Trade 2020: How OEMs and Suppliers are Adapting to Trade and Tariffs

Policy Resolution Group at Bracewell &The Franklin Partnership, LLC

Your Team in Washington, D.C.Lobbying Firm – The Franklin Partnership, LLP• Bi-partisan Washington, D.C.-based government relations firm

• Representing manufacturing industry since 2002

• Clients include: manufacturing associations, defense contractors, hospitals, cities

Strategic Communications Firm – Policy Resolution Group at Bracewell• Wash, D.C.-based public affairs & strategic communications consultants

• Promote NTMA and PMA in print, digital and other earned media; provide social media support to PMA

• Support Franklin Partnership government relations efforts by designingand implementing coordinated strategic communications strategy

• Representing metalworking industry since 2003

Agenda• Impact of Trade• Understanding Tariffs• Strategies to Minimize Impact• How OEMs, Suppliers Reacting to NAFTA, China• Europe Trade War • Steel Exclusions• Politics of Trade

Trade Impacts All Global Commerce• Movement of goods, people, finances• Tariffs on foreign imports• Retaliatory tariffs on U.S. exports• Tariffs on metals, machinery, packaging• Could create domestic and overseas sales growth opportunities• Supply chain disruptions• Tariffs cause artificial targeted inflation – tariffs on products inflate product’s price

Focus on your customer’s customer, not just impact on your business

Impact of Trade on PMA – Jan. 2020 Survey

• 49.4% lost work to low cost country last 24 months

• 50% of PMA members export a product

• 15% report taking on new business since China tariffs took effect

• 20% import machines, products from China

• 5% have non-U.S. locations

• Members report lead times for metals double

• Increased Aluminum prices by 5-20%

• Increased Steel prices by 15-30%

• Members attempting to pass along raw material increases to customers

Know the Rules of Tariffs• Tariffs apply to country of origin, not country of export

- 25% Tariff on Steel- 10% Tariff on Aluminum- 25% Tariff on Chinese industrial goods- 25% Tariff on European consumer goods, more pending

• Identify your Harmonized Tariff Schedule (HTS) codes- Cannot reroute machine, material to Thailand then to U.S. without further manufacturing

• To change your HTS code, must alter the form or function of item

• Understand valuation of imports – tariffs based on declared value- Some in China will subtract design costs from declared value to lower tariffs – NOT permitted- If the design was done in the U.S., that cost is not subject to tariff

Identify Product on Harmonized Tariff Schedule

Minimize Trade Disruptions• Can you source domestically?

• Identify vulnerabilities in supply chain- From where is product imported?- To where is your, your customer’s product exported?- Is a future trade war possible? Current, pending tariffs

• Price increases not only consideration; lead times extended, lower supply- Do you have the ability to warehouse, store excess inputs?

• Do not just focus on your own exposure, but that of your suppliers, customers

Sample Tariff Evaluation Tool – Metal Stamper

Global Tariffs on your Raw Materials/Inputs

25% tariff on steel

10% tariff on aluminum

25% tariff on Bronze strip from China

Quotas on South Korea, Argentina, Brazil

Potential 25-100% tariff on EU copper based alloys

List raw material price increases, delays

25% Tariff on Equipment from China, EU

Mechanical presses (HTS 8462.99.80.45)

Metal machining centers (HTS 8457.10)

Exclusion from tariff granted: Stamping dies suitable for

stamping steel or aluminum (HTS 8207.30.6032)

Welding machinery, tools from EU (HTS 8468.80.10)

List machines, equipment imported subject to tariffs

25% Tariffs on Your Packaging, Storage

Corrugated cardboard boxes (HTS 4819.10.00)

Pallet packaging/wrapping machine (HTS 8422.40.91)

Wooden pallets (HTS 4415.20.80)

Lubricants for machinery (HTS 3403.99.00)

List imported storage, packaging you import

Retaliatory Tariffs on Your/Customers’ Exports

Stampings to India (HTS 7326.19)

EU, India tariffs on U.S. motorcycles (HTS 8711.50)

45% China tariffs on U.S. dairy (exports down 54%)

China no longer accepting scrap, prices drop

List your products, customer’s goods subject to tariffs

Trade: Disruptions from DC? An Understatement

Current State of TradeOngoing Trade Battles

û Chinaû Europe Aviationû Europe Digital Taxû Australia?û Vietnam?û Steel, Aluminumû Autos, auto partsû Washing Machinesû Solar panelsû Semiconductorsû Rare Earth Elements

Pending Trade “Agreements”? India? China Phase II? UK

Resolved Trade “Disputes”ü South Koreaü Japanü NAFTAü China Phase I

Phase I U.S.-China Agreement Signed Jan 15• Lowers tensions, maintains status quo on tariffs• Majority of structural changes saved for Phase II talks

• 25% tariffs on 7,000 imported Chinese goods remain (Lists 1, 2, 3)• 15% tariffs on List 4A drop to 7.5%• Either side may resume, increase tariffs

• China to increase by $200b purchases of U.S. goods over 2017 levels- Manufacturing ($77.7b); Agriculture ($32b); Energy ($52.4b); Services ($37.9b)- Electric motors, ignition switches, printed circuits, batteries- May cause shortages, price increases for domestic users, distributors of those goods- Lathes for removing metal- Machine tools (including presses); machining centers

