Trade war intensification poses risks for natural products, experts say

The two countries have been at loggerheads over the trade issue since President Trump first took office in 2017.  They appeared headed toward a broad trade agreement earlier this year.  But since then, relations have again soured,​​ with the most recent round of talks collapsing last Thursday.

On Monday China announced that it would increase tariffs on nearly $60 billion worth of American goods.  This was in response to the Trump administration’s plans to increase tariffs on a broad list of Chinese goods, valued at as much as $200 billion. The president also hinted that other goods imported from China that are not currently on the list might be subjected to tariffs.

Muted earlier effect

The tariffs that were announced early in the Trump administration do not seem to have seriously disrupted the supply of dietary ingredients.  Many US-made dietary supplements use ingredients sourced from China, and in many cases there are no alternative sources. Most dietary ingredients escaped being named on the first iterations of the tariff lists, with the notable exception of amino acids and a few others. 

Experts interviewed by NutraIngredients-USA as the time said the 10% tariffs that were imposed at first could be absorbed if they pertained to dietary ingredients that are used in supplements made in the US.  The cost of the raw material is after all a small fraction of the overall cost of a product.

But when tariffs rise to the 20% or 25% level, and when they could apply to a broader list of goods, the present escalation in the trade war has the potential to cause real pain, experts now say.

Preparing for the worst

Cal Bewicke, president of branded ingredient supplier Ethical Naturals, which is based in Novato, CA, said his company had been preparing for a worsening of trade relations. 

“The one category that was already taxed at 10%, and that we understand will be going up to 25%, is amino acids. That affects our AlphaWave L-Theanine product.  But we had been preparing for some tariff waves and we have built up a significant inventory in that product,” ​Bewicke told NutraIngredients-USA.

“A lot of the material we import are botanicals or botanical extracts, so the tariffs haven’t affected our business there, yet.  But we have noticed an effect in excipients, which are involved in our contract manufacturing business,”​ he said.

Wilson Lau, vice president of Oakland, CA-based ingredient importer Nuherbs, took a more alarmist view of the advent of the more stringent tariffs.

“A large percentage of ingredients that go into vitamins and other dietary supplements are sourced from China, so these tariffs mean prices will go up for consumers on everything from vitamin C to amino acids to herbs. For Nuherbs, which specializes in the importation of herbs from China, it’s a disaster. There is only one commercial source for authentic Traditional Chinese Medicine herbs: China. For our class of goods, like many others, these tariffs will hurt the American public, American businesses, and American employees because there are no alternative sources for Chinese herbs,” ​he said.

Compressed margins

“A lot of us in the industry are going to see our margins compressed.  We deal in small margins, so this is significant. We will have to pass on the costs to buyers, so it will impact their margins, hurting their companies and employees.  This will disproportionally harm small businesses and those using unique ingredients, and undoubtedly some will not survive,”​ Lau added.

There is a process by which an importer can apply for an exemption. That decision presumably rests in part on whether there are alternative sources of supply for a given product on the tariff list.  But Lau said the process is cumbersome and costly, and in his estimation most of the applications for exemptions in the first go round of tariffs were denied anyway.

Tony Xue, general manager of the Shanghai office for ingredients supplier Ingredientsonline.com, said in the short term the tariff war escalation could cause some supply bottlenecks and price increases.  Long term, he said it will force companies to start looking for alternative sources of supply.

“There is concern for the future but the immediate action is that sourcing teams are looking to secure inventory, NOW.  This has resulting in very strong sales over the last few days,”​ Xue said.

“We see customers looking for alternative sources from around the world. They want the opportunity to approve additional factories of origin to back up their current supply chain. Ideally, ingredients should be produced in the right location or country with the best natural and technical resources that fit within the scope of that ingredient. In our industry, starting materials come from nature, chemicals, and fermentation and these materials are not always unique to China so we anticipate more and more supply coming from around the world,”​ he said.

Comments encouraged

 Lau encouraged stakeholders in the dietary supplement industry to participate in the comment process on the implementation of the tariffs.  There is a June 10 deadline for registering to speak at a hearing that is scheduled for 9:30 AM Eastern time on June 17.  The hearing will take place at the  US International Trade Commission at 500 E Street SW in Washington, DC.  June 17 is also the deadline for the submission of written comments, and rebuttal comments for statements made at the hearing will be accepted for a week after the hearing date.