How the Chinese Tariffs Are Affecting the Retail Market

Earlier this year, the Trump administration announced they would be placing a 25 percent tariff on $200 billion of Chinese imports. The tariffs had originally been placed on at 10 percent, pending a new trade deal between the U.S. and China, but the hikes came after the talks stalled. The tariffs are being used by President Trump as a way to break down long-running trade barriers to U.S. goods in China and stop the theft of intellectual property rights. However, many pro-consumer groups and even U.S. companies warn the tariffs will raise prices on everyday products in the United States. The President has warned that an additional $325 billion worth of Chinese imports could come under tariffs if no deal is made.

Tariffs an Attempt to Put Pressure on the Chinese Government

American businesses operating in China have complained for years about the unequal playing filed in China. U.S. goods are heavily taxed in China, and American companies are usually forced into joint ventures to gain access to Chinese markets. This often results what’s called technology transfers. The U.S. company has to provide their Chinese joint venture partner with technology and training in order to compete. On many occasions, those same partners take the technology and start their own entity in direct competition with the joint venture, without having to pay duties. The current slate of tariffs includes over 5,000 everyday goods that Americans use like shampoo, furniture, luggage, toys, clothing, and others.

For decades, countries had looked at China as an attractive emerging market, so they were willing to make concessions to the Chinese government in order to sell to Chinese consumers. However, as China’s economy has grown, there have been increasing calls from the international community for the government to begin removing trade protections. Efforts at diplomacy has thus far been unsuccessful, thus the reason for the recent tariffs from the U.S. government. President Trump and Chinese President Xi are expected to meet at the upcoming G20 meeting, and there are hopes that there will be dialogue to get both sides back to the negotiating table.

Expected Impact on Domestic Consumers

In the meantime, the tariffs can be expected to affect the U.S. retail market in a number of ways. Essentially, the tariffs are a tax that U.S. businesses must pay in order to buy the products. So, for example, if an American countertop company wants to import granite countertops from China, they will have to pay an extra 25 percent on top of historical prices. There is fear that that extra cost will then be passed down to the retail customers who buy those countertops. However, thus far, the United States hasn’t seen a drastic increase in consumer prices. For the most part, Chinese companies are subsidizing the extra cost in order to keep doing business. The hope is that a little short-term pain will pay off when talks are successful, and tariffs are removed. Additionally, companies are shifting supply chains to countries like Vietnam, and even back to the United States in order to avoid paying tariffs.

China, who is struggling to maintain its current economic growth projections, can be expected to continue aggressively subsidizing its products. This will help slow or prevent the migration of companies away from China in order to keep jobs and manufacturing in the country.

How Long Can Both Sides Stand the Pain?

Tariffs on products like clothing and countertops can continue in their current state for only so long. The low-end consumer good sector that China has seen so much success in operates on very small profit margins. Small adjustments like changes in tax rates or duties can push a lot of companies out of business. Pressure from U.S. tariffs are pushing up against rise domestic wages in China, so businesses there are certainly feeling the pain. If the companies can no longer afford to subsidize the cost of tariffs, then eventually they will have to pass price increases on to consumers. That means Americans will be spending more on products they use every day.

The aim of the Chinese government, perhaps, is rising prices will turn U.S. public opinion against the Trump administration, forcing them to back off the tariff strategy. On the other hand, the United States government feels that because American consumers buy American goods made in China, the U.S. companies will be able to shift supply chains outside of China. This will avoid any price increases on the American retail customer. Indeed, there is concern on the Chinese side that without significant Chinese brand loyalty in the U.S., American customers won’t care if their products are made in China or some other country. The real indication of how well the tariff strategy is working is whether normal Americans start to feel the pain in their budgets.

Contributed by Emmy Noel, writer on various topics  interests in business, retail and design. Emmy graduated from Ramapo College in 2016.