Trade war hasn't yet hurt ingredient supply, but observers wary of future flare-ups

President Trump took office almost two years ago with a ‘get tough on China’ message. His tool was a series of unilateral tariffs on thousands of different goods. These began with high profile tariffs on large scale commodity items like aluminum and steel, and filtered down into hundreds of high tech components. The lists finally expanded to include some ingredients in the dietary supplement sector, such as amino acids.

Recent talks between Trump and Chinese General Secretary Xi Jinping reportedly resulted in a ‘truce’ on the trade war​​. But Trump’s well documented unpredictability still has observers on edge. And a firm speech by Xi on Monday​​ that reaffirmed the dominant position of the Communist Party in Chinese affairs unsettled investors who seemed to have been hoping for further market liberalizations and sent stock markets reeling.

Much ado about nothing?

Dietary supplement industry stakeholders contacted by NutraIngredients-USA painted a picture of people making the best of a bad job. It has been a matter of scrimping a bit on prices and margins to make things work over the long haul.

The supplement industry has an advantage over some others in that the volumes of ingredients are small compared to some other sectors. And the margins tend to be fatter, giving more maneuver room.

George Pontiakos, president and CEO of supplier BI Nutraceuticals, said from what he’s seen on the ground, there hardly seems to be much a war at all.

“I have seen some effects in the broker market, with people trying to raise some prices to try to take advantage of the hysteria. But other than that, everyone seems to be managing pretty well. I have seen a lot of business as usual. I would have to say that essentially for us it has been kind of a non-event,” ​he said.

Loren Israelsen, president of the United Natural Products Alliance, said from his point of view the impact has been more profound than what Pontiakos has seen.

“We see many categories affected, including many nutrients, amino acids, botanicals and a number of common excipients. Adding to the issue is that China is the sole supplier for a number of these ingredients,”​ he said.

Move by China to prop up trade

Tony Xue, general manager in Shanghai for exporter ingredientsonline.com, said the Chinese government has taken some unilateral moves to smooth things over from its end.

“We’re finding there is more availability of some ingredients from China due to a recent policies change by the Chinese government. With a goal to ease the burden on the real economy and stabilize foreign trade, the Chinese government has raised the export tax rebate on some exports,” ​he said.

“We’re also finding that since the 10% tariff imposed in September, and in order to keep prices competitive, Chinese factories have lowered the prices on some ingredients (either they try to make profit lower on their own, or Chinese Government increase the tax rebate). This way, the final selling price in the US market is still at the same level as before. However, some ingredients do not qualify for the Chinese export tax rebate, so additional duty fees do apply,”​ Xue said.

Prices competitive—for now

Leo Liu, a partner in Novato, CA-based firm Ethical Naturals, said the 10% tariff now applies to amino acids and affects the company’s branded form of L-Theanine, AlphaWave. 

That tariff could go higher, he said, because although the early December Xi-Trump meeting was characterized as a ‘truce,’ no formal agreements have yet arisen from it. Still, even in a worst-case scenario in which the rhetoric and the tariffs ramp back up again, Liu said the supplement market seems ready to cope.

“Trump has threatened to increase tariff to 10–25% for ALL products from China. A lot of these things are unpredictable and out of people’s control,”​ he said.

“While Chinese manufacturers are likely to keep stable prices, distributors and users in the US will have to pay and absorb the increased tariff whenever it happens. However, most manufacturers believe that even with 25% tariff, prices of their products are still competitive when compared to other non-Chinese sources, and they don’t expect their sales will be greatly impacted,” ​Liu said.

“The post-G20 ‘detente’ is meant to cool the tensions and allow both countries to ease away from the truly damaging prospect of 25% tariffs on a wide range of key materials that flow into our industry. The bigger picture is that, should negotiations fail and new tariffs be imposed, the economic effect on lower and middle-income households here in the United States would be painful. I do not see how this makes sense from any perspective. Yet here we are on the edge,”​ Israelsen said

Looking beyond China

Xue said the episode could ultimately work to force companies to think about diversifying their supply. Companies sourcing botanical ingredients already do this as a hedge against harvest uncertainty. Now they might have to consider it because of political uncertainty, too.

“We also have customers looking for ingredients from alternative countries/sources. At ingredientsonline.com we have an entire team here in our California headquarters who are sourcing new ingredients from new factory partners around the globe looking for alternative sources and more options for our US customers,” ​Xue said.

“We are telling our members to secure key raw materials now, to get materials into the U.S. now and consider non-Chinese-sourced materials, as appropriate. Also of great concern, should prices quickly rise, there is a heightened risk of adulteration as supplies tighten, prices rise and mischief follows. Vigorous testing and back-up stocks and sources will be necessary,”​ Israelsen said.