Retailers are battening down the hatches, preparing for a tsunami of tariff-related price increases that are threatening their businesses and consumers’ pocketbooks. According to an article in The Wall Street Journal, $250 billion in goods have already been taxed with a 25 percent tariff, $107 billion in goods are set for September 1st tariffs of 10 percent, and additional tariffs on $156 billion in “certain goods”-electronics and clothing, including cell phones, footwear and toys-have now been delayed until December 15th (giving customers a break on holiday shopping and delaying major damage to corporate balance sheets until 2020).
A recent survey, conducted by Shopkick, indicated that American consumers are aware of tariff issues and have plans to react to rising prices. With 30,000 participants, the Shopkick survey found that 60 percent of respondents are aware of impending tariffs, 40 percent have already experienced price increases, and 44 percent say they will cut down on shopping to compensate. Many consumers plan to down-trade their shopping to less expensive stores: for example, switching from Macy’s to Target, from Walmart to Dollar Stores, or from Kroger to Aldi.
These days, it is not enough for retailers to study spreadsheets, closely monitor inventory and keep up with the competition and marketing trends. In order to successfully plan and manage their businesses, they must now be on the daily alert for presidential tweets, signaling the ever-shifting winds of trade agreements. The Trade War between America and China has dominated the news for some time now, with threats of tariffs and retaliatory tariffs, going back and forth, leading to an air of uncertainty for retailers and the economy in general.
Some American retailers and businesses are pulling out of China, others are establishing production centers in other Asian countries, including Vietnam and Indonesia, or increasing manufacturing in Mexico or India. Some businesses are doing a work-around, detouring goods through other Asian ports or through third parties, a practice called transshipment, hoping to avoid Chinese tariffs.
The Federal Reserve says that tariffs already in place are costing the typical American household an additional $831 a year and this figure will dramatically increase if the tariffs now planned through December go into effect. Retailers will be challenged to absorb these tariff-related increases in the costs of imported goods while maintaining affordable prices for their shoppers. Ultimately, U.S. households will feel the brunt of the pain.
China’s Belt and Road Initiative
To understand relations between the United States and China, it is imperative to understand China’s Belt and Road Initiative and its implications, globally, and for America.
In 2013, China’s President Xi Jinping announced an ambitious plan to create an unprecedented infrastructure and investment initiative stretching from east Asia to Europe. It was originally called the Silk Road Economic Belt and the 21st Century Maritime Silk Road. The actual Silk Road can trace its beginning all the way back to the Han dynasty in 206 BCE, but the legendary route only became well known after Marco Polo’s famous travels in around 1300 A.D. Polo forged trade routes from Italy and western Europe, through Central Asia and India, to China, a distance of more than 4,000 miles. Over time, China’s plan came to simply be called the Belt and Road Initiative (BRI). Eventually, it expanded to include other countries around the globe, including Africa and Latin America, giving China an opportunity to expand its economic, geopolitical (and perhaps even military) powers on the world stage.
By 2018, more than 60 countries-accounting for two-thirds of the world’s population-had signed onto this Chinese-centric venture. The plan encompasses building infrastructure-roads, bridges, rail lines, communications networks, energy pipelines, deepwater ports, and the like-as well as business investments and other strategies. A McKinsey & Company study reported that there were more than 1,000 Chinese-owned firms operating in Africa by 2017. And there are an estimated 2,000 Chinese companies operating in Latin America today, which have generated more than 1.8 million jobs. According to the American Enterprise Institute, by 2018, China had spent $400 billion among partner countries, much of it in the form of loans (some of which are described as “debt-traps,” since many smaller countries have been unable to meet payback conditions). Morgan Stanley predicts that China’s investment in BRI could reach $1.2 to $1.3 trillion by 2027.
In his new book, “Belt and Road, A Chinese World Order,” author Bruno Macaes, states that “China sees the project in imperial terms: a way to influence geopolitics and create its own supply chain to compete with those of the West.” He adds that he sees it as “a way for China to create a market to absorb China’s excess economic capacity.”
