TOKYO/SHANGHAI -- Tit-for-tat tariffs imposed by the U.S. and China are prompting businesses to pass the higher costs onto customers, a trend that will potentially add to inflation pressure in both countries.
An increasing number of companies operating in China, including such multinationals as BMW and Daimler, are raising prices, fueling concerns that rising inflation could lead to tighter monetary policies and create a drag on the world's two largest economies.
In the Chinese coastal province of Jiangsu, Kunshan Huizhong Machine is bracing for a hit to its earnings from Washington's 25% tariffs on some autoparts it exports to the U.S. The manufacturer has decided to shoulder a 15% portion on its own and pass the remaining 10% portion onto U.S. corporate customers. It also receives financial support from the government.
For Japanese electronic parts maker TDK, some Chinese-made items used in vehicles and industrial machinery -- such as capacitors and transformers -- have become targets of U.S. tariffs. "Our customers are accepting cost increases" on some such goods, said Senior Vice President Tetsuji Yamanishi. Fuji Electric is weighing price hikes on products such as electromagnetic switches and circuit breakers in response to the tariffs.
For many companies, raising prices presents a speedier alternative to the time-consuming and costly process of reshuffling supply chains -- especially for auto-sector players, which must maintain strict quality standards. Hitachi Automotive Systems, a Hitachi group autoparts maker, wrote in a memo to the U.S. trade representative that changing its supply chain would take several years.
A number of foreign automakers in China have been raising prices on cars imported from the U.S. to mitigate the higher tariffs they now face.
Tesla, the American electric vehicle maker which is building its first overseas auto factory in Shanghai, has boosted prices roughly 20% on its Model S sedan and Model X sport utility vehicle. BMW and Mercedes-Benz maker Daimler have also hiked prices on U.S.-made SUVs. On Tuesday, BMW downgraded its earnings forecast for 2018, citing "continuing international trade conflicts" and other factors.
Companies offering unique products have an easier time pushing through price increases because it is difficult for the customer to switch to another supplier. But in general, raising prices to cover costs tends to stir ill will. Some Chinese autoparts makers, including one located in Jiangsu and one in Zhejiang Province, appear to be bearing the burden of the tariffs themselves and say they are exploring new sales routes.
There are fears that higher import prices from a drawn-out trade war could further push up already-rising inflation rates in the U.S. and China.
The U.S. consumer price index climbed 2.9% year on year in June, the most in more than six years, and has hovered near 3% since. Chinese prices, which have been buoyed by rising wages and resource prices, have ticked up markedly as well.
Meanwhile, Washington's fresh 10% tariffs on $200 billion of Chinese imports, which went into effect Monday, included many consumer goods. Beijing responded with its own duties on $60 billion of American goods, likely spurring U.S. President Donald Trump to follow through on threats to impose tariffs on all remaining Chinese imports.
If inflation rates continue to climb and create a need for monetary tightening in the U.S. and China, it could blunt both economies. Higher U.S. interest rates could accelerate capital outflows from emerging markets, among other side effects.
A tighter monetary policy in the U.S. may destabilize the global economy, says Gabriel Sterne, head of global macroeconomic research at the U.K.'s Oxford Economics.
Under Trump's next phase of tariffs, consumer goods would make up 40% of those targeted, up from 24% in the latest tariffs, according to the U.S.-based Peterson Institute for International Economics. That would trail only capital goods, which would rise to 44% from 25%.
The Trump administration has so far refrained from imposing duties on certain products like the Apple Watch, apparently for fear of drawing a backlash from businesses and consumers. These products have an estimated trade value of $19.7 billion, according to Peterson.
But those goods would fall into the crosshairs under the next phase of tariffs, which "now also seem predetermined," Peterson wrote in a report last Thursday. Depending on the timing, the next wave of tariffs could pour cold water on the U.S. economy as well, especially heading into the year-end shopping season.