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June 03, 2019

Tariffs On Mexican Imports, India Trade Status Change Cause Concern For Promo

By  Christopher Ruvo

President Donald Trump’s threat to impose tariffs on Mexican imports and his decision to revoke preferred trade partner status for India and Turkey are the chief executive’s latest trade policy decisions to trigger concern for the promotional products market, ad specialty executives told Counselor.

Trump aimed to slap a 5% tariff on all imported Mexican goods by June 10, an action that the president has postponed “indefinitely” as of Friday night. He intended the tariffs to compel Mexico to do more to handle the “illegal migration crisis.” While Mexico has agreed to take steps to better secure its border with the U.S., Trump’s unpredictably means the tariffs are not completely off the table.

Citing alleged unfair trade practices from India and economic strength in Turkey, Trump also intends to terminate those nations’ status as beneficiary developing countries under the Generalized System of Preferences (GSP) program – a move that would subject goods from India and Turkey to higher duties. GSP lowers American duties on exports from 121 developing countries. India benefitted most from the program in 2017, when its exemptions on goods were worth $5.6 billion.

As it stands, industry executives said any future tariffs on Mexican products are not likely to have anywhere near the direct impact on promo that Trump’s tariffs on $250 billion of Chinese imports have had. The vast majority of the promotional products distributors sell in the U.S. are produced in China.

“I think the impact of the Mexico tariffs will be limited – and certainly far less than the situation with the China tariffs,” said David Nicholson, president of Top 40 supplier Polyconcept North America (PCNA). “I don’t believe the industry is heavily reliant on Mexico for product manufacturing. Still, there are several suppliers who utilize Mexico for decoration via cross-border programs. For these suppliers, the tariffs will potentially impact their cross-border costs.”

While the direct impact of tariffs on Mexico might be limited to such promo firms, there’s potential for the levies to drive price increases in the U.S., putting a drag on the American economy. That ultimately could trickle down to promo, making organizations less willing to invest in branded merchandise as budgets tighten, some ad specialty executives opined.

“We understand the political nature and desired outcomes of the president on several trade and other political issues, but it’s unfortunate that tariffs are the weapons of choice, especially as they tax U.S. businesses and ultimately the end users,” said Paul Lage, president of Top 40 supplier IMAGEN Brands. “Whatever game that is being played could be detrimental to our industry and our economy from a business perspective.”

Meanwhile, some worried the revoked GSP status for India and Turkey could potentially lead to price increases on promo items produced there. For instance, a growing number of industry suppliers have turned to India for manufacture of apparel and other items in recent years.

“This could have an impact on textiles, including canvas bags, jute, towels and apparel, which as a whole are pretty large categories in our industry,” said Larry Cohen, president of Top 40 distributor Axis Promotions (asi/ 128263). “Consequently, we are likely to see higher prices on these items for new orders coming into the United States.”

Some in promo also noted that India and Turkey are among the largest cotton-exporting nations in the world – ranking third and sixth overall in exports. Those same ad specialty leaders worry the revocation of GSP status could drive up cotton prices in a way that, ultimately, leads to higher prices on cotton products used by the promo industry.

Others shared a view articulated by Cohen – namely, that Trump’s willingness to swiftly impose tariffs and change-up trade relationships is making it increasingly difficult to source internationally. That’s especially frustrating, they say, as more industry firms look to diversify supply chains from China to new countries. “The swiftness of these tariffs doesn’t allow us to proactively prepare for the changes to our business,” said Lage.

Added Cohen: “One of the biggest impacts is the uncertainty. We know that there are manufacturers who are looking to relocate out of China. Without some certainty, they do not know where to move, which itself takes a lot of time. For our suppliers, they need to look for other places to source items, but can’t do so with any degree of confidence while there is so much uncertainty.”

A significant factor in the impetus to move at least some supply chain out of China stems from Trump’s decision to impose tariffs on a total of $250 billion in Chinese imports. Implemented within the last year, the tariffs have propelled price increases, supply chain disruption, destabilized annual pricing and other issues for the ad specialty sector, though industry sales have continued to grow quarterly. More price increases are likely ahead following Trump’s decision last month to hike tariffs on $200 billion in Chinese imports from 10% to 25%. Potential tariffs on an additional $300 billion in Chinese imports could affect virtually every promo product imported from China.

Despite such impacts, some promo executives say they see a positive endgame to the president’s strategy, wherein the U.S. will emerge in a stronger trade position – a situation that would, if realized, benefit the American economy and so to the domestic promo industry.

“Industries like ours, that are nearly all-in on China sourcing, will feel some pain along the way…but the U.S. will be better for the future,” said Gregg Emmer, vice president and chief marketing officer at Top 40 distributor Kaeser & Blair (asi/238600).