to get a footing in the Americas.”
Not All Negative
It is worth noting that 14% of the 86 survey respondents were not troubled by the tariffs, a relatively small but still significant number. “We’re investing more in the U.S. There’s no significant reduction in business, but a long-term positive effect on our business,” explained one PCB fabricator. “We’re booming,” said another. And one industry supplier stated, “Tariffs have positively affected our business, as premium manufacturing products and on-shoring has driven up our sales.” Additionally, one EMS executive concluded, “If the tariffs result in better trade negotiations and fairness between China and the U.S., then they are a good thing.”
What Should Be Done?
While the positive responses are good to hear, the overall response shows that rising tariffs are putting a painful squeeze on many electronics manufacturers in the U.S., China, and even Europe, and on their business partners and customers as well. IPC members tell us they are facing supply-chain disruptions, steeper costs, and market-access problems from the tariffs that have been imposed to date, and the impacts are likely to grow as the trade war drags on.
Indeed, the U.S.-China tariff war is a major contributing factor to the rising economic problems we see in those two countries and others. Wall Street analysts expect earnings of the S&P 500 to decline in the third quarter of 2019 for the first time in three years, with the tariffs and related uncertainties contributing to the trend. IPC’s latest “Pulse of the Electronics Industry” Report  showed that the industry’s view of the current direction of the business environment worldwide remained positive this quarter but just barely.
IPC’s position on this issue is rooted in the fact that electronics manufacturing facilities are located throughout the world, including the U.S. and China, and they are engaged in a complex web of supply-chain relationships that cross multiple borders. Imposing tariffs on goods from a single country like China gives the false notion that we are creating a steeper hill only for Chinese goods. More accurately, a great many goods coming from China are made by American companies, support American jobs, and are sold to American consumers as American goods.
IPC supports the right of all countries to address unfair trade practices, and we have longstanding concerns about some of China’s industrial policies, including government subsidies and intellectual property violations. But in the memorable words of IPC President and CEO John Mitchell, “Addressing unfair trade practices by ratcheting up tariffs is like using a sledgehammer to make orange juice; in both cases, it’s the wrong tool and makes a mess of the job.”
To begin to fix this situation, IPC is calling on the governments of the U.S. and China to de-escalate the tariffs and focus on concluding meaningful agreements that address the longstanding concerns of both sides. We also call on all members of the World Trade Organization—especially its largest members—to restore that body’s ability to play its role as arbiter of international trade disputes so that nations will not feel a need to resort to unilateral tariffs to resolve trade disputes.
How Might It Play Out?
The U.S. and China have engaged in on-again, off-again talks throughout this trade war, but at present, they are reportedly making progress toward a “phase one” trade deal that may include commitments on agricultural products, financial services, and intellectual property protection. The two countries had hoped to sign an agreement during an Asia-Pacific Economic Cooperation (APEC) Summit in Chile this month, but that event was canceled last week because of political unrest in that country.
In a little-noticed (but helpful) development, the Chinese government recently passed a new law to strengthen the intellectual property rights of foreign businesses operating in the country and “never allow forced technology transfer," a government official said. "Further, China will strengthen and speed up improvements made to standards for patents, trademarks, copyright infringement, counterfeiting judgments, inspection, and identification," he continued. Experts are speculating that this could support the IP component of a phase one deal, but by all accounts, systemic reform in China is a long-term project.
It is also unclear to what extent a phase one deal would dismantle the tariff structure built up over the last two years, and there is no clear path to a “phase two” or “phase three” deal. The bottom line is we’re in a “wait-and-see” situation. And until we see some solutions, the tariffs will continue to be a drag on the electronics industry and our workers and customers.
How Is the U.S.-China Trade War Affecting Your Company?
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- IPC, “Tariff War Fallout: U.S. Electronics Manufacturers Worried About Higher Tariffs and Laboring to Mitigate Impacts,” October 2019.
- IPC, “IPC Pulse Survey Shows Positive but Moderating Industry Outlook,” September 30, 2019.
Chris Mitchell is IPC’s VP of global government affairs. Contact Mitchell at ChrisMitchell@ipc.org.