Management & Finance

How the Trade War Affects Ecommerce and the U.S. Economy

The tariffs to date mostly affect merchants that sell goods made with imported steel or aluminum, as the manufacture of those items will likely become more expensive. Indirectly the tariffs affect all merchants as consumers' disposable incomes will decrease.

The tariffs to date mostly affect merchants that sell goods made with imported steel or aluminum, as the manufacture of those items will likely become more expensive. Indirectly the tariffs affect all merchants as consumers’ disposable incomes will decrease.

On July 6 the United States placed tariffs — ranging from 10 percent on imported aluminum to 25 percent on steel — on trading partners around the world. The European Union, Canada, China, and Mexico have all implemented retaliatory tariffs on American goods. These tariffs concentrate on agricultural and food and beverage products because the U.S. does not export many manufactured goods except for vehicles.

European Union

The European Union has placed 25-percent tariffs on $3.4 billion worth of American goods including Harley-Davidson motorcycles. In response, the company announced it would move the manufacturing of products going to E.U. countries to a plant outside of the U.S. Other products that the E.U. targeted are denim, orange juice, tobacco, whiskey, and peanut butter.

Many of the E.U. tariffs are for food and beverage items that Europeans would generally not purchase online from the U.S. sellers. Thus the E.U. tariffs will likely have a limited impact on U.S. ecommerce vendors who sell to E.U. countries.

On July 6 the United States placed tariffs … on trading partners around the world. The European Union, Canada, China, and Mexico have all implemented retaliatory tariffs on American goods.

Canada

The Canadian government has imposed tariffs on roughly US$12.5 billion of American exports. More than 40 U.S. steel products are taxed at 25 percent. A tax of 10 percent has been levied on approximately 80 other American items, including maple syrup, coffee beans, and jam. These tariffs will have a limited direct effect on ecommerce sales from U.S. merchants to Canadian consumers; mainly merchants that sell food are affected.

President Trump is considering imposing tariffs on completed vehicles and auto parts imported from Canada. Automotive trade between Canada and the U.S. is worth US$140 billion per year. The industry is highly integrated, with parts made in one country frequently assembled into vehicles in the other. Canada has said it will respond in-kind if such tariffs are applied. This will not directly affect most ecommerce sales.

Mexico

Mexico has placed 20-percent tariffs on almost $3 billion worth of U.S. products in retaliation for increased U.S. tariffs on Mexican steel. The Mexican government started the action on June 5 by eliminating preferential tariffs established under NAFTA on some products, including American pork, potatoes, and whiskey. Mexico buys 25 percent of American pork exports.

Other U.S. agricultural products — including apples, cranberries, and cheeses — have been added to the list. Mexico is also targeting some American steel products. The majority of products on the list will face tariffs between 15 and 25 percent. These tariffs will not substantially affect ecommerce sales from U.S. merchants to Mexico, as the tariffed products are not usually purchased online.

China

Thus far the U.S. has placed tariffs on $34 billion worth of Chinese exports. Most of this is in the B2B market — for industrial components that U.S. companies assemble into finished products in this country. President Trump is threatening to impose tariffs on another $200 billion in Chinese exports and has expressed his willingness to tax all of the $505 billion in goods that Chinese companies sell to the United States (as of 2017). This would go well beyond the industrial supply chain and extend to automobiles and finished consumer goods.

In response, China has placed 25 percent tariffs on agricultural goods, notably pork and soybeans. China buys about 60 percent of U.S. soybean exports or about $12.4 billion annually. China is now buying soybeans from Brazil.

If the U.S. follows through on taxing all Chinese imports, there will be a substantial negative impact on cross-border ecommerce because Americans purchase a substantial amount of finished consumer goods online that are made in China. This includes apparel and consumer electronics. Goods produced in China will become more expensive for American consumers because it is unlikely that merchants will absorb the significant increase in costs.

Additionally, Chinese ecommerce companies like Alibaba and JD.com that are beginning to attract American consumers (on the companies’ English language sites) will also be negatively affected by tariffs.

American ecommerce merchants who sell online in China will be much less competitive if U.S. goods become subject to potential retaliatory Chinese tariffs. Merchants that sell luxury goods may have an easier time because those goods do not typically include Chinese raw materials. In 2017, the United States exported $130 billion worth of goods to China, a significant figure but about one-quarter of Chinese exports to the United States.

