Dietary supplement industry considers the future of U.S.-China tariffs

05-Nov-2024 - Last updated on 05-Nov-2024 at 16:57 GMT

As much as 80% of raw nutraceutical ingredients on the market​ originate from China, according to Loren Israelsen, founder and president of the United Natural Products Alliance (UNPA). The trade association has engaged with both the Chinese government and supplement industry for the last decade and is a recipient of a U.S. Department of Commerce grant to increase dietary supplement sales into the Chinese e-commerce market.

Former president Donald Trump raised tariffs by 7.5% on several dietary supplement ingredients when he was in office, Israelsen noted.

The Center for Strategic and International Studies (CSIS) states that Section 301(b) of the Trade Act of 1974, which Trump utilized to increase those tariffs, “gives the president broad authority to take all appropriate action, including retaliatory tariffs, to obtain the removal of any act, policy or practice of a foreign government that is unjustified, unreasonable, or discriminatory, and that burdens or restricts U.S. commerce.”

In 2019, the U.S. implemented a 10% tariff on an additional $300 billion worth of goods imports from China, and those particularly affected the health and wellness industry​. Israelsen said that if Trump is elected, tariffs might increase by 60% on all imports from China​.

“In the current elections, tariffs have, again, been an important issue with a focus on all Chinese imports,” he added. “Time will tell if that [increase] happens and, if so, how broad and how much.”

If past is prologue, the presidential candidates’ previous tariff decisions should provide some insight on how future policies might lean.

The Trump administration used Section 232 of the Trade Expansion Act to impose a 10% to 25% tariff on all goods coming into the United States.

When it comes to Trump’s willingness to impose tariffs, Ivan Wasserman, partner at Amin Wasserman Gurnani LLP, said “whether [Trump] could impose such tariffs on his own is not clear, as generally, absent emergency situations, the U.S. Constitution gives Congress the authority to levy tariffs. So, if he does so without an act of Congress, we can expect legal challenges to be filed that may ultimately end up at the Supreme Court.”

According to the University of Nebraska’s Yeutter Institute​, “while the U.S. Constitution grants to Congress the power to levy tariffs on goods, Congress has delegated some of that power to the executive branch over time,” especially in the case of national security concerns.

The CSIS noted that “the Biden administration maintained Trump’s Section 232 tariffs, [though] it reached separate agreements with the European Union​, Japan​ and the United Kingdom​ on tariff-rate quota arrangements.”

Overall, President Biden followed Trump’s playbook on levying tariffs on Chinese goods, according to the non-profit, non-partisan Tax Foundation​.

In May, Biden also issued tariffs​ on $18 billion of Chinese imports​ including a 100% levy on electric vehicles, a 50% levy on solar cells and microchips, a 25% levy on electric vehicle batteries and their critical mineral components, and a 25% levy on steel and aluminum. Vice President Kamala Harris said she would back Biden’s targeted trade policies​.

After years of tariffs against China’s goods, how economically advantageous are these taxes for U.S. business and American citizens?

The Tax Foundation​ said that “while political rhetoric claims the tariffs have been paid by China and other foreign countries, they are actually paid by people in the U.S. importing foreign goods. And the economic burden of those higher tax payments has fallen almost exclusively on American consumers in the form of higher import or retail prices.”

How Americans cast their votes for president will determine whether U.S. policy takes a more hard-line America-first position, maintains the status quo or offers something more nuanced regarding trade with China. Regardless of whether Harris or Trump is elected, neither will appease the dietary supplement industry, as was evident in the viewpoints we gathered for this story.

NutraIngredients-USA spoke to 10 industry representatives—consultants, trade association leaders and business executives, including ones from American, Indian and Chinese companies. They indicated that U.S.-China trade relations will have repercussions for both American and Chinese citizens.

Israelsen summarized tariff decisions in this way:

“Historically, when tariffs are used, counter-tariffs follow. This is widely seen as an unnecessary increase in costs to industry and ultimately consumers. That said, there are cases where tariffs appear to be important to support critical domestic industries, particularly if government support for industries artificially lowers prices. Whether tariffs are good or bad is very much based on who is getting economically hurt.”

For individuals in the mushroom trade, Nammex may be a household name. The more than three-decade-old company, which offers wholesale, organic mushroom extracts, has deep ties to China​.

In 1989, the company’s founder, Jeff Chilton, initially traveled to the country to make business contacts and to attend a conference held by the International Society for Mushroom Science. The country is the mushroom motherland, and for good reason. China produces 94% the world’s supply, according to Chilton’s son, Skye.

But relying solely on China for one ingredient leaves Nammex vulnerable to the whims of tariff policy, he explained.

“Certainly, we had to work with our Chinese manufacturing partners,” he said, noting that they did not raise their prices on Nammex once U.S. tariffs began to increase on imports.

“I think there wasn't a whole lot of change for our business other than we have a line item in our books that is going straight to the U.S. government.”

However, weathering additional tariffs imposed by a new White House could mean Nammex would have to increase prices for its customers.

“It doesn't really matter which government we end up with,” Skye said. “They'll keep the tariffs for sure and potentially expand on those tariffs, and that's only going to make goods more expensive.”

Wilson Lau, president of wholesale Chinese herb supplier Nuherbs, is the third generation of his family to lead the California-based company founded in Oakland’s Chinatown.

Nuherbs specializes in importing traditional botanicals that are grown in China, and those for which there are few alternatives. Consequently, Nuherbs has broadened its business model to include more value-added and service-based offerings in addition to supplying organic herbs.

