Stocks are dropping sharply after President Trump threatened more tariffs against China. The escalation of tensions came as investors were hoping the long-running trade war between the world’s two biggest economic powers might be winding down. (May 6)
The Trump administration’s 10% tariff on $200 billion in Chinese imports has been a nuisance, with many U.S. businesses absorbing the cost or working around it.
But President Donald Trump’s threat over the weekend to hike the duty to 25% would dramatically compound the damage as the lion’s share of the costs are passed to consumers, taking a toll on the economy as well as company profits.
“A sudden tariff increase with less than a week’s notice would severely disrupt U.S. businesses, especially small companies that have limited resources to mitigate the impact,” says David French, senior vice president of government relations for the National Retail Federation. “American consumers will face higher prices, and U.S. jobs will be lost.”
The tariff would affect nearly 6,000 products and parts, including many consumer items such as furniture, clothing, electronics, handbags, luggage, hardware, shampoo, perfume, dishes, bedsheets, bicycles, meat and cereal. New-vehicle prices also could rise as parts from China become more expensive, Bank of America Merrill Lynch auto analyst John Murphy said in a research note Monday.
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AudioControl, which makes high-end audio equipment, imports about 25% of its parts from China, says Alex Camara, CEO of the Seattle-based company. Of the 10% tariff, he says, “We’ve primarily absorbed the cost, which has been painful.”
‘Impossible to absorb’
But if the tariff climbs to 25%, “it’s impossible to absorb,” he says. “10% has hurt our margins, but 25% is a severe impact.” And with the higher tariff slated to take effect Friday, he says, “You can’t even plan for that.”
Camara estimates he would have to raise overall prices to dealers and retailers by 8% to 12%, costs that would be passed to consumers and that could crimp sales. He says he also would have to curtail his investments in new technologies.
All told, the 25% tariff on the $200 billion in Chinese imports, along with existing duties on $50 billion in Chinese shipments and on steel and aluminum, would reduce U.S. employment by 934,000 and cost the average family of four $767 a year, according to a study by the Trade Partnership. Trump’s threatened 25% tariff would make up a significant portion of that toll.
Put another way, Trump’s levies on the total $250 billion in shipments from China have barely been blip for the economy, trimming growth by an estimated tenth of a percentage point for all of 2019, according to Oxford Economics. But increasing the tariff on the $200 billion in imports to 25% would triple the impact to three-tenths of a percentage point, taking a substantial bite out of U.S. growth that many economists forecast at about 2.2% this year.
Trump also has threatened to slap a 25% tariff on the remaining $325 billion in imported goods from China “shortly.” Such a move, along with the other duties, would cost the U.S. 2.1 million jobs and the average family of four more than $2,000 a year, the Trade Partnership study says.
The outlook isn’t all bleak. Some industries are expected to add jobs as the tariffs lead some businesses to buy U.S.-made goods, including steel, textile, apparel and electronic equipment manufacturers.
So far, retailers, especially large ones, have dealt with the tariffs through various strategies, French says. They’ve convinced Chinese suppliers to trim costs, imported a big stockpile of goods before the duties took effect, spread the added fees across many products to the minimize the impact, and absorbed some of the expenses, French says.
“Most retailers found a way around it,” he says, adding that smaller merchants are less able to negotiate and many likely had to eat costs or pass them to shoppers.
But with the 25% tariff looming, “You’re just taking the full brunt of it,” he says.
Some consumer electronics makers already have started shifting production from China to other Southeast Asian countries, a tactic that would intensify under a 25% duty, says Sage Chandler, vice president of international trade for the Consumer Technology Association.
Bluesalve Partners of Boonton, New Jersey, makes Bluetooth speakers and other products through contractors in China. When the 10% tariff took effect, company Principal Robert Heiblim renegotiated prices with its Chinese suppliers and imported extra products before the 25% duty was slated to take effect early this year. If the 25% levy is enacted, he says, he has sufficient inventory to last a couple of months but then would probably pass about half the 25% tariff to his dealers. They in turn would raise retail prices.
Hire fewer workers or layoffs
“There is no way around it,” he says. Heiblim, who plans to add up to 20 employees to his staff of 25, says he instead would reduce his hiring plans to just three to five people, limit raises and cut his advertising budget.
Kent International, a bike maker based in Parsippany, New Jersey, raised prices 10% last year because of the tariffs. Sales fell but then recovered as consumers adjusted, says CEO Arnold Kamler.
But “bicycles are very price sensitive, and another 15% price increase would be devastating to us both in sales and in lost profits,” Kamler says.
Tiffany Williams, owner of Luggage Shop of Lubbock in Texas, has had no choice but to pass the 10% tariff to shoppers. She estimates the higher prices have reduced sales by 5% to 10%, mostly affecting higher-end luggage previously costing $400 to $479. “Now it becomes more of a luxury bag,” she says.
As a result, Williams didn’t add a part-time worker over the holidays and another early in the year. If she’s hit with an additional 15% tax, “It’ll be really hard,” she says. She may no longer be profitable and likely would have to consider layoffs, though only as a last resort, she says.
“This is just crazy,” Williams says.
Contributing Yan Zhang and Nathan Bomey
In an AP interview, Democratic Senator Doug Jones of Alabama tells the Associated Press President Donald Trump’s tariff talk is spooking farmers, automobile manufacturers and others in the deep-red state. (Dec. 12)
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