How are OEMs, Suppliers Reacting to China?• Price of tooling, machines, often still 40% cheaper even with China tariffs

• Shifting manufacturing to other locations (especially electronics)

• Identifying third party, non-China sources – Top Five Importers to U.S.- Motor Vehicle Stampings – Canada, Taiwan, Mexico, South Korea, Germany- Other Metal Stampings – Mexico, (China), Canada, Spain, Italy- Special Dies, Tools – Japan, Canada, (China), South Korea, Germany- Machine Tools – Japan, Germany, (China), Italy, Canada

• Importing a more finished product to minimize number of tariffs applicable- U.S. Trade Representative expanded tariffs to cover derivatives of steel, aluminum- Rather than paying for more expensive metal stampings, import entire light housing instead

• Many manufacturers quoting more business in U.S. due to tariffs

Managing China Tariffs – Exclusions OEMs watching China Exclusion Requests – Applies to all Companies

Track all exclusions to see if it can apply to youhttps://ustr.gov/issue-areas/enforcement/section-301-investigations/tariff-actions

NAFTA – U.S.-Mexico-Canada Agreement

• Signed by President Trump January 28, 2020

• Canada to ratify by end of March

• U.S. sent Mexico $27m to begin labor rights enforcement• Likely enters into force late 2020/early 2021

• Lasts for 16 years; extension possible

• North American passenger vehicle content requirement increases from 62.5% to 75%

• Heavy duty truck content to 70%; Auto parts content will range in 3 tiers from 65% to 75%

• Steel, Aluminum Vehicle Content – 70% of steel, aluminum must originate in North America• Steel must be “melted and poured” in North America to meet auto standards (delayed 7 years)

• Mexico blocked smelted in North America for aluminum (Mx has no smelters, imports billets, scrap)

• 40-45% of passenger vehicle, light truck final assembly completed by workers avg. over $16/hour

Steel, Aluminum, Parts levels (Regional Value Content) and Wage rates (Labor Value Content) apply only to Auto OEMs

U.S.-EU Trade Tensions Escalate

• President has long sought conflict with Europe

• Administration will continue to use “stick’ approach, threaten tariffs

• U.S. said it would impose 25% tariffs on autos, parts if EU did not sanction Iran

• Boeing-Airbus Subsidy Dispute

- WTO has authorized tariffs against EU

- WTO will authorize tariffs in Spring against U.S.

- U.S. has already imposed 25% tariffs on cheese, preserved cherries, meat, hand tools, clothes

- U.S. could still impose up to 100% tariffs on copper based alloys:

o Brass, bronze, cupro-nickel – bars, rods, plates, sheet, strip, coils

o PMA successfully lobbied twice to keep copper based alloys off tariff list

• Comprehensive U.S.-EU agreement unlikely, likely limited to services, some goods

Managing Steel, Aluminum Tariffs - ExclusionsSuppliers submitting Steel/Aluminum Exclusion Requests – Granted by Company

(talk to your service center)68% Approval when no company objected to the request

4% Approval rate with one or more objections

Steel Pricing – Global Differences

$200.00

$300.00

$400.00

$500.00

$600.00

$700.00

$800.00

$900.00

$1,000.00

$1,100.00

January

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Febru

ary 12

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8

Marc

h 12, 2

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April 9, 2

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May

14, 20

18

June

11, 2

018

July

9, 20

18

August

13, 2018

Septe

mber 13, 2

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Octobe

r 8, 2

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November 1

5, 201

8

Decem

ber 12, 2

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January

14, 20

19

Febru

ary 11

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9

Marc

h 14, 2

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April 8, 2

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May

13, 20

19

June

10, 2

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July

8, 20

19

August

12, 2019

Septe

mber 9, 2

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Octobe

r 14, 2

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November 1

1, 201

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January

13, 20

20

Febru

ary 24

, 202

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SteelBenchmarker HRB and Shredded Scrap PriceUS EU China Scrap Price World Export

Source: steelbenchmarker.com

Coronavirus – Major Disruptions• China factories: 1/3 of employees working

• Major transportation delays – 2 week quarantine for delivery drivers

• Goods sitting on ports, awaiting delivery

• Largest impact on autos, electronics manufacturers

• Containers 30% full from China

• More disruptions likely to come – next 45-60 days

• Some PMA members reporting increased quotes to replace China suppliers

• Government has resources to help identify domestic, overseas suppliers

China Alternatives – Where Major OEMs GoThailand

• Printers• Computers• Electronics

India• Telecom• Clothing

Japan• Auto parts• Robotics• Advanced Mfg

Taiwan• Personal Computers• Electronics

Vietnam• Clothing• Electronics• Personal Computers• Auto parts

Mexico• Auto parts• Electronics

Politics of Trade: 2020 White House and Beyond

• What if President Trump wins a second term?- Phase II China deal possible in Spring 2021

- U.S.-EU dispute likely continues

- Phase II Japan deal possible

- If immigration surges, could resume pressure, tariffs on Mexico

• What if a Democrat wins the White House?- Likely continue many industrial tariffs on China, could add for human rights

- Removal of tariffs on EU, Japan, national security partners

• What if either party wins the White House?- Climate change provisions included in future trade agreements

- Questions linger over Mexico labor enforcement

Questions?The Franklin Partnership, LLPOmar@franklinpartnership.comjguzik@franklinpartnership.com

Policy Resolution Group at BracewellPaul.nathanson@bracewell.com