by Kevin Williams, Director at JMC Global
Let’s start with a quick recap of what has changed over the past six months, then look forward to 2019.
Trump announced a "Trade Policy Agenda" intended to benefit US workers and companies in February 2018. He called for a re-negotiated NAFTA and a “Section 301” investigation into Chinese practices, related to forced technology transfer, unfair licensing, and intellectual property policies and practices. Subsequent announcements threatened to impose tariffs on Chinese goods unless an agreement with China was reached.
A 10% additional tariff was imposed – including Furniture Starting September 24, 2018, US Customs began collecting an additional 10% tariff on $200 billion worth of Chinese-origin imports, including most furniture products.
Increased bonds required of importers Many importers have been forced to increase the level of the bonds they maintain with US Customs (CBP). Required bond amounts are often 10% of the projected amount of annual duties, taxes and fees the importer of record pays to CBP each year. Since many tariffs on furniture were ZERO, these new requirements are 20 to 100 times what they were, creating confusion and a burden om many small importers.
Stronger US dollar buys more abroad Financial impact of these 10% tariffs has been offset by currency strengthening. The USD has strengthened in value over past 6 months, up 10% in value vs Chinese Yuan/Renmibi (CNY) – from 6.31 CNY on 4/9/18 up to 6.92 on 10/10/18.
25% tariffs on the horizon Unless a trade deal between USA and China is reached soon, these tariffs will rise another 15% (up to 25% total) as of Jan 1, 2019.
Peak Season Congestion = Longer & Tighter than Ever! Net effect of all this tariff uncertainty has been importers rushing to accelerate all their material on order, trying to arrive before these higher tariffs begin. Result has been that “Peak Season” has started sooner and is going longer and stronger than ever, with major congestion and delays in China and vessels fully booked up for weeks / months.
Shortage of US Trucking Nationwide, carriers are reporting increased “Load to truck ratios” and a growing shortage of drivers. Thus, rates have risen (2% per month!) and LTL carriers are packed, causing customer service issues.
NAFTA 2.0 On September 30, USA announced that a new trade agreement (USMCA) had been reached with Canada and Mexico. In 2017, Mexico exported $1.14b of furniture to USA, and this is expected to more than double in the future.
Global Oil prices reach 4 year highs and even higher in foreign currencies. This has caused a significant increase in costs for all modes of transportation – ocean, rail, trucks, and air.
GDP Rising, Unemployment Rate Falling US unemployment rates have reached 50 year lows, as the strengthening economy is putting millions back to work. Wages are rising and companies doing more to retain current staff and recruit new employees. The economy continues to grow: GDP growth hit 4.1% for Q2 of 2018.
Here’s the outlook over the next 6-12 months:
The hospitality industry will continue its strong growth trend, with expectations of 5% growth in new projects in 2019 and 2020.
Tariffs will rise to 25% starting January 1, 2019, impacting budgets everywhere.
Oil prices are projected to continue to rise – up to $100/bbl by 2019. The impact here will be rising transportation rates (or at least sustaining them at the Peak Season levels).
Expect a rapid growth in sourcing outside of China, where furniture manufacturers are already experiencing RECORD SALES, and they are expanding their production capability as quickly as they can. Alternative countries include Vietnam, Indonesia, Malaysia, India, Brazil and Mexico. However, China still has a 55% market share ($13.7b in 2017), more than all other countries combined. Thus, Chinese factories will continue to manufacture the majority of furniture for some time to come. Which leads to point 5…
Cheating will increase. Some competitors will try to avoid tariffs by mis-labeling their goods, either hiding their Chinese origins or re-classifying them under a different harmonized code number. The Wall Street Journal wrote an excellent piece on this (email Kevinw@JMCgl.com if you can’t access the full story behind their paywall).
Want more insights? Check out this excellent piece by Thomas Russel, Editor at Furniture Today – titled: “Global Sourcing: What’s the Next Move?”