Analysis: New tariffs will bring ‘pain’ to retail and consumers
The new tariffs [10% tariff on $200 billion worth of Chinese imports, with duties rising to 25% at the end of the year] are bad news for the retail sector, especially as the latest round seems to extend the tax to a vast array of consumer goods. Many retailers will now be faced with a difficult choice of whether to pass the cost increases across to consumers or to take a hit on their margins. The exact response will vary from retailer to retailer but, in our view, both strategies are likely to be used.
The pain for retailers real, not least because it comes amid a raft of other cost increases including more spending on technology, elevated logistics costs, higher gas prices, and rising labor expenses. In short, additional tariffs are the last thing the retail sector wants.
Fortunately, the consumer is currently in a position to cope with some mild rises in retail prices. However, a rise in prices across the board will likely result in a decline in retail volumes over the longer term, which will be unhelpful to the sector.
Shifting production is a further option for some retailers, and many have been looking at this. However, given the extensive manufacturing capacity in China and the difficulty associated with quickly shifting supply chains, this can only be achieved over a period of time and will, in itself, result in some additional expense.
The small bit of good news from today’s announcement is that, initially, the tariff rate will only be 10%. This will still increase prices, but it does mean that the steeper rate of 25% will not be introduced before or during the critical holiday season. However, should an agreement between China and the U.S. not be found before the New Year, retailers could well start 2019 on a gloomy note.
Ultimately, while the President may have a sound political motivation for trying to level the playing field in world trade, these policies will bring at least short-term pain to retail and to the consumer.
The pain for retailers real, not least because it comes amid a raft of other cost increases including more spending on technology, elevated logistics costs, higher gas prices, and rising labor expenses. In short, additional tariffs are the last thing the retail sector wants.
Fortunately, the consumer is currently in a position to cope with some mild rises in retail prices. However, a rise in prices across the board will likely result in a decline in retail volumes over the longer term, which will be unhelpful to the sector.
Shifting production is a further option for some retailers, and many have been looking at this. However, given the extensive manufacturing capacity in China and the difficulty associated with quickly shifting supply chains, this can only be achieved over a period of time and will, in itself, result in some additional expense.
The small bit of good news from today’s announcement is that, initially, the tariff rate will only be 10%. This will still increase prices, but it does mean that the steeper rate of 25% will not be introduced before or during the critical holiday season. However, should an agreement between China and the U.S. not be found before the New Year, retailers could well start 2019 on a gloomy note.
Ultimately, while the President may have a sound political motivation for trying to level the playing field in world trade, these policies will bring at least short-term pain to retail and to the consumer.