The Sunshine Economy: Trade With China

Sep 23, 2019

A yellow line on the floor in one of Andres Ochoa's warehouses is the difference between struggling with higher costs and competing for new customers.

The line denotes a Foreign Trade Zone inside the warehouses of SAP USA Truck and Auto Parts in Miami. The zone has shielded SAP from the trade war between the U.S. and China.

"A free trade zone means that product has entered the country without having duties or tariffs paid, and it's being held in a bonded facility," Ochoa said. "There's that line that separates everything."

Ochoa's company imports most of its products from China: suspension parts, hydraulic hoses, air brake components, water pumps, sensors, and scores of other parts for semi-trailer trucks. If it weren't for his trade zone, Ochoa would face an additional 10 to 25 percent in taxes when the gear arrived in his warehouse. As long as the items are exported back out of the U.S., they avoid the tariff and Ochoa's company doesn't have to pay the tax.

City Furniture CEO Keith Koenig rides through his Tamarac warehouse on June 26, 2018, giving high fives to the employees. About 30 percent of City Furniture's merchandise has been affected by the higher tariffs on Chinese-made goods.
Credit AP Photo/Brynn Anderson

Tariffs Hit Home

Keith Koenig has to pay the tax. He runs City Furniture. About 30 perecent of the store's items are made in China. All of the company's patio furniture is. "We're right in the middle of the tariffs," said Koenig.

Six percent of the global trade done in South Florida is with China, according to data from WorldCity, a global trade information firm based in Coral Gables. Trade with China is most significant at PortMiami, where it is the second largest trading partner after the Dominican Republic.

 

Almost all of the trade business with China in South Florida is in imports. That business is down 20 percent through PortMiami this year. A lot of what comes from China into South Florida is furniture and furniture parts.

 

Although Koenig's company has had to pay the tariffs, he said he's been successful in negotiating lower prices from Chinese manufacturers to absorb the cost. It has allowed him to keep retail prices stable. "We have mitigated most or all of the tariff increases," he said.

 

President Donald Trump has claimed China is paying the tariffs. Tariffs are levied upon arrival in the U.S. and owed by the importer. For instance, City Furniture pays the tariffs on products it imports from China. However, as Koenig has experienced, Chinese manufactuers have cut their prices, off-setting the higher tariffs. Koenig said, "So the tariffs being borne by the Chinese supplier for us is partially or totally true."

 

Jay Foreman, CEO of Basic Fun!, poses for a photo at Toy Fair New York 2019 in New York. Foreman says President Trump's proposed tariffs on toys imported from China could hurt his Boca Raton-based business.
Credit Andrew Kelly/AP Images for Basic Fun!

  Toying Around

 

Jay Foreman is waiting for Dec. 15. He's accustomed to waiting on the holiday shopping season. He runs toy company Basic Fun, based in Boca Raton. But he's bracing for mid-December this year because that's when the Trump Administration has pledged to decide whether or not to expand the list of Chinese imports subject to higher American tariffs. And this time, toys may be on that list.

 

"China is integral to our whole business from start to finish. Primarily, because there's really no better production and supply chain and distribution chain in the world," said Foreman. He estimates 90 percent of Basic Fun's products come from China. Those include Lite Brite, Lincoln Logs and Speak and Spell.

 

"We've been lucky," he said. Foreman credited a push by the toy industry in getting the administration to delay its decision on toy tariffs until after most of the holiday shopping season is over. "It's our hope that the administration wakes up and realizes that these tariffs are really harmful and pushes them off."

 

There have been several rounds of tariffs slapped on Chinese-made goods. They began two years ago when the U.S. International Trade Commission decided importing solar panels and washing machines hurt American makers. In January 2018, President Donald Trump began the first tariffs targeted to those products. In all, the new taxes went after a relatively small $10 billion worth of imports. 

 

A few months later, China retaliated with its own taxes on American soybeans. 

 

Since then, the Trump Administration has taxed imported steel and aluminum, machinery and electrical equipment, semiconductors, auto and truck parts and hundreds of other items. China has responded with its own taxes on American-made goods.

 

Large cranes tower over PortMiami waiting to unload container ships. China is the second largest trading partner through the port this year, according to WorldCity, a global trade information firm based in Coral Gables.
Credit AP Photo/Wilfredo Lee, File

Uncertainty Strategies

 

Threats, counter-threats, taxes and retaliatory taxes have been traded back and forth between Washington and Beijing, with consumers and companies caught in the middle demanding a variety of strategies to deal with the uncertainty.

 

The higher tariffs would have "either put us out of business completely or left us at a huge disadvantage," said Ochoa, who's with exporter SAP USA. He said the advantage of the company's Foreign Trade Zone has led to new business because it has allowed SAP to maintain its pricing. 

Foreman with Basic Fun expects toy prices will "go up significantly" in 2020 if the December 15th tariffs go into effect. "Manufacturers...can only absorb these tariffs for a certain period of time. Eventually the consumer has to be acclimated. This has to be a tax passed along to the consumer," Foreman said.

Koenig's Chinese suppliers of City Furniture merchandise "absolutely" are citing the tariffs for cutting their wholesale prices. "Every one of the suppliers I meet with over there is petrified of the loss of business that they could face. Every one of them is counting on growing their business," said Koenig.