Lau said he understands how businesses in this environment are forced to raise prices.

“As ingredient suppliers, our margins aren’t such that we have a lot of leeway to absorb cost, so if our prices rise, we have to pass it on,” he said, adding that tariffs have been “bad” for business overall and that companies seek predictability and not tariffs that “skyrocket overnight.”

For Chinese firm LifeWe Bio, based in Xi’an, which specializes in manufacturing ingredients used in food, nutraceutical and pharmaceutical industries, approximately 70% of its exports go to the United States, according to Howey Huang, the company’s sales director.

“We only do exporting, so [U.S. tariffs are] only a disadvantage for us,” he said. “We will just lose our profit more to meet customers’ target price. I think the Chinese government will also take some measures to react to these tariffs.”

According to the foreign policy publication the China Leadership Monitor​, the Chinese government responded in 2021 to U.S. trade actions with “retaliatory tariffs” which “allowed China to penalize foreign companies for actions seen as contrary to its interests.” However, the publication noted that “Beijing reacted relatively mildly to the sanctions on ZTE and Huawei and the more recent technology and financial restrictions, largely because most options would have been self-defeating. For example, imposing restrictions on U.S. companies like Apple or General Motors that have major production bases in China would mean loss of jobs for Chinese workers.”

Regarding Biden’s most recent tariffs against products such as electrical vehicles, Reuters reported​ that Chinese state media have “shot back” and accused the United States of “subverting its own free trade principles and taking action that threatens climate goals and will push up costs for American consumers.”

For companies based in both the United States and China, as is the case for Layn Natural Ingredients, there is a balancing act when it comes to tariffs as they are impacted by both nations’ policies.

“One of the things we're trying to do is anticipate what people's needs are going to be for 2025 so maybe we can bring in stock and warehouse it before those tariffs, assuming those tariffs, go into effect,” said Jim Roza, chief scientific officer at Layn. “You can inventory them and help stave off some of that cost upcharge.”

The company is also exploring shifting some of its manufacturing in Asia to its facility in Indiana, essentially beginning the manufacturing process overseas but finishing the process in the United States.

But Roza admits there is a point where options are limited for businesses trying to mitigate the tariffs. He added that certain ingredients, such as monk fruit, are sourced primarily from China.

“It's a global economy and the days of being able to produce everything by yourself and be self-contained, it's just not realistic anymore,” he said.

In response to the possibility of future tariffs, Layn will likely scale up production of ingredients beyond its current capacity, helping to lower costs for consumers. Upping production may have an environmental toll because it is not clear to what extent farmers can sustain increased yields.

There are alternative markets from which Layn procures products and ingredients.

“We produce over 75 different standardized polyphenolic extracts, many of which we're sourcing the biomass from Thailand, Vietnam, India, etc.,” Roza said. “We do turmeric. We do rosemary. These are coming from various different parts of the world.”

India has become a key alternative to the Chinese ingredient supply, said Uday Gosalia, president of U.S.-based UGo Beyond, a platform marketing company for the self-care and wellness industry with ties to India. He said that India grows crops such as shatavari, boswellia, amla, curcumin and berberine, serving as competition to the China market.

“India still needs to work on a lot of research and continue prioritizing supporting affective formulations and going beyond being the non-China option to being the preferred partner,” Gosalia said. “Chinese companies in terms of production capacity and efficiency have been able to control market share. They have mastered almost all the major products in nutraceuticals.”

India is also still dependent on China for exports in key sectors such as chemical and drugs and that despite trade restrictions, Indian imports from China soared​ in 2022 to $102 billion, a 74% increase from 2020.

Bill Bookout, president of the National Animal Supplement Council, had traveled to China on five occasions prior to the pandemic to establish business and government connections on behalf of his organization. He said that 70% of the ingredients used in animal supplements come from China.

“Many vitamins, minerals and a lot of the ingredients that are popular ingredients that we recognize—glucosamine, chondroitin, MSM—are highly dependent on Chinese sourcing and supply of raw materials for animal supplements,” he said. “And what happens there is prices go up and U.S. industry can really be held hostage by Chinese supply. A lot of the industry segments are subsidized by the Chinese government, and if we don't have manufacturing capability here, we can't compete on price when supply chain interruptions happen.”

He explained that the United States has become much too dependent on many foreign suppliers, especially China, and so tariffs are a way to trying to level that playing field. When given the hypothetical situation of a world of no tariffs, Bookout said the Chinese government would still subsidize industry segments, controlling price.

Bookout is in favor of prioritizing America-first initiatives, noting that protecting U.S. trade should be focused on diversification of industry, meaning the United States is less dependent on any one specific area, whether it is China, India or South America.

“Right now, we have potential shortages of critical ingredients, vitamins and minerals that may cause significant impact and even potential interruption in supply, because we can't just switch over [production] to India or switch over to the United States,” he said.

This begs the question, can other countries compete on the price and labor of ingredients from China?

Possibly.

Skye Chilton of Nammex said that over the last three decades, the Chinese economy has brought about 300 million people out of poverty.

“They have a very vibrant middle class now that has disposable income,” he said, adding that they demand higher wages for jobs.

This has forced some Chinese companies to produce their own goods overseas, including goods for the U.S. market.

“You could be getting a product from Vietnam now, but it could still be a Chinese company,” he said.

Copyright - Unless otherwise stated all contents of this web site are © 2024 - William Reed Ltd - All Rights Reserved - Full details for the use of materials on this site can be found in the Terms & Conditions

Related topics Suppliers Markets & trends Regulation & policy Supply chain Botanicals