Author: Ian Chan

What are Tariffs – How Do They Work?

Most modern economists suggest that tariffs are harmful for all nations involved and in the last 60 years many countries have been trying to minimise any friction to trade by removing tariffs. However, in recent news, not a day goes without mention of tariffs! So what are tariffs, why is everyone talking about them and how do they affect your day to day business?

A Background into Tariffs

A tariff is essentially a tax on imports and/or exports between sovereign states. Historically, governments have used tariffs to raise funds from traders. It is important to note that tariffs don’t cause a rise in the seller’s price, but instead cause an increase of the purchaser’s cost, affecting importers and consumers. They are often collected by Customs agents at entry points such as seaports, airports or border crossings. The revenue from these collections then goes to the government.

Interestingly the US Federal government was primarily funded through customs revenue from independence until 1913 when the Revenue Act was passed, leading to the introduction of income tax. During this period, customs revenue routinely accounted for 80-90% of total federal revenue. As of 2017 customs revenue makes up roughly 5% of revenue.

Other than revenue generation, tariffs have also been used to provide protection for domestic industries or to attempt to influence global trade. In theory, through tariffs goods imported from overseas end up costing due to the additional taxes placed on these imports. The additional costs end up being borne by consumers. Supporters of tariffs say that they help protect domestic industries that are less competitive. Opponents of tariffs argue that tariffs are an unfair tax on consumers and results in domestic manufacturers less competitive with little incentive to improve production processes.

How tariffs work

Modern Tariffs

The World Trade Organisation (WTO) is where nations negotiate and set the rules on international trade. The WTO deals with diverse matters from the harmonisation of product classifications to the administration of trade rules. Generally no WTO member may discriminate against another member when trading. This is known as most-favoured-nation (MFN) treatment, all WTO members should be given the same tariffs. There are exemptions to this.

The WTO state: “countries can set up a free trade agreement that applies only to goods traded within the group —   discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries. And in services, countries are allowed, in limited circumstances, to discriminate. But the agreements only permit these exceptions under strict conditions. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong.”

Despite these rules, the WTO do not have any enforcement powers. They can investigate claims brought against sovereign nations for unfair tariff targeting and these findings are then published. If there is no remedial action undertaken, the WTO then allows retaliatory tariffs.  

The WTO are currently investigating the tariffs from the US & China

Issues with Tariffs

The US has increasingly attempted to influence global trade by placed placing tariffs related to the country of origin of a product. Through the Trade Act 1974, the US imposed 25 per cent additional tariffs on approximately $34bn of Chinese imports in June 2018. These have slowly ramped up and almost all goods from China imported to the US now attract a 25% tariff. This has created a large headache for product owners, it isn’t easy to build a new supply chain in less than a year. I wrote about this earlier in a previous post.

Ge-Shen is based in Malaysia where we maintain normal WTO trading tariffs with the US and have extensive experience with localising supply chains. Do get in touch with us to see if we can help you overcome problems associated with new or potential tariffs

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Trade uncertainty – Options for Manufacturers

For today’s global companies, geopolitical uncertainty has affected more than just price, but also investment, consumption, inventory and even the way companies must do business. With changing tariffs, free trade agreements, bans and retaliatory actions, how do you stay lean and cost competitive.

How should you deal with trade uncertainty? What can product owners do to diversify their risk in such circumstances? Here are 5 suggestions we have.

1. Have a backup country / location

Start exploring other countries as a second location to manufacture your products, whist another location might not be the most convenient or most cost economical, any supply shocks from trade uncertainty can be better weathered when you have a backup plan. If the country where your main manufacturing base were to come under unexpected tariffs, you could easily increase the load on a second location.

It often takes more than half a year to develop a manufacturing site or a vendor in a new country, so it pays off in the long term to start sooner. A lot of the work is done up front with qualification and testing being set out, so to increase volume later shouldn’t be difficult as long as you work with your suppliers.

