On the Impact of China Tariffs: Is This a Dead Cat Bounce?

Investopedia defines a dead cat bounce as follows:

A dead cat bounce is a temporary recovery from a prolonged decline or a bear market that is followed by the continuation of the downtrend. A dead cat bounce is a small, short-lived recovery in the price of a declining security, such as a stock. Frequently, downtrends are interrupted by brief periods of recovery — or small rallies — where prices temporarily rise. The name “dead cat bounce” is based on the notion that even a dead cat will bounce if it falls far enough and fast enough.

Outside investing, the term is sometimes used to refer to a situation where things are looking really good simply because everyone is going wild to prepare for when they get really bad. I am getting a strong sense that is what has been happening of late with US-China trade.

First though a bit of a backstory. Our law firm has a long history of representing American companies (mostly fishing and mining and timber) in the Russian Far East and representing Russian companies seeking to do business in the United States. Fifteen years ago, this practice of ours was booming but the Great Recession had a deleterious impact on this practice and bad relations between the United States and Russia have reduced it to maybe 5% of what it once was. Fast forward back to a few years ago when the United States and Russia were both talking about initiating sanctions against the other. One would think all this talk would have further reduced our Russia practice but it actually had the opposite effect.

The more talk of sanctions, the more Russian related legal business we got, mostly from people in Russia wanting to do things in and with the United States before US sanctions hit them and American businesses wanting to do things in and with Russia before Russian sanctions hit them. Then when the sanctions were actually announced our business increased even further as we started representing companies that had disputes — either with their counter-party in the other country or with governments alleging they had violated the sanctions or owed lots of money in duties or fines. And then eventually the lights went out. Like nearly totally out.

We are right now in what feels like the middle of the bounce as between the US and China. The Asia manufacturing lawyers at my firm are all working harder than ever trying to accommodate companies (mostly US) eager to conclude deals with China as quickly as they possibly can. Typical work for our Asia manufacturing lawyers in the last few months has consisted of the following:

  • Companies that have been buying from China for many years with no or bad contracts are coming to us seeking China manufacturing contracts on “an expedited basis.” Their reasons for this change usually relate to the fact that they did not feel they needed a contract when they were buying $60,000 of product at a time but now that they are going to be buying $2.5 million to beat the tariffs, they are a lot more risk averse.
  • Client companies that have been buying from China for 3-5 years on contracts we drafted for them 3-5 years ago are calling us for new contracts. Some of these people want us to modify their existing China contracts to account for existing and potential tariffs and currency fluctuations and others want us to draft contracts with their new manufacturers in Vietnam, Thailand, Indonesia, Malaysia, Pakistan, Turkey, Mexico or wherever.

In the meantime and as expected — our international trade lawyers have been working super long hours as well these days. They are being called on for urgent help with the following:

  • Helping companies secure exemptions from tariffs. For more on this, check out China Tariffs and What to do Now.
  • Helping companies figure out how they can have their products made in countries outside China (so far it’s been mostly in Vietnam, Thailand, Indonesia, Poland, Taiwan, Malaysia, Pakistan, Turkey and Mexico) and so as to qualify their “new” products as having legitimately NOT been made in China for US tariff purposes.
  • Helping companies figure out whether what their Chinese manufacturers are telling them about how the products are now being made in Taiwan or in Malaysia or wherever and therefore will not be subject to duties. Note that so far at least, every single time this claim has proven to be false. In other words, just because someone says their product is no longer being made in China and just because they have some sort of certificate from some country other than China claiming the product was in fact made in a country other than China, it likely was not. If you are the one importing the product into the United States you (not your Chinese factory or anyone else) are responsible for knowing where the product was made and for paying the tariffs if the product qualifies as having been made in China.

So for now at least our China practice and our international trade law practice are both booming and this state of affairs holds true for every China lawyer, every manufacturing lawyer and every international trade lawyer with whom I have spoken in the last three months. An old adage about lawyers is that we do well when times are good and when times are bad, just not when things are staying the same. That has been the case so far.

Not surprisingly, it is not just international lawyers at full capacity these days, American and European companies that do business with Asia (mostly) are seeing many choke points as well. We are hearing the following from our clients and our readers:

  • We are hearing that the Chinese government has increased the VAT rebate for exports from 13% to 16% to encourage more exports.
  • The RMB has depreciated and that means Chinese goods are cheaper than they were, further encouraging exports.
  • “Everything along the supply chain is at or near full capacity right now. We are hearing that both China and US West Coast ports are really busy and ships are full and shipping costs are rising.
  • The time for getting products from Asia through U.S. customs and getting products from the United States through China customs has greatly increased. This is due in part to the increase in shipment volumes, but also because customs officials in both countries are “going through everything with a fine-tooth comb” that comes from the other country. No surprise, right?
  • An old China hand friend of mine put it this way: “Prices are rising at every point. Tariffs, freight forwarding, shipping and trucking are all going nuts. It is one big clusterf–k.” He went on to say that he expects things to get considerably worse over the next few weeks because of the new and widespread tariffs and because of the upcoming Christmas/Holiday Season. “Everyone is and will be racing to get their products to port to avoid the possibility of more and increased tariffs in January; everything is going to go into hyperdrive like nobody has ever seen before.”
  • Our international litigation lawyers are already seeing an increase in disputes related to late delivery and shipping disputes.

So for now, things are booming but for how long will this last? Will there be a crash in February or when or not at all?

What are you seeing out there?