Importers Await Effect of Slap at ‘Four Tigers’ : Decision to End Duty-Free Status of Asian Nations May Escalate Costs in U.S.
When Richard V. Sallis sits down to plan his company’s product line a month from now, his 1989 toy line may have a new cost factor: increased duties on some products from Hong Kong.
Sallis, vice president of marketing for Playmates Inc. in La Mirada, will have to figure out how to accommodate the expense, and one solution may be to shift some production to China.
Meanwhile, Emily Rodriguez is fielding calls from Esprit de Corp.’s overseas forwarders and shippers at the company’s offices in San Francisco. The callers are concerned about the impact of new duties on imports from four Asian countries.
“They are a little perturbed,” said Rodriguez, director of transportation at Esprit, an apparel manufacturer and retailer. “They are calling us and asking, ‘Is this going to impact our business?’ ”
Businesses up and down California that import goods from Hong Kong, Taiwan, South Korea and Singapore have been evaluating the possible effects of President Reagan’s recent decision to strip the four countries of certain trade benefits.
Beginning in 1989, the four nations--nicknamed the “four tigers” because of their rapid economic growth--will no longer be able to export a wide variety of goods to the United States duty-free under the Generalized System of Preferences, a program for “newly industrialized countries.”
The Administration hopes that the move will prompt the four, which had a combined $38.4-billion trade surplus with United States in 1987, to raise the value of their currencies at least 10% to 15%, which would help curb the flow of imports into the United States by making them more expensive. The four have refused to allow their currency to float freely against the dollar.
Some California businesses importing from these countries may face higher duties, and others will not. But most were concerned about how their Asian vendors, suppliers and contractors would react to the Administration’s action. Would they raise prices to recoup the possible $450 million, or average 5%, in new duties on previously exempt imports such as computer parts, toys and sporting goods? Or would they be willing to take a little less in profits?
A Negotiating Tool
“These things have a way of rationalizing themselves out. I truly expect the overall impact on California and the nation in general will be pretty hard to quantify,” says Charles H. Nevil, who heads Meridian Group, a Los Angeles export management company. “The worst thing is the psychological impact, in that it is one more slap in the kisser from America.”
For now, companies see little immediate impact on consumer prices. Imports of apparel and footwear, for example, are already subject to duties, so little change is expected. Large electronics companies such as Hewlett-Packard and Apple Computer say the impact will be minimal. Smaller high-tech firms are more vulnerable to cost increases. Toy makers such as Mattel and Playmates won’t know the impact until toy lines are decided.
The ultimate cost, however, may not be measurable in simple dollars and cents. U.S. competitiveness is at stake, according to industry groups that fought the President’s action.
A change in the law in 1984 allows the United States to use the Generalized System of Preferences, or GSP, as a negotiating tool to open up foreign markets to U.S. goods and to protect U.S. intellectual properties such as patents, copyrights and trademarks. Counterfeit products ranging from records to software from developing countries in Asia have been a particularly touchy trade problem.
“We are literally in negotiations with Korea, Singapore and Taiwan on intellectual property laws,” said Linda Colancecco, manager of intellectual property issues at the Computer & Business Equipment Manufacturers Assn. in Washington.
“We used the GSP as leverage at the bargaining table. They cleaned up copyright laws and improved other intellectual property protection laws, but enforcement is still an issue. Unless the law is enforced, piracy is still a paramount issue, particularly in regard to software.”
Pulling South Korea, Singapore, Taiwan and Hong Kong from the GSP, Colancecco said, “cuts our bargaining power and sets us back substantially.” It undermines the “protection of our future business,” she said.
Lifting the GSP status appears less punitive at least in the short term because the value of imports from these countries that entered the United States duty-free in 1987 totaled only about $10 billion. The four already pay duties on more than 80% of their imports that do not qualify for GSP treatment.
Collins Co. in Irvine, for example, imports 30,000 different products ranging from screws and furniture to Christmas decorations from Taiwan. Michael Lee, senior vice president, said only about 20%, or $56 million, of the firm’s $280 million in annual North American sales will be affected by new duties of 5% to 8%.
He said many Taiwan businessmen expected the United States to remove preferential tariff treatment for Taiwan. “We assumed the time would come sooner or later, but we didn’t expect it to come so fast.”
Rodriquez at Esprit, which produces 50% to 60% of its garments and accessories in the four countries, fears “the political ramifications of people being angered or distressed.” An emotional reaction might affect other aspects of doing business, such as buying raw materials and could raise the prospect of new government restrictions or licensing requirements in those countries.
Esprit is putting together some of its staff to send overseas to talk with suppliers.
To remain competitive, the Asian suppliers and vendors may not pass on the full cost of the new duties to customers. “My hunch is that the four tigers will look for more specific ways to remain competitive,” Nevil said. “One of the ways to remain competitive is to cut (profit) margins. I don’t know if they are strong enough so that they can cut their margins . . . but I think they will try to hold the line on prices because they do not want to lose market share.”
Might Shift Production
The decision will depend on guesses of their U.S. importers’ reaction. “If the suppliers perceive that there are viable options for the buyers in terms of switching countries, then they will be more cautious in passing on the price increase,” said Ronald L. Solberg, a senior economist at Security Pacific Bank. “If they feel there are few alternatives, they probably will pass it along immediately.”
They also might shift production to other products. When Hong Kong, for example, foresaw new quotas on its textile exports, it began manufacturing fur coats, Nevil said. “It is a mental job of staying one step ahead of big bad wolf”--the U.S. Congress and government, he said.
Lee at Collins said another alternative for Asian sources may be to upgrade products so they can be sold at higher prices.
Meanwhile, the dilemma for toy makers illustrates the way U.S. firms capitalize on low production costs and other trade benefits offered by Asian countries. Playmates, for example, owns factories in Hong Kong and China that produce preschool toys and dolls, including its popular Cricket doll.
Sallis says most of the firm’s imports from Hong Kong are subject to duties. But the company will be introducing an action figure toy, a category now duty-free, which will be subject to duties in 1989.
A toy company’s cost depends on its product mix, which changes annually, and where the goods are produced. Mattel, for example, has plants in South Korea and Hong Kong. If the new duties had been in place on toy imports in 1987, they would have cost the Hawthorne company $1 million, according to a company spokesman. Even an amount that small would have affected Mattel, which expects a loss for 1987 despite sales of about $1 billion.
However, a company spokesman said: “We view it as having minimal effect on our overall business and will have to take it into account in our overall planning.”
Duties on toys vary, however. All preschool toys originating from Taiwan enter the United States duty-free. Plush toys from South Korea, which are imported flat and stuffed in the United States, are duty-free, but those that come already stuffed from South Korea carry a duty.
Such factors will play into each company’s production analysis. Toy makers have been tackling rising costs in the four tigers and most have moved some manufacturing into China.
“Our business, like most consumer businesses, is very volatile anyway,” said Douglas Thomson, president of the Toy Manufacturers of America in New York. “The movement already has been going on into China and into Thailand. We’ll be looking at other places as economies of various countries change.”
