Is the trade deal an early-Christmas present?
On Friday, the U.S. and China agreed on a Phase One Deal that provides some tariff relief for U.S. businesses that import from China. Should retailers be rejoicing?
Under the proposal, tariffs on $156 billion in Chinese imports — primarily consumer goods such as toys, clothes and electronics — that were set to be imposed on December 15 will be delayed. Those tariffs would have taxed virtually everything China sells to the U.S.
Tariff rates on $120 billion of Chinese imports imposed in September will be halved to 7.5 percent from 15 percent. A 25 percent tariff placed on $250 billion of Chinese products implemented earlier in the 19-month trade dispute will remain in effect, although those imports exclude most consumer products.
In a tweet, President Trump vowed to begin negotiations “immediately” on a more-comprehensive Phase Two Deal that could remove all tariffs.
Retail trade organizations praised the progress while pushing for a rollback of all tariffs. Critics see tariffs raising prices for consumers and undermining long-term planning. For instance, while some suppliers have significantly reduced their exposure to China, a fear is that new tariffs will be placed on countries they’ve shifted too. With precise conditions still being negotiated, there are also fears the Phase One Deal could fall apart.
A study from the National Bureau of Economic Research (NBER) released in October found that retail prices have been largely unaffected by the recent rounds of tariffs. However, the reason was because retailers “are absorbing a significant share of the increase in the cost of affected imports by earning lower profit margins on those goods.”
Retailers appear to be finding avenues to offset any rising input costs because most have only modestly reduced 2019 earnings, if at all, due to tariffs.
One mitigation tactic has been bringing in products earlier to avoid the tariff hits, although that now leaves the industry with elevated inventory levels. NBER’s study noted that with that tactic no longer an option, the pressure to increase prices to consumers would likely increase in 2020 should the tariffs remain in place.
- Trump, China tout tentative ‘Phase One’ trade deal, including canceling upcoming tariffs – USA Today
- A U.S.-China Trade Détente – Wall Street Journal
- Retailers call China trade announcement ‘right direction’ but say a final deal is needed – National Retail Federation
- Retailers Applaud Phase One Trade Deal – RILA
- Apparel and Footwear Industry Group Reacts Following ‘Phase One’ Deal; Emphasizes that all Tariffs Should be Removed – AAFA
- Tariff Passthrough at the Border and at the Store: Evidence from US Trade Policy – National Bureau of Economic Research
- Retailers, not consumers, facing the brunt of trade war tariffs: Study – Washington Examiner
- Tariffs Have Mixed Effects on Grocery Industry, Shoppers – Progressive Grocer
DISCUSSION QUESTIONS: How much confidence should retailers have that tariff concerns will significantly ease in the coming year? What lessons around the supply chain, pricing and planning should the retail community be taking from the 19-month U.S.-China trade dispute?