Last week, MTG published a blog that was mostly written by AI to provide an overview about the current trade situation. The tariff rates between the United States and China have not changed over the past week. Usually, I would not feel the need to write that, yet these are unusual times. The purpose of the previous blog was informational with some insight while this blog will focus on insights and recommendations for business.
Where We Are Now
Tariffs are now at the lowest level since 2018 when the first Trump administration moved our previous tariff of about 3.2% to 20% over a 2-year period. The Biden administration did not make any substantial changes to the rates. In the first 100 days of the second Trump administration, the tariffs have shot up to 145%. This graph from the Peterson Institute for International Economics shows the change between the two countries well despite the fact that, at a month old, it is out of date.
The current rate of 10% seems like a godsend for companies and consumers that relay on products manufactured in China. In a way, that is true. A 10% tariff is much more manageable than 145%. Yet there are two elements that should make everyone wary of the current state of affairs. One is that the current rates are only for a 90-day period. That means that if there is no agreement in 60 days (as of May 19) then tariffs will return to at least one of the earlier rates. Two, given the trends over the past 100 days, there is little reason to be confident that the current rates will hold even if a deal is reached after the truce.
The damage has already been done as companies have worked to shift manufacturing, reduce orders, and/or raise prices on the consumers. As a gamer, I am happy that the Nintendo Switch 2 will not be affected by tariffs, but its accessories will likely increase which will be a real shame around Christmas.
Rapidly Changing Situation
Most individuals and businesses at this point understand the board market conditions we are in now, at least, I hope. The boarder market is one thing but what should you do as a company? The answers may not be as simple as you believe. Lately, our clients have primarily focused on understanding how they can get out of China to avoid the tariffs. We have received many inquiries for the past 5 years on this topic, but it has really accelerated over the past 3 months. Companies rushed to us as tariffs kept rising to find solutions for them to move out of China. Now that tariffs have rapidly decreased, our clients are hesitant to make big changes but still feel they need to do something.
That is the logical course of action. Leaving during high tariffs is a sensible decision. Yet, there are ripples to that plan. Is it wise to leave if the tariffs suddenly shift? Or what about if it is not feasible to leave?
It goes without saying that a sudden drop in tariff rates will change the relocation calculations. What was the logical decision is no longer the best one. These companies should not move. Was all the time, energy, and resources worth it for a decision to be reversed? Yes, because the move plans can be used again in the future. There will be changes at the margins but the move plans made years ago are still valid today and it is an effective hedge against risk.
A number of companies we work with are large enough and/or have easily movable production that they might move anyway, or they are prepared to do so.
For smaller companies, the options are more limited because there are really only two choices: accept much higher prices or go out of business. Neither is especially good. The new 10% tariff is great news for them. Their position is much better, and they can weather the storm. Yet hoping that there will not be another spike in tariffs is foolish. Now is the time to prepare. The best course of action is collaborating with your suppliers to lower the costs and split the savings between the two of you. There are two advantages to this option: you hedge some of the risk of higher tariffs as you can more easily absorb the results and you can enjoy higher profits until the situation requires a change.
Many companies have told us they or their suppliers are highly automated so there is no cost cutting that can occur. Our experience says otherwise. Everywhere our team has worked we have found opportunities for better, safer, and more productive operations.
What Should My Company Do?
Is it better to plan for relocation or to work with your suppliers (or your own factories) to improve operations? As Tony Stark famously said:
Companies should pursue both options to some degree to protect themselves from future risks. Start with an analysis of which would pay off the most. It could be relocation; it could be improved operations. The goal here should be to have at least plans for each otherwise, your company is more likely to be caught flat footed and scrambling to find a solution the next time a major event disrupts global markets.
What can MTG do to help you improve your operations?
