New tariffs have firms taking different roads

By Jim Spencer - Star Tribune (Minneapolis)

WASHINGTON — With a potentially devastating round of new tariffs set to take effect Oct. 15, multinationals that do business in China have adopted two distinct strategies depending on whether they buy from or sell into the Chinese market.

Buyers, such as Target Corp. and Best Buy, scramble to deal with cost increases, while sellers such as Medtronic, Ecolab and Cargill battle to sustain foreign investments.

As the trade war continues, a split in “investment and operational strategies (is) beginning to take place,” members of the U.S.-China Trade Council reported. “Companies will continue to invest in China to access Chinese consumers, but at the same time, rising production costs will push more companies to divest export-focused operations from China.”

Companies whose businesses rely critically on products or parts imported from China bought up inventory ahead of protective tariffs imposed by the Trump administration. Succeeding rounds of U.S. levies and Chinese retaliation have forced retailers dependent on Chinese imports to factor increased costs into their product lines.

In September, Target told its suppliers they will have to absorb the costs of new tariffs imposed by President Donald Trump so stores will not have to pass them on to customers.

The company also warned in its latest annual report that “a large portion of our merchandise is sourced, directly or indirectly, from outside the U.S., with China as our single largest source, so any major changes in tax or trade policy, such as the imposition of additional tariffs or duties on imported products, could require us to take certain actions, such as raising prices on products we sell.”

In contrast, Ecolab, Medtronic and Cargill, which rely on sales to Chinese consumers for significant shares of their business, are developing plans to sustain their access to the Chinese market.

Cargill, which recently announced expanded Chinese investments, is standing fast. “Cargill has not relocated any of our businesses or supply chains out of China, and at this time we don’t have any plans to,” a spokeswoman told the Star Tribune.

That thinking reflects what the U.S.-China Trade Council survey generally showed, said Robert Kudrle, an international trade specialist at the University of Minnesota: Despite the trade war, China remains a good place to do business.

Roughly 17% of companies said they planned to curtail Chinese investments, up from 8% the 2018 survey. Yet the overwhelming majority of businesses — 83% — plan to maintain their Chinese investment strategies.

Only 10% are considering moving existing plants out of China, and only 3% of those plan to move operations back to the U.S.

Best Buy told shareholders of a series of measures that reflect the new reality.

Purchases from China represent roughly 60% of total costs of goods sold by Best Buy, the company said in a quarterly report filed with the U.S. Securities and Exchange Commission (SEC) in August. The company has already seen tariff-driven cost increases for Chinese-made headphones, smartwatches and televisions. It could soon see tariffs drive up costs of computers, mobile phones and gaming consoles.

“Through the second quarter of fiscal 2020, we have been able to minimize the impact of the tariffs on our business by accelerating purchases and working with our vendors, some of which are in the process of migrating their manufacturing out of China,” the company reported. “We are taking additional actions to mitigate the impacts of tariffs, including factoring tariffs into our product assortment decisions, promotional and pricing strategies, sourcing changes and other strategies in partnership with our vendors.”

By Jim Spencer

Star Tribune (Minneapolis)

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