The Escalating Trade War: What’s At Stake
Like most U.S. businesses, promotional products companies are wrestling with how to respond to and position themselves during the escalating rounds of tariffs on Chinese imports. These tariffs are a growing concern, as successive rounds will levy increasing rates and encompass more product categories relevant to industry companies.
Earlier this year PPAI joined with the National Retail Federation and 64 other organizations representing U.S. retailers, manufacturers, farmers, agribusinesses, technology companies and other industries to submit comments to U.S. Trade Representative (USTR) Robert Lighthizer on the administration’s proposed tariffs on Chinese imports. The correspondence expressed concern that tariffs are the wrong approach and will harm U.S. companies, workers and consumers.
In August the USTR announced a third round of goods targeted for tariffs under the Section 301 investigation which was scheduled to take effect August 23 and levies a 25 percent tariff on approximately $16 billion in imports. A number of product categories sold in the promotional products industry were added to this list, including handbags, luggage, headgear and LEDs, as well as components such as machinery parts and a wide variety of fabrics. China’s Ministry of Commerce responded, announcing tariffs on approximately $16 billion worth of imported goods from the U.S., which was also scheduled to go into effect August 23. Lighthizer’s office heard public comments on the plan and was scheduled to reach a decision after this issue went to press.
“Twenty-five percent is a meaningful number, and this may not be the end of the game,” says Jonathan Isaacson, president of Lawrence, Massachusetts, supplier Gemline. “China is likely to respond in kind, so it’s likely this is not the last set of increases. Over time, more suppliers and distributors will be affected, especially those involved in imports. A tit-for-tat trade war benefits no one.
“What the companies in this industry need to understand is that this is coming, and it’s largely out of our control,” Isaacson says. “Suppliers cannot just pick up their supply chain and move it to a new country. That process involves a lot of time and complexity, especially if you need to maintain social and product compliance. Also, other countries they may move into don’t have the same infrastructure that China has to support that supply chain.”
Isaacson adds that if the tariffs stay in place for any length of time, it can affect the Chinese factory base and permanently take out capacity in the Chinese market. “If you take it out, it’s unlikely to come back, which will force prices up more,” he says. “The ramifications of the tariffs are significant and potentially long-lasting, even if tariffs are removed after a short time. Three months, that’s maybe something we can live with. If it’s a year, you’ve got permanent structural change.”
He urges distributors to become aware of the tariffs, to stay informed and to have a conversation with customers at an appropriate time, in an appropriate context, that “this is coming down the pike. Also, be aware that if you have a direct import order in the system in an affected category, prices may go up mid-stream. It is happening very quickly and there has been no time to react. And today, as we talk, we don’t know for sure what’s going to happen.
“The tariffs are meant to be meaningful, and they are,” Isaacson says. “If this continues to escalate, other product categories will get swept up over time. Given the impact it’s going to have on the industry, contact your legislators and let them know how this affects you.”
Gene Geiger, MAS+, CEO of Lewiston, Maine, distributor Geiger, says he has been monitoring the trade conflict with growing concern. “As a person who studied economics in school and believes that free trade brings broad benefits, I feel strongly that we lose if trade barriers go up. Indeed, many of those who have studied the Great Depression of the 1930s feel it was made much worse when trade barriers went up.
“The President’s idea that tariffs are good and trade wars are easy to win is totally at odds with what I believe,” Geiger says. “Moreover, given Western countries’ history with the Chinese and their immense sense of pride, we are not going to find them kowtowing to us. They cannot afford to lose face in a conflict with us, and their political system enables them to hold firm for longer than I think we can.”
Geiger sends out a newsletter each Sunday to his sales force, and almost every week for the past few months he has published updates on the trade issue. “I’ve told them to prepare themselves for tariffs to impact the products we sell and to begin to talk with their customers about what will potentially happen. Lately, I’ve told them the chances are better than ever that we will be hit.”
He adds, “Since the tariffs have not hit us yet, and since everyone hopes Trump is blustering and will subsequently find a way to settle things, I have not been setting off alarm bells. Since we just don’t know for sure, my thought is that our salespeople are the best ones to work into conversations what might happen, knowing that everyone is aware that price rises for consumer goods, food, cars, etc. are on the horizon if things are not settled. Prices going up for our products will be no surprise to anyone. This punch has been telegraphed for weeks.”
Bill Mahre, president of Hugo, Minnesota, supplier ADG Promotional Products, says the struggle lies in not having all the information. “Like a lot of things going on, it’s really challenging for any company to know what’s happening day to day because there’s so much fluidity in the situation.
“At this point, it may not have affected existing inventory. For products that are on the water, it’s a question of asking yourself if it’s worthwhile, in the scheme of things, to update your costing structure to reflect the tariffs or are you better served by staying with the status quo,” Mahre says.
“Nobody is going to win a trade war. Consumers will eventually pay higher prices, and there’s lot of turmoil in the short term. People are reacting without clearly understanding the impact on raw materials and their business model.”
Chuck Fandos, CEO of business services company Facilisgroup, says he is concerned about what happens to pricing as the issue goes forward. “Will it change item by item or across the board?” he asks. “The short answer is that nobody knows. We know prices will go up but not in what categories. I wouldn’t be surprised if, with this uncertainty, we saw more suppliers stop publishing year-long pricing, and reverting to the web and updating their prices as things change.
