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How companies are being impacted by trade

How companies are being impacted by trade

How companies are being impacted by trade, to read the other chapters in this publication, click here.

 

The biggest trade conflict being waged right now is between the US and China, of course, with the US imposing tariffs on an estimated US$200 billion a year in Chinese imports and China imposing retaliatory tariffs of its own. 1 Elsewhere, the US has recently imposed but then lifted tariffs on steel and aluminum from Europe and Canada, threatened tariffs on Japanese and European automobiles and all goods imported from Mexico,2 and even contemplated tariffs on aluminum from Australia.3

Meanwhile, the UK's long-anticipated exit from the EU, which as of early July had still resulted in no formal exit plan, has left European businesses puzzling over how the ultimate resolution of the Brexit vote will play out and what new trade-related costs it may impose on their organizations.

Against this backdrop, businesses have been struggling to plot their responses, and, in some cases, suffering setbacks. In the US, retailer Kohl's, which imports about a fifth of its goods from China, has said that additional costs relating to tariffs have prompted it to lower its earnings guidance for this year. Home Depot, the home improvement chain, has said it will spend about US$1 billion more to buy goods from China due to the US raising tariffs on goods from that country to 25 percent from 10 percent. That's on top of the approximately US$1 billion in costs the company incurred when the tariffs were at 10 percent. 4

Many companies have contemplated moving manufacturing operations out of China (Vietnam, Malaysia and Thailand have been favored replacements, as well as Mexico) and some have executed on those plans. But even that strategy was shown to be dicey this spring when the US threatened escalating tariffs against Mexico if it doesn't stem the flow of migrants into the US meanwhile, The New York Times reports that ControlTek, a small electronics manufacturer near Portland, Oregon, “is rewriting contract language to make it easier to pass the cost of tariffs on to its customers… (and) shifting supply chains out of China where possible, and redesigning products to avoid Chinese components where it isn't.” 5 That same article notes that camera maker GoPro is shifting some production from China to Mexico, mimicking what Universal Electronics, a manufacturer of remote controls, did the prior year. And it reports that Varex Imaging, a Utah-based maker of X-ray equipment, is working to redirect its supply chain away from China.

It's certainly not only smaller companies, nor only US companies, taking action. In May, a Japan-based multinational imaging and electronics company said it was planning to shift some production of copiers out of China to avoid the impact of potential tariffs on US customers. 6 A US-based tool and lawn equipment maker said in May that it was moving production of wrenches from China back to the US, with its chief executive saying that if the company knew the tariffs on China-made goods were going to be made permanent, it would make “sweeping changes” to its supply chain. 7 Elsewhere, a Japanese electronics and auto parts maker, which has factories in China, has reported that the trade conflict between China and the US, where many of its products are sold, trimmed about US$365 million from its operating profit in the year ended March 31. 8 In the UK, meanwhile, a KPMG client selling goods primarily in continental Europe has decided to move its manufacturing operations from the UK to Eastern Europe to avoid tariff penalties that might arise as a result of Brexit. 9

Geopolitical-driven trade upheaval isn't confined to developed economies, either. Nationalist sentiment also is on the rise in many developing economies, where in some cases it has translated into resource nationalism --a process in which states impose more control over their natural resources. In Sub-Saharan Africa, for example, Tanzania in 2018 established new regulations on gold, requiring foreign-owned mining companies to provide shares to local firms and the state.10

Shortly thereafter, the Democratic Republic of the Congo declared cobalt and coltan `strategic' minerals --they are used in electric cars --and hiked the royalties miners pay on them to the Congo government. 11 And early this year, Zambia announced increased royalties on copper exports, imposed import duties on copper-cobalt concentrates as well as precious metals, and ended the deductibility of mineral royalty taxes for corporate income tax purposes. 12

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Contributors

Jerry Thompson
Principal, Tax
KPMG in the US

Christopher Young
Principal, Tax
KPMG in the US

Grant Wardell-Johnson
Head of Australian Tax Centre
KPMG in Australia

Alfonso Pallete
Latin America Head of Markets, Americas Tax*
KPMG in the US

Olivier Sorgniard
Director, Trade and Customs
KPMG in the UK

* KPMG Americas Ltd. is not an accounting firm and is not licensed or registered to practice accounting in any jurisdiction.

Footnotes

1“How Trump's Trade War Is Being Fought Around the World,” by Carlos Tejada and Amie Tsang, The New York Times, 5/31/19

2“How Trump's Trade War Is Being Fought Around the World,” by Carlos Tejada and Amie Tsang, The New York Times, 5/31/19, and “U.S. and Canada Reach Deal to Lift Steel and Aluminum Tariffs,” by Lucy Baly, NBC News, 5/17/19, https://www.nbcnews.com/business/economy/u-s-lift-steel-aluminum-tariffs-it-slapped-canada-mexico-n1007026

3.Trump Administration Considered Tariffs on Australia,” by Ann Swenson, Maggie Haberman and Jim Tankersley, The New York Times, 6/2/19, https://www.nytimes.com/2019/06/02/business/trump-australia-tariffs.html

4. “Big Retailers' Sales Lag as They Gird for Tariffs,” by Suzanne Kapner and Sarah Nassauer, The Wall Street Journal, 5/21/19

5. “Trade Way Starts Changing Manufacturers in Hard-to-Reverse Ways,” by Ben Casselman, The New York Times, 5/30/19

6. “To Avoid Tariffs, This Japanese Copier Maker Plans Less `Made in China,'” by Megumi Fujikawa, The Wall Street Journal, 5/16/19M

7 The Wall Street Journal, 5/15/2019

8 “Escalating U.S.-China Trade Fight Stings Companies World-Wide,” by Chuin-Wei Yap and Takashi Mochizuki, The Wall Street Journal, 5/10/19

9 Example provided by KPMG's Olivier Sorgniard in interview with writer, 5/14/19

10 “Australian, New Zealand Dollars Menaced by Resource Nationalism,” by Dimitri Zabelin, Dailyfx.com, 10/25/18

11 “Cobalt to Be Declared a Strategic Mineral in Congo,” Reuters, 3/14/18

12“Zambian Mineral Royalties Increase,” by Theo Acheampong, Ph.D., IHS Markit, 1/11/19

Disclaimer

Throughout this page “we”, “KPMG”, “us” and “our” refer to the network of independent member firms operating under the KPMG name and affiliated with KPMG International or to one or more of these firms or to KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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