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China Tariffs and Inflation: Why Bearings Should Be Excluded

China Tariffs and Inflation: Why Bearings Should Be Excluded
OMCO SUMO Insights
July 2022

Nearly every Original Equipment Manufacturer (OEM) that uses bearings in their products has been affected by the Section 301 tariffs on Chinese imports. Section 301 tariffs that are currently in place reach as high as 25% and cover hundreds of billions of dollars’ worth of imported goods. Recently (July 28, 2022), US President Biden and China President Xi met via online meeting, and some news or movement on tariffs is likely to result from these discussions.

Bearings, along with engineered assemblies, castings, or mounts that include bearings, are tariffed at 20% to 25%. This can be a significant hit on margins for OEMs, particularly in sectors such as Industrial Automation, Food & Beverage, Fenestration (doors & windows), Agriculture, Automotive, and others that use multiple bearings in their products. Bearings are also a key component of numerous manufacturing, distribution, and fulfillment systems and infrastructure. If you look into an Amazon.com distribution center you’ll see miles of overhead and belt conveyors, all made possible by bearings.

There are some good intentions behind the China tariffs, which were first implemented by the Trump administration and extended by the Biden administration. Three primary reasons for the tariffs include preventing Chinese “dumping” of low-cost or subsidized Chinese products into the US, punishment for Chinese theft of US intellectual property, and increasing US manufacturing and labor activity.

However, many critics believe the tariffs are overly broad, and a more targeted approach is needed. Some components or products, such as bearings, should be excluded from tariffs because they are costing US businesses but not achieving any of the 3 goals listed above. The tariffs are significant – a 25% surcharge on top of the cost, while at the same time material costs (especially stainless steel) have been up 40%. That cost increase will be passed on to the buyer and the consumer.

As a US manufacturer ourselves, OMCO SUMO strongly supports trade actions that help drive success and competitiveness of the US manufacturing sector and US labor. We want to reinvigorate manufacturing in the US, but for value-added products, not commodities like bearings. It’s expensive to source bearings outside of China. Premium Japanese or Swedish bearings companies (e.g. NTN, SKF) cost 3X more, and they also source many of their bearing components from China. India is an alternative that costs 20%-50% more than China, and much lower ability to meet large volumes, and more risk from quality and supply chain sustainability. The ecosystem, materials, and intellectual property for bearings is in China.

Cixi, China Bearing Factory 

Economically we can’t just bring a competitive bearing manufacturing industry to the US without a major government funded program. The difficulty would be similar to creating a microchip manufacturing ecosystem in the US. For example, the US could subsidize/create one 1,000,000 square foot factory, which would be able to compete on 10 bearing models. But there are more than 3,000 models commonly used by industry. The US would need an ecosystem for material, tubing, equipment for different types and sizes of bearings. And the US would have to support the development of another industry — steel production. Do people want that? Where are we going to get the labor? It would take many billions in subsidies and decades of development.

Unfortunately, for the industrial buyer wondering “how will I be affected,” there isn’t good news yet. The needed targeted approach may not come so fast. The four-year time limit on Section 301 tariffs is set to expire soon. But the list of duties included in initial tariff relief are still under discussion, and value is expected to be relatively small (i.e., $10 billion vs. $370 billion imposed). No final decision has been made on timing/execution of the plan. “I think we’re going to see something relatively modest in the short term. But over the long term, I’m hopeful [that] this will lead to a process that tries to rationalize things more broadly and link them more closely to their supply chain objectives.” – Former deputy director at the National Economic Council

A well-reasoned, targeted tariff approach is needed. And clarification on timing and exclusions. Engineering and Procurement organizations want to know which parts are going to be affected. “Is it the ones that I’m buying? How long am I going to be paying 20-25% more for Chinese components that are critical for our products?” OMCO SUMO works with customers to manage tariffs and tariff uncertainty. We transparently include the tariff surcharges as a separate invoice line item, which makes it easy to track (and eventually remove). If customers are using bearings that are included as part of an assembly or mounts (which are tariffed at a lower rate), OMCO SUMO can package bearings into custom assemblies in China and lower overall tariffs. Or OMCO SUMO can go further and complete final assembly in our US factory (Wisconsin), which typically means there will be no tariff on the mounts, housings, chains, stamping or labor.

You can stay on top of latest Section 301 tariff actions here:
https://ustr.gov/issue-areas/enforcement/section-301-investigations/tariff-actions

custom specialty

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OMCO SUMO is a manufacturer and global OEM supplier focused on ESG and sustainable sourcing for bearings, engineered assemblies, and motion-related components across all industries requiring mechanical power transmission. Established in 1964, with our extensive experience and global supplier networks from over 50 years in business, we are deeply knowledgeable and passionate about helping customers achieve sustainable sourcing and ESG goals, focusing on both the integrity of product performance and the corresponding influence on human rights, the environment, and fair business practices. OMCO is the first and only provider of proprietary ESG ratings within the power transmission industry covering an extensive and expanding network of manufacturers throughout Asia that provide high-quality lower-cost products, and often sharing the same supply chain with well-known premium brands without the accompanying overhead. Our goal is to support our customers with transparent values-driven business practices that help achieve sustainability of the triple bottom line: people, profit, and planet.

 

 

 

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