“There are more questions than answers. And one thing that will be really hard for suppliers is that they have a base line built on years of knowing where their competitors are, and the cost and competitive structure of the marketplace,” Fandos says. “As this is brand-new to everyone, they’re going to be making decisions based on pricing information without knowing what their competition or the marketplace will be doing.”
Ira Neaman, founder and president of Avenel, New Jersey, supplier Vantage Apparel, says distributors that sell products across all categories need to be careful with outstanding quotes and protect themselves with a provisional statement that says pricing may be adversely affected by future tariffs.
“And, suppliers need to be aware of what is happening in their individual category if tariffs are likely,” Neaman adds.
David Klatt, CEO of Tampa, Florida-headquartered supplier BIC Graphic North America, foresees a significant impact of the tariffs on the industry as a whole. He says, “We won’t know the impact to our own product assortment until the USTR evaluation is complete, but unfortunately, we do know that BIC Graphic will have to pass on a price increase to our customers as a result of these tariffs. This impact will affect all products, not just promotional items, so consumers purchasing similar products like bags, etc. should see these changes even at the retail level.”
He notes, however, that nearly 50 percent of BIC Graphic’s order volume is produced in the company’s U.S. facilities and those products will not be affected by tariff implications. “This availability will provide options for distributors whose clients are budget-conscious and who may be dealing with increased costs in other areas of their business. Proactively, we already source product from other areas—South Korea, Vietnam, India, etc.—which also provides additional item options that will not be impacted by this tariff implementation.”
With so much uncertainty about how the tariffs will play out, the most concrete, definitive step that many companies can take is to communicate with clients and establish expectations of how tariffs could affect prices going forward.
Tom Goos, MAS, president of distributor Image Source, has found that while his clients are aware of the tariffs, they aren’t clear on what they cover. He says, “The tariff lists are very product specific right now, so at this point the issue is very narrow. But they’re in the news, and we’re not getting a lot of pushback, just concern. I think people understand the political environment and what’s happening there.
“We’re communicating with our clients in advance—letting them know, for example, that if they’re placing a large backpack order there might be a tariff. Alongside educating our clients that this is something that they should expect, we’ve been looking at supply chains outside of China and how that relates with labor, and whether it’s an effective channel in terms of pricing, quality and delivery.”
Goos expects the tariffs to be felt all the way through the chain, from the client up through the suppliers. He adds, “I wasn’t sure they were going take on the momentum they have, and it now seems to be skyrocketing. For me, it’s about educating my sales team on the issue, the questions they need to be asking and what they should let the client know.”
Jeff Lederer, president of Prime Line, part of the alphabroder family, says, “The way we look at that is to be proactive and prepare. We’ve been indicating to customers on recent quotes that it’s a dynamic that we’re all trying to work through. We want to be fair and open, and be partners with our customers in this.
“Regarding how this will impact our general purchasing, it would be on goods in the back half of the year,” Lederer says. In some scenarios, he explains, they might have to raise prices based on the products that come in from China post-tariffs.
“We want to find a way to partner with distributors and be open to challenges on open quotes,” he says. “Distributors are our lifeblood, and service for us is the most important thing. Our key message regarding tariffs is that this is a partnership and that we’re all in this together.”
Memo Kahan, president of Los Angeles, California, distributor PromoShop, Inc., says the tariffs are a good conversation to have with clients as they are real and in the news daily. His company is adding a disclaimer to every overseas quote that reads: “The above quotation is based on current U.S. duties and global trade relations and is subject to change due to new governmental tariffs. If such tariffs take place before your items are imported into the United States, the corresponding amount will be added to your invoice.”
New York City-based Axis Promotions has taken a proactive step to notify all of its clients with recent orders and quotes that may be affected. The distributor’s new quotes also have clauses set in place to notify clients ahead of time. Shamini Peter, COO at Axis Promotions, says, “Clients have been extremely understanding and recognize this is something that is affecting everyone. Some clients have also been proactive in asking. For future orders with Axis, there is potential for an increase in raw material prices as well as labor costs to cover these unforeseen changes. Our vendors have made us aware of the potential increase in prices and are working with Axis to ensure everything is done transparently.”
She adds, “Axis prides itself on having an innovative and adaptive supply chain. We are focused on expanding our partnerships and building stronger relationships in India, Vietnam, Malaysia, the Philippines, Honduras and many others. This will be our priority and initiative for the upcoming year to battle against potential tariff escalation, and as an Association, I think it would be of tremendous benefit for PPAI to open up any possible relationships for its members outside the affected areas.”
Stan Dohan, MAS, president of Blanchester, Ohio, supplier The Allen Company, says he doesn’t see the tariffs as anything more than temporary. “We’ve worked with our factories to best navigate any turbulence, and thus far there’s really been none. We’ve also spoken with our longtime import partners.”
Dohan adds, “We have almost never exercised ‘prices subject to change,’ and while we will attempt to hold, this is so well publicized that I believe our distributor partners will be understanding if we see some levels tick up.”
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James Khattak is news editor of PPB.