Trump tariffs leave costly China supply question unanswered

Business Times

2 days ago

[BEIJING] US President Donald Trump's recent flurry of trade deals have given Asian exporters some clarity on tariffs, but missing are key details on how to avoid punitive rates that target China's supply chains.
Trump unveiled tariffs of 20 per cent for Vietnam and 19 per cent for Indonesia and the Philippines, signalling that those are the levels the US will likely settle on for most of South-east Asia, a region that ships US$352 billion worth of goods annually to the US.
He's also threatened to rocket rates up to 40 per cent for products deemed to be transshipped, or re-routed, through those countries, a move largely directed at curbing Chinese goods circumventing higher US tariffs.
But still unclear to manufacturers is how the US will calculate and apply local-content requirements, key to how it will determine what constitutes transshipped goods. South-east Asian nations are highly reliant on Chinese components and raw materials, and US firms that source from the region would bear the extra tariff damage.
That's left companies, investors and economists facing several unanswered questions about Trump's tariffs that appear aimed at squeezing out Chinese content, according to Deborah Elms, head of trade policy at the Hinrich Foundation in Singapore.
'Is that raw materials? All raw materials? Above a certain percentage?' she said. 'How about parts? What about labour or services? What about investment?'
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In an agreement with Indonesia last week, the White House said the two countries would negotiate 'rules of origin' to ensure a third country would not benefit. The deal with Vietnam earlier this month outlined a higher 40 per cent tariff rate for transshipped goods. And Thai officials, who have yet to secure a deal, detailed that they likely need to boost local content in exports to the US.
Missing details
The Trump administration is not providing much clarity on the matter right now. US officials are still working out details with trading partners and looking at value-based local content requirements, to ensure exports are more than just assembled imported parts, according to a source familiar with the matter, who did not want to be identified discussing private talks.
A senior Trump administration official also said this week that details on the approach to transhipment are expected to be released before Aug 1, the deadline for when higher US tariffs kick in.
Some factories are already adjusting their supply chains to comply with rules that will require more locally-made components in production.
Frank Deng, an executive at a Shanghai-based furniture exporter with operations in Vietnam, and which gets about 80 per cent of business from the US, said in an interview that his firm is making adjustments as authorities appear to be more strictly enforcing country-of-origin rules.
Vietnam has always had specific local content requirements for manufacturers, Deng added, including that a maximum of 30 per cent of the volume of raw materials originates from China, and the value after production in Vietnam must be 40 per cent higher than the imported raw materials.
'We have been struggling to meet all the standards so that we can still stay in the game,' Deng said. 'But I guess that's the only way to survive now.'
For most of South-east Asia, reducing the amount of Chinese-made components in manufacturing will require a complete overhaul of their supply chains. Estimates from Eurasia Group show that Chinese components make up about 60 to 70 per cent of exports from South-east Asia – primarily industrial inputs that go into manufacturing assembly.
About 15 per cent of the region's exports now head to the US, up about four percentage points from 2018.
Local content
The US has become increasingly vigilant about China's ability to bypass US trade tariffs and other restrictions through third countries since Trump's first trade war in 2017.
Thailand signalled its frustration over the lack of clarity for how much local content is needed in goods exported to the US to avert transhipment rates, but noted it will likely be much higher than a traditional measure of 40 per cent. 'From what we have heard, the required percentage could be significantly higher, perhaps 60 per cent, 70 per cent, or even 80 per cent,' Deputy Prime Minister Pichai Chunhavajira said on Jul 14.
'Emerging countries or new production bases are clearly at a disadvantage,' he said, as their manufacturing capabilities are still at an early stage and must rely on other countries for raw goods.
Vietnam, Thailand and Malaysia have all taken steps this year to address Trump's concerns, increasing scrutiny of trade that passes through their ports, including new rule-of-origin policies that centralise processing and imposing harsh penalties on transshippers.
Developing nations may still struggle to enforce Trump's rules or comply with the rules if it means going up against China, their largest trading partner and geopolitical partner.
'The reality is it's not enforceable at all,' said Dan Wang, China director at Eurasia Group. 'Chinese companies have all kinds of ways to get around it and those other countries have no incentive to enforce those measures, or capacity to collect the data and determine local content.' BLOOMBERG