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August 26, 2019

Heightened Tariffs Prompt Promo Price Increase Fears, Worry Over Economy

The trade war between the U.S. and China has escalated, with both sides ratcheting up import duties in moves likely to impact the promo products industry.

By  Christopher Ruvo

Rising tariffs and related fallout in the escalating U.S.-China trade war has some top promotional products executives predicting further product price increases within the industry and broader economic impact that could bode badly for ad specialty firms.

The latest haymakers in the approximately year-and-a-half-long trade war between the world’s two largest national economies occurred Friday. That’s when China announced it will be imposing tariffs of 5% to 10% on virtually all imported U.S. goods that haven’t already been slapped with punitive tariffs. Beijing also said it will be raising duties on items already subject to the tariffs and resuming levies on U.S. automobiles (25% rate) and auto parts (5%).

The ramped up tariffing from China President Xi Jinping came in response to newly planned duties that U.S. President Donald Trump’s administration is aiming to impose on Chinese imports starting September 1st.

Rising Import Tariffs

In response to Beijing’s new levies, Trump upped the ante on those upcoming duties, as well as tariffs already in place. Originally slated at a rate of 10%, tariffs set to go into effect on some $300 billion worth of China-made imports will now be 15%. The tariffs take effect on some items on Sept. 1, others on Dec. 15. Meanwhile, existing duties of 25% on about $250 billion in Chinese imports will rise to 30% come October 1st, Trump declared.

The vast majority of promotional products sold in the U.S. are produced in China. As a result, the import duties have triggered price increases on certain levy-affected items, destabilized annual pricing within the industry and caused other issues, such as propelling American promo firms to intensify efforts to diversify their supply chains beyond China.

Pricing Woes & ‘Extreme Chaos’

The new round of tariffs stands to exacerbate those issues – and potentially cause others besides, executives told Counselor. “This has been nothing but extreme chaos for our industry,” Eddie Blau, CEO of Top 40 supplier Innovation Line (asi/62660), told Counselor. “The bottom line is our prices will continue to increase as the president continues to increase tariffs. The hidden costs are horrendous also. We should be focusing on growing our businesses, not doubling back every other week to figure out new pricing.”

David Nicholson voiced similar frustrations and concerns. “This is now the third significant tariff change in the last few months, so it’s next to impossible for suppliers in the promo industry to develop any type of effective strategy,” Nicholson, president of Top 40 supplier Polyconcept North America (PCNA), told Counselor. “The ground is constantly shifting and it’s impossible to predict where this is headed. The obvious outcome of the latest tariffs will be additional price increases across most categories in the industry.”

While industry leaders think future price rises could fall anywhere in the 5% to 20% range, most say it’s too soon to say exactly how much prices will go up on affected items. But as Nicholson and Blau alluded to, distributors should expect weightier price tags on tariff-impacted items in the months ahead as suppliers replenish stock with items imported under the amplified duty rates. Distributors were already sizing up the possible impact. “Suppliers may amortize the increase across all their products,” Shamini Peter, chief operating officer at Top 40 distributor Axis Promotions (asi/128263), told Counselor. “The last escalation was about 2% to 5%. With this, it may increase another one to two points.”

PCNA and other supplier firms said they’ll do what they can to minimize price hikes, but their hands are, to an extent, tied. “Consistent with our approach to prior increases, we are attempting to keep any price changes to a moderate level and to offset wherever possible,” Nicholson told Counselor. “Unfortunately, as we contemplate tariffs of 30%, there’s little opportunity to avoid an impact as significant as this.”

A negative of price increases is that promo firms fear the value proposition of promotional products will be diminished, causing some end-clients to desist investment in ad specialties or reduce their spend. The repercussions of the trade war and tariffs imposed by both the U.S. and China could carve a deeper-cut in promo companies’ bottom lines as it has potential to have a dampening effect across the economy.

Consider: Companies exporting to China may see reduced sales as a result of Beijing’s duties on American goods. Meanwhile, stateside businesses might, like promo firms, be experiencing increased input costs because of the tariffs the Trump administration has imposed on Chinese goods. Some stateside firms may not be feeling either of those impacts, but might have clients who are, which hurts the bottom line. All those scenarios, and other similar manifestations of the trade war, could lead to decreased spending on promotional products, some fear.

“It’s important to remember that prices on many goods, not just promotional products, are expected to increase because of these tariff changes,” Melissa Ralston, chief marketing officer at Top 40 supplier BIC Graphic North American (asi/40480), told Counselor. “That means consumers may be watching all discretionary budgets across the board and companies using traditional printed marketing collateral with annualized prices will need to find ways to become more agile.”

Adding fuel to the fire is the volatility of the trade war and its seemingly daily swings in tone and policy. “The more troubling outcome is likely to be greater uncertainty for the U.S. economy as a whole, which has broader negative implications for the demand for promotional products,” Nicholson told Counselor.

Still, it’s not yet time to sound the emergency alarm, say some executives. “I don’t think corporations are going to eliminate promotional products,” Peter told Counselor. “There’s still value for a corporation to use promotional products as a tool to promote their brand.”

Ralston noted that steeper prices on China-produced goods could lead to more spending on USA-made products or budget-friendly items. At the end of the day, she believes the market for a wide variety of promo items will remain strong. “Promotional products are one of the most influential and affordable forms of advertising, so we do feel there will continue to be sales opportunities across all price points and brands,” Ralston told Counselor.

“Hereby Ordered…”

Shortly after news of China’s ratcheted-up tariffs broke, Trump issued a tweet saying American companies are “hereby ordered” to start looking to locales outside China to produce goods. The declaration sparked fears that Trump might try to use emergency powers to force American companies to relocate operations from China.

However, administration officials clarified the comments on Sunday, saying the president will not be taking such steps. “What he is suggesting to American businesses,” said Lawrence Kudlow, the president’s top economic advisor, is that “you ought to think about moving your operations and your supply chains away from China and secondly, we’d like you to come back home.”

Asked about the president’s comments, a number of industry executives offered off-the-record comments that echoed what Nicholson said on the record – namely, that an order to move operations completely from China is “not grounded in any reality or understanding of the current global supply chain.”

“I fear this is symbolic of what is becoming an increasingly prolonged and aggressive trade war,” Nicholson said. “These types of immediate responses – Trump’s off-the-cuff reactions to China’s moves on Friday – highlight how far away both sides are from reaching a settlement. This could lead to further tariff increases and an even more difficult climate between both sides. Most concerning is the likelihood that China plays out a ‘waiting game’ strategy. It has become very difficult to predict where this is going and how best to manage and respond.”

On Monday, the word from the White House was that Beijing officials had contacted the Trump administration about getting “back to the table” for serious trade talks. That helped bump up stocks early in the day. Nonetheless, as of this writing, there were no major breakthroughs in the trade war to report.

As the conflict continues, many promo distributors say they’re just going to keep soldiering forward and rolling with the punches. “We’re trying to stay focused on client needs and leaving the supply chain challenges to our suppliers,” Memo Kahan, owner of Top 40 distributor PromoShop (asi/300446), told Counselor. “Based on what I’ve heard, everyone is waiting to see what happens next. We are in uncharted territory, and looking forward to putting these conversations behind us soon.”