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Trump's latest trade war escalation brings tariffs direct to consumers

The following is based on Panjiva's research and insights covering global trade policy, the logistics sector and industrial supply chains, drawing from global freight data.

The White House will apply 10% duties on all Chinese products not already covered by tariffs from Sept. 1. President Donald Trump cited Beijing's lack of delivery on agricultural purchases, and talks more generally, for making the late July decision. The implementation has been delayed as the U.S. trade representative is consulting on whether so-called list 4 tariffs should include all, or a subset, of products.

It is not yet clear what a China retaliation may be. The government may decide there is no point in negotiating and active measures could include reduced purchases, including of agricultural products by state-owned enterprises, or implementation of its "unreliable entities" list. It could also lead to regulatory measures such as customs and enforcement actions.

As was the case ahead of list 3 tariffs applied in December 2018, there will likely be a surge in imports at the start of the peak shipping season as companies seek to preempt tariffs.

Panjiva analysis shows that the biggest products not yet covered in recent tariff announcements are all in the consumer sector and include: smartphones where imports were $43.2 billion in 2018, representing 81.8% of total imports; apparel and footwear worth $42.1 billion, representing 37.6% of the total; laptop PCs worth $37.5 billion, equivalent to 94.4% of the total; toys worth $11.9 billion which is 97.6% of the total; and video game consoles worth $5.4 billion, representing 97.6% of the total.

Imports of toys and video games usually peak in October ahead of the holiday season, Panjiva data shows. Hasbro Inc. has already indicated that switching supply chains is slow and takes years to implement.

Laptops have a double peak in shipments in August for back-to-school sales and November, depending on model release schedules. There could be an acceleration in shipments of higher-end models by air rather than sea.

Dell Technologies Inc. and HP Inc. are already planning to move production out of China for the longer term. Panjiva's seaborne data indicates China accounted for 88.7% of Dell’s U.S. seaborne imports in the 12 months to end-June. Quanta's laptop supplies to Dell, meanwhile, continue to be entirely from mainland China including Hong Kong.

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The largest group of the list 4 is smartphones, with $43.2 billion imported in 2018, representing 81.8% of the total. Imports are seasonal. The peak typically is in November as a result of Apple Inc.'s product release cycle. That comes as growth slowed to 3.5% in dollar terms in the 12 months to May 31. That there was growth is down to increased values per phone since the quantity of phones fell 1.9% over the period.

There is already evidence of stockpiling. Imports in May alone surged 24.3% year over year in handset numbers and 26.3% in dollar terms. This may have been the result of a breakdown in the earlier round of talks between China and the U.S. that brought increases in list 3 tariffs to 25% from 10% as well as threats regarding list 4 tariffs.

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Given that phones are largely a luxury good with complex supply chains, many manufacturers may increase prices rather than retool their manufacturing.

Yet at the other end of the spectrum, tariffs may lead to price increases of apparel and footwear. Imports from China have already fallen to 37.6% of the total following nearly two decades of shifting production. Yet, it remains the largest production center with Vietnam representing 16.8% and other Asian countries combined 22.5%.

Apparel makers including Ralph Lauren Corp. and Guess? Inc. have already indicated a mixture of price increases and longer-term sourcing decisions will be used. Meanwhile, the footwear industry including adidas AG and Under Armour Inc. said in a joint notice in May that tariffs will be "catastrophic for our consumers, our companies, and the American economy as a whole."

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Christopher Rogers is a senior researcher at Panjiva, which is a business line of S&P Global Market Intelligence, a division of S&P Global Inc. This content does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.

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