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May 13, 2019

U.S. Raises Tariffs to 25%

China retaliates by raising tariffs on $60 billion worth of U.S. goods.

By  John Corrigan

The trade war between the United States and China has escalated yet again, as President Donald Trump officially raised tariffs on $200 billion worth of Chinese imports. U.S. customs officers started imposing the 25% tariffs – an increase from 10% – at 12:01 a.m. ET on Friday. Thousands of Chinese products have been targeted, such as seafood, meat, luggage and electronics, raising prices for American companies and their customers across a large portion of sectors, The New York Times reported.

On Monday, Beijing retaliated by vowing to raise tariffs on roughly $60 billion worth of U.S. goods. Starting June 1, China will raise tariffs to as high as 25% on U.S. imports it currently taxes at 5% to 10%, The Wall Street Journal reported. Roughly 5,000 products will be targeted at 25%, such as frozen fruits and vegetables, animal products and seasonings. Products to be charged at 20% include vodka, baking condiments and chemicals.

The ramifications of this sudden tariff hike are potentially devastating for the promotional products industry, which imports the vast majority of items sold stateside from China. “An additional tariff increase and expansion of the impacted item list will affect all products, not just promotional items, so consumers purchasing similar products like bags, etc. will most likely see these changes even at the retail level,” says Carrie Lewis, marketing/communication manager at Top 40 supplier Bic Graphic (asi/40480).

Distributors need to work with their supplier partners immediately to understand when and how the tariffs will affect pricing, says David Capano, senior vice president of sales at Top 40 distributor Summit Group (asi/339116). “The concern is that this doesn’t tamp down overall client demand,” he says. “It necessitates us to be very proactive with clients in regards to upcoming projects, budgets and alternative products and sourcing.”

The tariff hike comes right in the middle of the latest round of trade negotiations. A Chinese delegation led by the country's top trade negotiator, Vice Premier Liu He, arrived in Washington on Thursday. Hours before the talks began, Trump said that he received a “beautiful letter” from his Chinese counterpart, Xi Jinping, urging the two countries to “work together” to resolve their dispute, CNN reported.

Apparently, that was not enough to halt the tariff hike that Trump had threatened earlier this week. Trump also mentioned that another $325 billion of Chinese imports will be taxed at 25% in the near future. China’s foreign ministry has responded by vowing that “if the U.S. tariff measures are implemented, China will have to take necessary countermeasures,” Newsday reported. Since the trade war began last July, China has placed tariffs on nearly all of America’s exports, including agriculture products.

Several industry leaders weighed in earlier this week on how the tariff hike would impact business. “While a number of suppliers were able to absorb the initial tariff increase, I highly doubt any of them will be able to absorb these costs without passing much of it on to the distributor,” said Larry Cohen, president of Top 40 distributor Axis Promotions (asi/128263).

A few industry leaders had hoped Trump was threatening to raise tariffs as simply a negotiating tactic. Now that it has become reality, contingency plans have to be made. “It’s obviously a severe setback for the promotional products industry, creating an intense amount of chaos and uncertainty,” said Eddie Blau, CEO of Top 40 supplier Innovation Line (asi/62660).

The uncertainty includes questions over whether or not any tariffs will remain in place after a deal is struck – and, if so, for how long. Naturally, suppliers and distributors that source/buy most of their products from China want to see the tariffs abolished. Even though the tariffs are on Chinese products, it’s the importing American companies – and, often, ultimately consumers and B2B end-buyers – that pay the price to cover at least some of the levy burden.

“If we have to increase pricing to the end consumer, we will start to push them into other avenues of spending for their marketing dollar,” said Bob Herzog, CEO of Top 40 distributor Corporate Imaging Concepts (asi/168962).

BIC Graphic has been preparing for the worst case scenario by supplying products made outside of China, providing options for distributors whose clients are budget-conscious and who may have to deal with increased costs in other areas of their business. “BIC Graphic produces nearly 50% of our order volume in our U.S. facilities and has proactively sourced items from other areas like South Korea, Vietnam, India, etc. to provide options that won’t be impacted by tariff increases,” Lewis says.

Suppliers have already had to adjust their annual catalogs due to the tariffs. Some have printed pricing with disclaimers like “High Tariff Risk Product - Check our website for the most current pricing.” Others have eliminated pricing all together, presented branding lookbooks instead.

“This will be the first step in moving away from the annual pricing commitment and toward a variable pricing model,” says Howard Cubberly, general manager at Goldstar (asi/73295). Goldstar is the supplier arm of National Pen, both of which are owned by Top 40 distributor Cimpress (asi/162149).

“While it will present difficulty in programs, company stores and repeat business, there really will be no choice. In addition, suppliers face other supply chain challenges in rising costs that we will have to pass along at some point. Companies are already sourcing from other countries instead of China and bringing more ‘Made in USA’ items to market, but this type of adjustment is a large undertaking and takes time. Embracing variable pricing through technology will make initiatives like PromoStandards even more important where distributors and suppliers can share real time pricing changes,” Cubberly says.

In all, the Trump administration has imposed tariffs on $250 billion in Chinese goods. China has responded with counter tariffs on at least $60 billion in U.S. imports. Trump initially aimed to escalate the 10% levy on $200 billion in China-made products to 25% on January 1, but he said late last year that progress in trade talks made it reasonable to extend the rate acceleration date to March. In February, Trump extended that deadline.