US companies are using an ingenious method to game the system and avoid the worst of Trump's trade war
- American companies may be finding an ingenious way to skirt around the tariffs imposed by President Donald Trump on importing Chinese goods.
- UBS's Paul Donovan said some US firms are likely funnelling imports from China through other foreign subsidiaries.
- This allows them to import products from China, but without having to pay the 25% tariffs levied on imports from the country.
- Concrete evidence for this is slim, but there are clear signs it is happening, Donovan said.
American companies may be finding an ingenious way to skirt around the tariffs imposed by President Donald Trump on importing Chinese goods, as a means of avoiding the financial hit caused by the 25% taxes.
According to a note from Paul Donovan, the global chief economist for UBS Wealth Management, some US firms are likely funnelling imports from China through other foreign subsidiaries, say in Canada, before finally importing them into the US. This allows companies to continue importing from China while dodging tariffs.
Here's the key paragraph from Donovan (emphasis ours):
"A US company importing electrical switches from China now has to pay the new trade tax. A US company importing something that uses Chinese electrical switches from a Canadian subsidiary does not have to pay the new trade tax.
"If US companies move a stage of their manufacturing overseas (to a country other than China), the trade tax is avoided. The US is, in reality, importing as many Chinese electrical switches as ever it did. It is just now they come packaged up as something else, and that package is made somewhere other than China."
This means of skirting round tariffs is most effective, Donovan says, in multinational companies based in the US, as these firms, by their very nature have offices and manufacturing plants around the world. For these companies, moving small parts of production to different factories is a fairly simple process.
It is however, hard to detect, meaning that such moves are unlikely to show up in official data.
"In many cases, however, it is not the whole production process that is changing location, just one part of it," he wrote.
"Around 40% of all global trade is done by multinational companies. These companies by definition have factories in more than one country. It is not easy to spot this in the data."
Read more: Crops are rotting in fields as Trump's trade war bites US farmers
That means there is no real concrete evidence to support Donovan's theory, but there are very clear hints that it is happening.
"Exports of Chinese electrical switches to Canada increased substantially after the US taxes, as US imports fell," he said. "Other products saw similar surges in Canadian demand. The patterns of trade after the July trade taxes are certainly suggestive."
So far, the US and China have traded tit-for-tat tariffs on goods totalling $360 billion, with the US acting as the aggressor, and Trump threatening numerous times to place tariffs on all US imports from China, worth about $500 billion.