More Tariffs Imposed on Chinese Imports; China, Industry React

152

Washington, D.C., and Beijing, China—President Trump has announced that he will impose a 10% tariff on the remaining $300 billion worth of untaxed imports from China, according to The Washington Post. These new tariffs take effect September 1. News of the new tariffs comes just a day after negotiators wrapped up talks in Shanghai, agreeing to meet again in September to keep working on a deal.

How we got here: Tariffs Have Been Implemented. What Next?
U.S. Raises China Tariffs, Threatens to Impose More
China Raises Tariffs on All American Goods

The Post reported that China’s government issued warnings to the Trump administration over the action: The Commerce Ministry said that China “will have to take necessary countermeasures to defend its interests.” In a statement, a Commerce Ministry spokesman said: “The U.S. moves to escalate trade frictions and hike tariffs are out of line with American and Chinese peoples’ interests and the interests of the world, and risk bringing the world economy into recession.”

Update: As of August 6, China reacted by allowing the country’s currency to weaken past the level of 7 renminbi per American dollar, easing the impact of the tariffs. According to the New York Times, China said it would no longer purchase soybeans or other crops from the United States. The Times noted that Xi Jinping, China’s leader, has hinted that China’s economy can take a hit if it means not backing down in the face of American Aggression.

Industry Reactions
Daniel Fabricant, Ph.D., president and CEO of the Natural Products Association (NPA), expressed support for the tariffs, telling WholeFoods: “We’re very supportive of what the White House is doing; the trade balance issue is important. Dietary supplements are a booming industry here in the U.S. and so if we are exporting to China, and we’re getting hit with a 25% tariff exporting and they’re sending raw ingredients into the country at 2%, that can’t work. We’re only going to create a deficit that way. There’s got to be a rebalancing, which long-term is good.”

And in the short term? Dr. Fabricant noted: “NPA fought for an exemption process on list 3 and we just got one, so we’re waiting for the details on that. We’ll do the same for list 4. If it’s impossible to get supply from anywhere other than China, that economic cost if going to hurt and so it could certainly hit prices to shelf. At 10% it is probably going to be absorbed more so readily than 25% would be. The bigger issue is if you can’t get supply anywhere else, 10% becomes very critical to your business. So if there’s an exemption that needs to be filed and if there’s a process for the exemption, we’re going to continue to work on that like we did for list 3 and we’ll go from there.”

Related: NPA: Opening of Exclusion Process for Tariffs on Dietary Ingredients a Major Victory

Scott Steinford, Managing Partner, Trust Transparency Center, also spoke to WholeFoods about both the possible long- and short-term impacts. “This will be an across-the-board consumer impact in regard to not only dietary supplements, but all products. It is clear that imports from China have been a major part of our economy, so that will be affected.”

Related: Why the Industry Depends on China

In terms of possible big-picture, Steinford added, “I think it’s important to look at an emerging topic that’s coming from the Vietnamese this time. [US Secretary of State Mike] Pompeo yesterday talked about the Vietnamese situation where their trade impact and deficit is also becoming an alarming issue. The topic to watch out for is whether this going to become a domino effect or a whack-a-mole strategy as new economy and ours is not keeping up with the efficiencies or advantages of some of the others.”

Looking ahead to the future, Steinford questioned, “Is this a good long-term strategy? Wait and see. But in the meantime, we’ll just have to deal with what we have to deal with. In conversations I’ve had with ingredient suppliers, they say they’ve decided to absorb some of the costs, but they do understand that they have to pass on some of the costs as well. It’s not as much of an impact at the 10% level, but as it increases to the 25% as has been the case with some products, it becomes more impactful.”

Also speaking to the supply chain, Loren Israelsen, president of the United Natural Products Alliance (UNPA), said in a memo to UNPA members: “Clearly this will affect our raw material sector. We are in communication with our colleagues at the U.S. Embassy and Commercial Service in Beijing and will share any updates we receive from them. In the meantime, we will also be in close contact with others in the industry to evaluate the ripple effects this will have throughout the supply chain and to our end-user consumers.”

Israelsen raised another concern: “As we have noted before, as goods become more expensive, the risks of spiking and adulteration also rise. We will be on the lookout for suspicious goods that are unrealistically inexpensive.”

Advice for natural products retailers

Calm, Compromise, and Communication are key to weathering any storm that might develop as a result of the tariffs, Steinford shared in his Tracking Transparency column in WholeFoods Magazine. His advice (originally July 15, 2019):

  • Calm – It is important to keep the entire direct economic impact of the tariffs in perspective. The contribution of raw materials is typically 55%-65% of production costs. This cost can be higher if branded ingredients are used and lower if non-branded commodity ingredients are utilized. The total contribution of raw materials to the final retail product, on average, only accounts for approximately 10% -15% of the consumer price. The average dietary supplement consumer will pay an estimated $22 more per year for their products. The average CoQ10 consumer will likely pay an additional $20 more annually per year for that ingredient. By itself, the impact might not be sufficient to make a difference to your consumer base, but the price elasticity for consumers is always a concern.
  • Compromise – Many Chinese ingredient manufacturers are understanding the full impact of the tariffs should not be passed on to their customers. Also, many United States manufacturers have maintained above average inventories in case the tariffs affect their products. The end result will likely be all elements of the supply chain, including the retailer and eventually the consumer, will absorb the total impact of any tariff impact. Retailers should plan on some impact from the tariffs and be prepared to accept some margin deterioration and/or consumer reaction.
  • Communication – Communication and education will continue to be the key to success in retail. Communication with your suppliers and proactive discussions surrounding the tariffs impact will provide valuable information that will allow you to anticipate challenges or changes. Additionally, preparing FAQs to address consumer inquiries will be beneficial.

Ending on a positive, Dr. Fabricant told WholeFoods: “I hope the growth of the industry is where people are focused. Part of the challenge of the industry is growing, foreign countries like China want U.S. products, so in some ways it’s indicative of the win. I know some people won’t take it that way, and we get it, but it is a growth industry. That’s something I hope everyone is proud of and is looking for solutions.”

Another takeaway from Dr. Fabricant: “This is why people should be part of trade associations. We’ve been fighting for some of these concerns to be addressed on both sides both the supply chain coming into the U.S. as well as products going out of the U.S. that clearly international consumers want. And so, if that’s not important for companies I don’t know what is. We need to play the short game and the long game.”

LEAVE A REPLY

Please enter your comment!
Please enter your name here