Trading Tariffs

In September, the US announced tariff increases of between 25% and 100% on a range of Chinese goods, including 100% on electric vehicles (EVs), EV batteries, solar panel cells, and steel and aluminum products.

The US is not alone in using tariffs, or the threat of tariffs, in an attempt to protect critical domestic industries. Some EU tariffs on EVs made in China rose sharply in October, sparking fears of a tit-for-tat trade war between China and the West.

In this environment, will increased use of tariffs undermine global economic recovery, or protect domestic industries from unfair competition? The reality is often somewhere in-between.

Facing up to the flood

So why impose tariffs at all? Trade tariffs tend to be imposed to protect domestic industries from cheaper foreign imports, and especially those imports that have benefited from what the importing nation regards as unfair practices. This can refer to overly generous state subsidies or unrestricted access to cheap credit.

Tariffs can also be imposed to encourage the onshoring or nearshoring of the production of core components, and to close gaps in important supply chains. In the US, for example, the auto industry now faces the consequences of diminished domestic chip manufacturing. At one point more than 40% of chips were produced domestically. Today that figure is less than 10%.

US tariffs have focused mostly on chip manufacturing, EVs and EV batteries and other manufacturing components, in an attempt to strengthen its position in these items on the global stage.

“The tariffs being levied on China are partially the result of the Chinese government significantly subsidising the electric vehicle industry, and the need to level the playing field for the US,” says Tom Alongi, a partner at UHY LLP, UHY’s member firm in the US, and head of its automotive practice.

The concern in the US and EU is that China will use this competitive advantage to flood Western markets with vehicles that are considerably cheaper than locally- made equivalents, undercutting domestic manufacturers. China denies that its actions have been uncompetitive and in turn has described the EU duties as ‘protectionist and unfair’.

The US has made recent investments through the CHIPS and Inflation Reduction acts in an attempt to make US manufacturers more competitive internationally, but Chinese manufacturers still have a 10-20% cost advantage compared to their US counterparts. It will be diicult to make up that ground in the short term.

The Chinese economy is also facing a challenging period, and weak domestic demand is forcing Chinese producers to increase reliance on export markets. A range of ‘green’ industries (including EVs) have been heavily supported in China, creating a glut of supply.

This is in stark contrast to the situation in the West, where high inflation and interest rates have hiked production costs in comparison to Chinese equivalents in a number of areas.

The politics of trade

In circumstances like these, some targeted tariffs on imported goods can seem logical.

“Tariffs are deemed by officials as a means to buy domestic automakers time to catch up from a cost standpoint,” says Tom. “The big question is, can traditional Original Equipment Manufacturers (OEMs) in the US or EU actually catch up?” As global geopolitical tensions rise, the US is keen to promote onshoring and friendshoring (with political and economic allies) of advanced microchip manufacture.

The tariffs are meant as an additional pillar, alongside legislation, to support US competitiveness and decrease reliance on foreign supply chains.

Politics is rarely far from the surface when it comes to tariffs, even where less sensitive goods are concerned. For example, China imposed a punishing 200% tariff on Australian wine in 2020 which it only lifted in 2024. Tariffs were also placed on imported barley, while other measures were used to curb imports of beef, timber, coal, cotton and lobsters. As a result, Australia’s exports of these goods into China fell to nearly zero.

“The claim from Beijing was that Australia was ‘dumping’ wine on the Chinese market – selling it at a price less than what it cost to produce,” says Michael Coughtrey, managing partner at UHY Haines Norton in Sydney. “By contrast, the Australian government believed the tariffs were politically motivated. Whatever the precise reason, the tariffs caused significant challenges for Australian producers.”

Trade tariff fallout

Whatever the reasons for trade tariffs, their results can be difficult to predict. In the short term, tariffs may slow the momentum of cheaper imports, giving domestic producers a window in which to introduce production efficiencies or launch new, more competitive products. But less favourable outcomes are equally likely.

“The harsh reality is that the long-term impact of tariffs is often increased protectionism for an industry sector, giving it less reason to increase output or efficiency, plus less efficient supply chains and most importantly higher costs for consumers,” says Tom.

Brazil is one example of a country that has imposed high tariffs on imported automotive parts without obvious benefit. The intended outcomes, including more localised production, increased labour demand and better domestic supply chains, have not materialised. The reality has been higher costs for vehicles, more supply disruption, and trade tensions with companies seeking ways around the tariffs by importing through third-party countries.

Inevitably, one consequence of imposing tariffs is that the countries you target tend to target you back. For example, in the wake of the EV decision, China has launched investigations into some European food and drink imports, raising the possibility of a wider trade war.

The US Department of Agriculture (USDA) calculated that retaliation by EU countries, Canada and China for tariffs imposed between 2018 and 2019 cost the US USD 25.7 billion in revenues without leading to any significant job creation. In this case, there is no doubt that the target countries suffered too, in a mutually destructive exchange of pain. The question is whether any of it was worthwhile in the first place.

Some countries continue to acknowledge the counterproductive nature of trade tariffs, and look to widen free trade agreements instead. In July, the Australian government abolished tariffs on a further 457 product types.

“In fact, over the last ten years or so, the Australian government has abolished many tariffs and actively promoted its policy of open trade, pushing for total liberalisation of our trade as opposed to protectionism,” says Michael. “The government agenda is to continue to push for the removal of trade barriers, even to the detriment of Australian manufacturing and industry.”

Preparing for a trade war

By contrast, the mood among major economic blocs suggests more tariffs may be in the pipeline. Nothing is certain at the moment, but the possibility of a wider trade war clearly exists as the giants of the global economy try to strike a balance between the free flow of trade and domestic political sensibilities.

Against this backdrop businesses should prepare for the possibility of disruption, particularly where supply chains are concerned. Sound financial management is clearly part of this, as a healthy cashflow gives firms options if new suppliers must be found in a hurry. UHY professionals can act as partners and trusted advisors in this regard.

Many firms in the UHY network can also go further. In the US, UHY has an experienced team of supply chain and procurement advisors, who have been guiding clients as they deal with the possibility of tariff increases.

“Our team has developed proven procurement strategies that can help clients mitigate or eliminate supply chain disruption risks or tariff-induced trade wars,” says Tom.

“Most importantly, we have saved clients significant amounts of money through efficient and repeatable vendor pricing strategies, training on how to negotiate with vendors, resourcing and contingency planning with alternative vendors, and looking at how to improve efficiency on the shop floor to be more competitive.” These are strategies that many more companies will need to put in place if the current state of tit-for-tat tariffs escalates into an all-out trade war. Most economists hope that, for the sake of global economic growth, the imposition of any new import duties will be limited in scope, scale and duration.

Read more stories in Issue 19 of the UHY Global Magazine published by UHY International.