Dover is 6,923 miles from Beijing, but the impact of U.S. tariffs on Chinese goods is rippling all the way to Delaware and throughout America.
Manufacturers are debating whether to move their China operations to cheaper locations. With the rising cost of products, retailers’ margins are getting squeezed even tighter. And consumers will be asked to pay more for goods from Nikes sneakers to wedding gowns.
Tariffs are taxes designed to restrict imports by increasing the price of goods and services purchased from another country, making imported goods less attractive to domestic consumers.
In theory, tariffs benefit the United States because the government receives tax money from imports. Businesses that produce goods on U.S. soil face less competition because the prices of imports are inflated.
But analysts say trade wars erode confidence and increase concerns in the marketplace. With a new 10-percent tariff that targets cellphones and televisions scheduled to go into effect on Sept. 1, Mark Zandi, chief economist at West Chester-based Moody’s Analytics predicts a 50-percent chance of a recession within the next 12 months. Previously, he saw the odds at 35 percent.
So what’s next?
Analysts also are batting back expectations for retailers that rely heavily on Chinese-made goods, including Best Buy, Target, JCPenney, Macy’s, Nordstrom and Kohl’s. Deutsche Bank downgraded Dollar Tree, predicting tariffs will diminish the deep discounter’s bottom line.
Nike, the biggest shoe maker in the world, makes 23 percent of its footwear in China. However, analysts don’t expect sales to be impacted because consumers have demonstrated a willingness to pay more for its label.
Apple, Dell, Nintendo and other companies most likely to be impacted by the next round of tariffs are shopping for manufacturing space elsewhere. But those jobs are not going to Americans. The tech giants are looking in India, Malaysia and Vietnam. Leaders in other industries are trying to figure out what is coming next.
Tricia Fitzharris, president of Food Safety Solutions, a Hockessin-based provider of food and sanitation services, says the tariff strategy lacks focus.
“The uncertainty that is being created by these tariffs and escalating wars is the greatest concern,” she says. “Economies function better when they understand the rules and a common end-game.”
Todd M. Stonesifer, a realtor from Kent County, supports the tariffs. He believes the taxes are a reasonable price to pay to keep America strong.
“I believe it is a negotiation tactic and it is necessary for the U.S. to stand up to trade partners,” he says.
Mitigating the damages
The 25-percent punitive tariff that targets components used in manufacturing means it costs more for U.S. businesses to produce products in China. Companies have responded by reducing their profit margins, cutting whatever costs they can, and raising prices to the retailers and other businesses that buy the products.
So far, the tariffs are not prompting many companies to pull up stakes and move, says Sheng Lu, a University of Delaware professor who has studied the impact of tariffs on clothing imported to the U.S. from China.
That’s because Chinese manufacturers have matured into highly skilled and reliable businesses. Shifting to other sources for low-end goods is a viable option. But it’s more difficult to find alternative sources for more complicated products.
Breaking up with China will be hard for makers of wedding apparel. Chinese manufacturers of bridal gowns have installed air conditioning to avoid perspiration stains from the hands of seamstresses and tailors on delicate fabrics, an amenity not found in most Asian factories. They have trained armies of embroiderers and beaders.
“U.S. retailers may quickly move sourcing orders from China to other suppliers for basic fashion items, such as tops, bottoms, and underwear,” writes Lu in his paper How the Tariff War is Shifting ‘Made in China’ Sourcing Strategy for U.S. Apparel Dealers. “However, there seems to be many fewer alternative sourcing destinations for more sophisticated product categories, such as accessories and outerwear.”
While there already has been some shifting in sourcing over the years, there has not been a mass exodus from China. Lu notes that in 2007, 32 percent of shoes exported from China were shipped to the U.S. A decade later, in 2017, 25 percent of shoes made in China arrived in the U.S. as China increased its trade with other Asian countries and the European Union.
A taxing history
The Tariff Act of 1789 was the first major piece of legislation passed after the ratification of the Constitution and was signed into law by George Washington. Under the act, foreign ships were assessed a 50-cent duty on every ton of goods. American ships paid 6 cents a ton.
Written by James Madison, the act countered high duties imposed by Britain on goods imported from the United States. But it didn’t dampen commerce, with Britain continuing as America’s primary trading partner. In America’s early years, before the advent of personal income taxes, tariffs provided as much as 95 percent of the nation’s revenues.
America’s last significant tariff initiative was the Smoot-Hawley Act signed by President Hoover in 1930 as the nation was sliding into the Great Depression. Designed to protect U.S. farmers, the act alienated European trading partners and imports and exports declined by two-thirds.
Smoot-Hawley didn’t last long. In 1934, Franklin D. Roosevelt signed the Reciprocal Trade Agreements Act, which batted back tariffs and promoted trade with foreign countries.
As the current tariffs imposed by President Trump continue, analysts expect increased pushback from U.S. businesses. According to a survey of more than 150 global businesses by QIMA, a Hong Kong-based supply chain audit and inspection service, more than three quarters of American respondents report being impacted by the U.S.-China tariffs, citing rising costs as one of their most serious problems.
UD’s Lu says manufacturing in China is still more cost effective than in other countries that are experiencing growing pains in an increasingly competitive and complex marketplace.
“The retail price of Made in China apparel was still lower than products sourced from other regions of the world,” he writes. “Notably, apparel Made in Vietnam is becoming more expensive in the U.S. retail market, too — an indication that as more production is moving from China to Vietnam, apparel producers and exporters in Vietnam are facing growing cost pressures.”