Trump says US firms must look for an alternative to China © AFP/Getty Images
Trump says US firms must look for an alternative to China © AFP/Getty Images

Trump's order on Chinese supply chains confuses firms

5 September 2019

US businesses have been thrown into confusion by president Donald Trump’s surprise “order” that they should find alternative suppliers outside China as he stepped up tariffs on Chinese imports.

Trump tweeted: “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing...your companies HOME and making your products in the USA.”

The tweet followed the announcement that the Trump administration would impose a 10% tax on $300bn worth of Chinese imports, which include iPhones, toys, footwear, and apparel.

When China retaliated, Trump said he would increase the tariffs by an additional 5%.

Companies with an especially marked exposure to supply chains in China immediately saw shares plunge.

Shares of Apple, Nike and Caterpillar were among those to slump following the demand they pull out of China.

JP Morgan said the latest round of China tariffs would predominantly affect consumer goods and electronics companies, such as Ralph Lauren, Whirlpool and HP, which also saw shares fall.

Many commentators initially wondered whether Trump in fact had the power to order firms out of China without Congressional backing.

Trump responded to this confusion with another tweet, this time saying: “For all of the Fake News Reporters that don’t have a clue as to what the law is relative to Presidential powers, China, etc., try looking at the Emergency Economic Powers Act of 1977. Case closed!”

Yet following the initial shock of the announcement a broad consensus appears to have emerged that Trump can indeed make life very difficult for companies that defy his order.

The New York Times cited several international law experts who argued that Trump would have a significant range of powers under the Act he cited in his tweet.

Judith Alison Lee, an international trade lawyer at Gibson Dunn, was quoted as saying that the law was written so broadly that Trump’s action could be within his power.

“It would be hugely disruptive but, technically speaking, I think the statute gives him that authority,” Lee said.

And lawyers noted that courts had tended to interpret the International Emergency Economic Powers Act in favour of allowing the president a broad exercise of authority.

Many companies certainly appear to fear that Trump will carry out his threats.

In late July the Nikkei Asian Review reported that more than 50 multinationals including Apple, Nintendo and Dell were already looking for alternative sourcing destinations to China to escape punitive tariffs.

Apple is often cited as one of the companies with the greatest exposure to Chinese supply chains.

Reuters conducted an analysis of Apple supplier locations and found that 44.9% were located in China in 2015, a proportion that rose to 47.6% by 2019.

It was impossible to calculate a proportion of spending with Chinese suppliers as Apple does not disclose how much it spends with each one.

But the Nikkei reported that Apple had already asked its major suppliers to assess the cost implications of moving 15-30% of their production capacity from China to India.

However, many American companies that have developed intricate supply chain links with China over decades are struggling with the potential implications of this latest twist in the trade war.  

“It's impossible for businesses to plan for the future in this type of environment,” said David French, National Retail Federation senior vice president for government relations.

“The administration’s approach clearly isn’t working, and the answer isn’t more taxes on American businesses and consumers. Where does this end?” 

And in an interview with CNBC Jay Foreman, CEO of toymaker Basic Fun, said that Trump’s shifts were simply too unpredictable to stop the company sourcing from China. 

Basic Fun, which makes toys such as Lincoln Logs and mini retro arcade games, said about 90% of its products were made in China. Foreman said there were simply no viable alternative locations for toy manufacturing.

“I’m not really sure the American consumer is ready to start making toys in the kind of conditions you might see in factories in India, and there’s no labour here in the United States to manufacture toys,” said Foreman.

He added that Vietnam did not have the production capacity to replace China as a sourcing destination for US companies and that moving production to India, for example, was also risky because it appears that country’s trade practices might be next in line for Trump’s hardball trade tactics.

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