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Chinese made jackets are displayed for sale at a Manhattan department store on May 07, 2019 in New York City.
Spencer Platt | Getty Images News | Getty Images
American retailers are working hard to leverage this Memorial Day weekend to boost sales. Heavyweights like Amazon, Target, Macy’s, and Home Depot all have big promotional plans to accomplish this.
But after all the holiday specials fade, U.S. consumers could be in for a surprise: higher prices.
On May 10th, the White House announced that it was raising the tariff rates on a range of Chinese imports from 10% to 25%. The policy exempted those cargo ships already on their way to the U.S., but the higher rates would apply to any goods that departed following the announcement.
The freighters that set sail after the 10th are nearing America’s shores, with many set to arrive next week. According to the Office of the U.S. Trade Representative, nearly 6,000 categories of Chinese goods that come into the U.S. will now face higher duties. Worth about $200 billion in total, they encompass a diverse group of items ranging from televisions to handbags, high tech to high fashion.
Retailers like Walmart and Macy’s already have warned that these tariffs – and others that may come later this year – may result in higher prices for their customers. The degree to which this occurs, however, will depend on how well they are able to respond.
Finding alternative products difficult
Initially, these retailers will work to identify alternative sources for these tariffed goods. For instance, Target sells a Wilson youth baseball glove that is made in China that will be subject to the new 25 percent levy, but there are other comparable gloves made by Wilson and Rawlings that come from the Philippines and Vietnam. Target may simply swap out that particular mitt for a non-tariffed one.
President Donald Trump meets business leaders at the Great Hall of the People in Beijing, China, in November, 2017.
Jonathan Ernst | Reuters
Unfortunately, finding alternative, non-Chinese suppliers for some products will be much more difficult. For instance, about 90 percent of the Christmas lights imported into the U.S. come from China and are subject to the new 25 percent import tax. There are no American manufacturers left. U.S. retailers that depend on selling these lights will have to try to cut costs to cover the higher duties to the extent that they can. They will also attempt to push the cost increase up the supply chain to the Chinese manufacturers, who will in turn attempt to cut their own costs. The degree to which this can happen will, of course, depend on the margins they are working with. At the very least, they will need to cover their costs.
The extent to which U.S. customers will feel these tariffs at the cash register will therefore depend on the product. For low-margin products where China dominates, the increases likely will be higher than those products with easy substitutes or alternate supply chains.
Grab a deal
As this process unfolds over the coming weeks, retailers and consumers should be aware that they could face even greater difficulties later this year. In order to force Chinese negotiators back to the table, the administration is considering implementing new tariffs on an additional $300 billion worth of Chinese imports. These imports are overwhelmingly consumer goods that, if tariffed, would make the current challenges we’ve outlined much more daunting.
Clearly American businesses understand and need the issues with China to be resolved. They want China to respect intellectual property rights and to follow WTO rules. They want free and fair trade. But as time goes on, the question is whether the pain is worth it. And so the drama continues.
As the next chapter of the trade dispute unfolds, the American consumer will begin to feel the impact for the first time. Hopefully, U.S. and Chinese negotiators will strike a deal in the months ahead that avoids further tariff escalation.
However, between honoring our veterans and grilling this weekend, it might be worth slipping out to the store to grab a deal or two.
Steve Odland is president and CEO of The Conference Board and former CEO of Office Depot and AutoZone; and Erik Lundh is a senior economist at The Conference Board. Mr. Odland is also a CNBC contributor.