2. Develop your supply chain

With the supply chain in China having grown to such breadth, it may be too easy to rely on a single location. You can work with an established contract manufacturer or supply chain consultants to tap into their existing vendors as they will have a pre-built network. This saves a significant amount of time in searching for vendors as finding a suitable fit between price, quality and delivery is a challenging approach.

Having a new location also doesn’t mean that you need to redevelop the entire supply chain. Countries in South East Asia can easily draw upon your existing supply chain to reduce the burden of sourcing and improve the speed at which you can establish a presence.

3. Understand trade rules

What HS code do your products come under, what is the percentage required for a change in country of origin? Which countries have free trade agreements which each other? How to deal with trade uncertainty? These are all important questions to ask before making inroads into a new location. Global companies often have multiple manufacturing sites to take advantage of different tariffs or free trade agreements. Having a CM with multiple sites can look to reap the rewards of multiple geographic locations without much of the legwork. Vietnam (http://ec.europa.eu/trade/policy/countries-and-regions/countries/vietnam/) is a signatory in a free trade agreement with the EU, so goods manufactured in Vietnam will have a significant cost advantage for European markets.

You might also be able to benefit from assembly in a different country as CKD/SKD can often change the HS codes. Experienced partners can help you navigate and also suggest opportunities for greater efficiencies.

4. Understand the differences

A period of change means the rules will be different, existing strategies may not work, old strategies may be worth revisiting and new ideas have a chance of taking off. Taking South-East Asia as an example, each country has its own language and culture to deal with. Malaysia is multicultural with some of the more widely spoken languages include English, Mandarin, Cantonese and Malay. Malaysia also has a good legal system based off British common law. Vietnam on the other hand is more homogenous with a legal system based off French Civil law and Communist ideology.

5. Don’t delay

Trade uncertainty is the key word, waiting for a clear sign is often too late. It pays to have the infrastructure set up so that you can seamlessly switch should the worse happen. When the worse does happen, you will be caught off-guard and have customs, regulatory and approval delays.


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Manufacturing in Malaysia

When someone says global manufacturing, most people would immediately think of China, maybe you might even think of Vietnam. Most people haven’t considered Malaysia as a manufacturing location despite how Malaysia is well positioned to take advantage of global supply chain. Let me give you 5 quick points on why you should consider manufacturing in Malaysia.

1. Malaysia has an established supply chain network

Malaysia has an established supply chain with global companies and strong local players. In fact companies such as Intel, opened their first manufacturing facilities in Malaysia in the 70s. The list has grown to include Robert Bosch, Clarion, Amphenol, B.Braun, Broadcom, Toshiba, Sony, Motorola, etc. The presence of these companies require material and resources which means the 2nd tier and 3rd tier vendors are well developed as a result this makes it easy to manufacture your product in Malaysia

2. LMW – Licensed Manufacturing Warehouse

We at Ge-Shen are a LMW – licenced manufacturing warehouse. This means that there are no tariffs placed on goods by the Malaysian government for goods related to manufacturing, in effect each of our factories are outside of Malaysia for custom purposes. Customs duty exemption is given to all raw materials and components used directly in the manufacturing process from the initial stage of manufacturing until the finished product is packed ready for export, easy!

3. Geography

Malaysia is well placed geographically. The straits of Malacca is one of the main global shipping routes. We are served by well established ports in Penang, Klang, Johor and we can even ship through Singapore. The proximity of Malaysia to China, Japan, South Korea and the rest of Asia also helps with sourcing and exporting finished goods.

4. English Speaking

Malaysia is a diverse country with many ethnic groups and languages, one of the upsides is that English is widely spoken as a business language. This means that we can communicate easily with you to get any issues resolved. Cutting out a layer of translation increases the ease of doing business.

5. Ease of doing business 

Malaysia ranks highly on the ease of doing business rankings as published by the World Bank http://www.doingbusiness.org/en/data/exploreeconomies/malaysia . Malaysia currently ranks at 15 across all economies in the world. Less red tape means it is easier to get things done, helping you with time to market.


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