China has more bargaining chips than other countries involved in the trade war. It holds $1 trillion worth of U.S. Treasury bonds. If it stops buying new bonds or sells off its holdings, it would trigger an increase in yields, putting pressure on the U.S. government’s debt load. The Chinese government could also make it harder for U.S. companies to operate in China by imposing stricter regulations.

The most likely scenario — and one that China has likely started to implement — is devaluing its currency, the yuan. A decrease of 8 percent would almost cancel out the tariff on Chinese goods as prices for those goods would be less. If China devalues the yuan, there are more yuan per dollar, and Chinese exports to the U.S. become less expensive. But it also increases the cost of imports from the U.S. to China. Because China exports so much more to the U.S. than it imports, it might be willing to do this.

China has more bargaining chips than other countries involved in the trade war. It holds $1 trillion worth of U.S. Treasury bonds.

Disrupting the Supply Chain

“Made in America” can mean manufactured in the U.S. with American components. But it can also mean assembled in America with a percentage of parts or raw materials made in other countries. These components are subject to tariffs, and because fewer goods are manufactured domestically than 30 years ago, there are sometimes no alternatives to imported materials. The U.S. requires a product to be “substantially transformed” in the United States to be identified as made in America. Assembly meets that requirement.

American electronics makers are especially vulnerable to supply chain turmoil. Rare earth minerals and alloys are used in many products that American companies manufacture here or overseas. Computer memory, DVDs, rechargeable batteries, cell phones, catalytic converters, magnets, and fluorescent lighting all require these minerals.

Almost all American manufacturers of such products buy the minerals from China, which furnishes about 80 percent of the world’s supply. China could cut off the supply to U.S. manufacturers in response to the tariffs. While Canada also mines rare earth minerals, it is much more costly to do so there, and Canada might use the minerals as a bargaining chip in trade relations.

President Trump’s stated reason for imposing tariffs is to make American goods more competitive. However, if other countries retaliate by implementing tariffs on U.S. exports, that is not going to happen. Globally, all consumers will pay more for all kinds of goods.

Whirlpool

Consider this example. China and South Korea are major exporters of washing machines. When President Trump announced a minimum 20 percent tariff on imported washing machines earlier this year, Marc Bitzer, C.E.O. of American brand Whirlpool, stated, “This is, without any doubt, a positive catalyst for Whirlpool.”

However, when the U.S. also imposed tariffs on imported raw materials — steel and aluminum — prices for those materials skyrocketed. Whirlpool uses both steel and aluminum.  Thus tariffs on those materials have raised costs for Whirlpool by $350 million and decreased its profit margins. The price for steel produced in the United States is 60 percent higher than for steel produced in the rest of the world. Buying steel from U.S. suppliers would eliminate any of Whirlpool’s remaining profits. Whirlpool slashed its profit outlook for 2018 because of a “very challenging cost environment.” Its stock price has dropped because the company has missed Wall Street expectations.

Whirlpool and its Asian rivals LG and Samsung have increased prices on washing machines since the tariffs went into effect. Washing machine prices in the United States in June increased by 20 percent over 2017, according to the U.S. Labor Department.

Conclusions

  • The tariffs to date increase the cost of raw materials and in some cases disrupt the supply chain. China is the only source of some goods. A shortage of raw materials will likely result in the United States.
  • Increases in costs will be passed on to consumers. In the U.S., this means higher prices for locally assembled goods as a result of tariffs on B2B raw materials and components, as well as tariffs on finished consumer goods. In China, Mexico, Canada and all the members of the E.U., food and beverage prices will increase.
  • Most American merchants that sell durable goods (not for immediate consumption) will be unaffected unless they are buying and selling goods made with raw materials and components, such as steel, that have been slapped with tariffs. Online merchants who sell goods made with steel or aluminum will have to raise their prices or suffer reduced profit if they maintain current pricing.
  • Any escalation in the tariff war that results in more goods being taxed will raise overall consumer prices, and thus dampen both ecommerce and brick-and-mortar sales.
Marcia Kaplan

Marcia Kaplan

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