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Fifteen percent tariffs on another $120 billion of imports will be cut in half.
"It appears the United States and China have reached some kind of tentative ‘Phase One’ agreement,” Nelson Dong, senior partner at the international law firm Dorsey & Whitney law firm, said in a statement. “While the deal does not affect the 25 percent Section 301 tariffs already in effect on List 1, List 2, or List 3 goods made in China, the U.S. will now reportedly reduce by one-half the List 4A Section 301 tariffs that came into effect in September, moving down from 15 percent to 7.5 percent, and the U.S. will also hold off on imposing the 15 percent Section 301 tariffs on about $160 billion of List 4B items imported from China that had been scheduled to start on December 15. “
In turn, China will increase purchases of U.S. agricultural products; agree to major structural reforms concerning intellectual property protection and market access; and will abide by an enforcement tool that “snaps-back” tariffs if China doesn’t keep its word.
Prior to Friday’s announcement, U.S. electronics manufacturers were simply hoping the trade war wouldn’t worsen before the end of the year. Tariffs are now “baked in” to contract negotiations, one manufacturer said, as companies scramble to secure business for 2020.
“I think it’s becoming an accepted part of doing business,” said George Whittier, president and COO of Morey Corp., a design and manufacturing services provider based near Chicago. “When negotiating new contracts tariffs have to be factored in, but there’s no consistency on how our customers want to do it.”
Accounting for tariffs
Some companies want to account for tariffs across their bills of material, he explained; others want a premium attached to specific line items. “So, we may be talking about an x-percent increase across a contract, or $5 added to a single component,” Whittier said.
Like many small to mid-size U.S. manufacturers, Morey imports electronic components from overseas. When possible, Morey has switched to non-Chinese suppliers; in other cases, it can’t. The majority—65 percent-- of the world’s printed circuit boards are made in China, according to the IPC trade association.
U.S. companies have reported tariff increases on 31 percent of the total dollar value of their imports, an IPC survey found. Crucially, 69 percent of U.S.-based companies reported a contraction in profit margins due to the increase in costs from the imposition of tariffs.
Although overall anxiety has abated somewhat since tariffs arrived in June 2018, the trade war has been a drag on the electronics industry. Booking new business contracts for 2020 has been a challenge for many manufacturers. “[The intensity] is not as much as not as much as before -- I think we are at the level of maximum impact of tariffs [before any new tariffs on France, Argentina and Brazil] ,” said Tim Fiore of the Institute for Supply Management. “Manufacturers are adjusting, and it doesn’t seem there will be relief until the administration stops using tariffs as a multipurpose weapon.”
On the upside, more products are being excluded from tariff lists, Whittier said. Companies can apply to the U.S. Trade Representative for exemptions: U.S. passives manufacturer Kemet Corp. recently won an exclusion for its Tantalum Polymer capacitors. “It’s still just a handful of suppliers,” Whittier added, “our hope is it becomes more prominent over time.”

George Whittier, President and COO, The Morey Corp.
Accepting tariffs as the new normal has eased some dissention in the supply chain, Whittier said. “The processes to account for tariffs are now in place so [tariffs] take up less air. The big thing for us is the removal of the annoyance of constantly dealing with our customers on this issue. It’s a relief to go back to the things we want to do and book new business.”
About those exports…
The overall trade picture – including the U.S. boycott of Chinese telecom giant Huawei Technologies – still weighs heavily on the components and semiconductor industry. The Trump administration has extended special licenses that allow U.S. companies to provide goods and services to Huawei. But uncertainty over Huawei’s long-term trade status has prompted some chipmakers to factor Huawei out of their financial projections.
In October, Xilinx Inc. CEO Victor Peng told analysts it was “prudent” to remove all remaining revenue expectations related to Huawei from Xilinx’s fiscal 2020 outlook. ” Xilinx shipped $50 million worth of product to Huawei in its first fiscal quarter of 2019.
The bigger worry for chipmakers is their design status within Huawei’s wide-ranging 5G portfolio. The company is reportedly producing equipment that does not contain some U.S. technology. Industry experts fear damage has already been done to the high-tech supply chain.
U.S. manufacturing contracted for the third straight month in December, largely due to trade uncertainty. More than half—51 percent—of respondents to the IPC tariff survey already source components from countries other than China. Nearly one in five companies (19 percent) are relocating manufacturing operations and potentially other business interests outside of China.
"As is inevitably the case in such major trade negotiations, ‘the devil will be in the details,’” said Dong. “While many U.S. firms will be relieved that there has apparently been a modest roll-back of the List 4A tariffs and at least a suspension of the List 4B tariffs, most companies should avoid premature celebration until both sides have announced the deal and, even more critically, the deal terms can be seen and evaluated in more concrete form.”
Dong suggests the U.S. and China are seeking an “off-ramp” to their lingering trade dispute. Tariffs and counter-tariffs have dampened and even damaged the economies of both countries. However, he added, tariffs are only a part of the picture.
“There are still many other areas of confrontation where the [Trump administration] is likely to make life more difficult for the business communities in both countries,” he said. “The White House is still intent on imposing more and increasingly rigorous ‘national security’ reviews under the evolving rules of the Committee on Foreign Investment in the United States (CFIUS); adding new market exclusion powers at the Commerce Department and the Federal Communications Commission to block the importation of Chinese telecommunications equipment and technology [most visibly in the realm of 5G technologies]; expanding U.S. export controls to limit and cut back on U.S. technology transfers to China, and creating new immigration visa barriers that will probably reduce the number of Chinese nationals allowed to study or work in the U.S.”
This effort should also be viewed against the backdrop of a newly announced Department of Defense shift of focus from the Middle East to looking at Russia and China as the major strategic threats against U.S. interests in the foreseeable future and potentially more direct encounters between U.S. and Chinese military forces in places such as the South China Sea and the Taiwan straits, Dong added.
"Thus, viewed as a whole, the business outlook for U.S.-China trade and investment is probably bleaker at this point than a year ago, at least given the current Administration’s apparent approaches to these issues.”