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Trade war

US and Japan rethink supply chains as trade war widens

Companies shift production out of China to avoid new tariffs

U.S. imports of clothing from China will come under the next round of tariffs under the Trump administration, a move which is making apparel companies rethink their supply chains.    © Reuters

WASHINGTON -- U.S. and Japanese companies are scrambling to overhaul their supply chains that include Chinese production in order to deal with the escalating trade war between Washington and Beijing as both announce more tariffs on each other's goods.

The U.S.-China conflict is entering dangerous waters, the head of a U.S. industry association said in an email to member companies on May 10 after the U.S. raised some existing tariffs from 10% to 25%. The email also encouraged companies to dig in for a lengthy fight that might include customs and approval delays.

Washington will also impose additional tariffs on roughly $300 billion worth of Chinese goods previously excluded. About 40% of the items to be hit with the new duties are consumer products, including toys and smartphones, up from about 24% in the last round.

As a result, California-based camera-maker GoPro is moving production of U.S.-bound products to Mexico from China. "The U.S. production in Mexico helps us avoid any threat of tariffs," CEO Nick Woodman said.

Shoe maker Sketchers USA plans to boost production in India and Vietnam, while toy maker Hasbro will reduce Chinese procurement to 60% at the end of 2020 from the current 70%.

A spring survey from consultancy Bain & Co. found that 60% of about 200 U.S. companies would be reviewing their supply chains over the next 12 months.

The coming round of U.S. tariffs will cover a wide range of products from smartphones to wristwatches to clothing. Japanese companies that produce watches and cameras in China for the U.S. market are also being forced to reassess their network of suppliers.

Citizen Watch, for instance, manufactures its less-expensive watches for the U.S. in China. "We need to think about Thai and Chinese production," Director Toshiyuki Furukawa said about the possibility that watches will be hit by new tariffs.

Japanese companies also control a large share of the digital camera market. Sony, which exports some cameras to the U.S. from production bases in China, said, "We are observing the situation and will explore necessary responses."

And there is growing concern that products close to consumers like clothes will also face 25% tariffs. Uniqlo operator Fast Retailing exports some U.S.-bound products from Chinese factories. The company may relocate some production to Vietnam and Bangladesh for the North American market, which generates 5% of its global sales.

Auto interior maker Kasai Kogyo exports molds made in China to the U.S. Tariffs have delivered a 500 million yen ($4.57 million) blow to the company since last July, and that figure will grow now that duties have increased to 25%.

But companies with extensive manufacturing systems in China will have difficulty relocating. The country hosted about 380 of Apple's roughly 800 partner facilities last year, for example, which means moving the production of items like the iPhone to other countries would be problematic.

The trade war is also casting a pall over U.S. employment. Companies are cutting about 190,000 jobs, according to a survey of layoff plans in the January-March quarter by U.S. research company Challenger, Gray & Christmas -- a 36% jump on the year. The service sector is strong thanks to firm demand, but the manufacturing sector, which relies on overseas demand, is sluggish.

Office and industrial goods maker 3M's CEO Mike Roman said in April that 2,000 jobs, or 2% of the company's workforce, would be cut. The Minnesota-based company is being forced to shave costs as the trade war slows the Chinese economy, one of its major markets.

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