The Chinese are known for their inscrutable patience. It has been said that while Americans plan for the next fiscal quarter, the Chinese plan for the next hundred years. Perhaps, this is why the ongoing tariff and trade wars with Washington have not been more successful. Given time, China could potentially replace American trade with its own BRI partners, especially developing countries with burgeoning middle classes. At the same time, Chinese exports to Europe have been increasing. And like ancient imperial Rome, China reportedly sees “All roads leading to Beijing.”
In addition to trade and infrastructure development in BRI countries, China has been aggressive in acquiring massive land tracts, especially in Sub-Saharan Africa, South America and even Australia. China has purchased and leased millions of acres and devoted them to agriculture, mining and other endeavors, in many cases, exporting China nationals to operate these locations and sending products back to China. Indeed, China has even purchased significant farmland in America, and the acquisition of U.S. Smithfield Foods, the largest pork producer in the world, in 2013, for $4.72 billion, guarantees a supply of pork to China (China is combating a serious outbreak of Swine Flu). While China has a huge land mass, arable land is scarce and crowded along the southern coasts, and feeding China’s population of close to 1.5 billion people, or 18.4 percent of the world’s population, will only grow more challenging in the future.
Economic programs may become enmeshed in other agendas as well. In 2017, China opened its first military outpost beyond its own borders, in the east African nation of Djibouti, on the Horn of Africa, a key strategic location. Over the past decade or so, China has been creating artificial islands in the South China Sea, in the interests of developing a stronger presence in that area, no doubt including strategic military installations.
Five Other Trade War Effects
While Washington and Beijing debate trade tariffs, and while China deals with a slowdown in its economy at home-the Chinese Bureau of Statistics reported that China’s annual GDP growth declined to 6.2 percent in the second quarter of 2019, the slowest growth since 1992-the Chinese government has made it more difficult for individuals and companies to move funds offshore, and it has openly discouraged investments in the United States. Those cut-backs have had a negative impact on sales of U.S. Treasuries, U.S. real estate, tourism, agricultural products, and even recycling.
1. U.S. Government Debt
In recent decades, China has held more U.S. government debt than any other foreign nation, but now China has begun to reduce its holdings, cutting its stake by $10.4 billion, to a low of $1.12 trillion. With a growing national debt of more than $22 trillion-the deficit grew by 77 percent in the first quarter of 2019 alone-America could be vulnerable should the Chinese decide to start reselling its store of U.S. Treasuries.
2. Real Estate Investments
After America’s Great Recession, an increase in Chinese purchases speeded the recovery for both residential and commercial properties, with China becoming the largest foreign buyer of U.S. real estate. According to CBRE Asia Pacific, “Chinese buyers spent a total of $17 billion USD on commercial real estate in the U.S. between 2010 and 2015, and a whopping $93 billion USD on U.S. homes.” But in 2018, the Chinese reversed this trend, cutting their purchases to $2.63 billion, the lowest level in six years, and in the third quarter alone, they actually sold $1 billion of U.S. real estate. This cut-back was one factor that contributed to a slowdown in U.S. home sales in late 2018.
3. Tourism and Foreign Students
China has advised its citizens against visiting or studying in the United States. Over the past decade, Chinese travel increased at an annual average rate of 23 percent, but this trend dramatically slowed in 2018, especially in terms of travel to the United States. Bank of America Merrill Lynch reported that a potential “worst-case scenario” could mean a downtrend of as much as 50 percent in Chinese travel to the United States-a hit of $18 billion to the U.S. travel industry. According to U.S. customs forms, there were 5.7 percent fewer arrivals by Chinese visitors in 2018, compared to the prior year, and a 12 percent decline in visits to New York City. Macy’s reported that it sales from foreign travelers were down 9 percent in the latest quarter. According to the U.S. Embassy in Beijing, in 2006, there were 10,000 Chinese undergraduates studying in the United States. By 2018, based on U.S. Department of Education data, the number had increased to 363,341 students, the largest portion of foreign students at U.S. universities, contributing $13 billion annually to the American economy. U.S. Immigration and Customs Enforcement (ICE) data reports that Chinese students declined by 2 percent in 2018, the second year of decline, with further reductions expected.
4. A Punch in the Farm Belt’s Stomach
One of the sectors most disrupted by tariffs has been agriculture. U.S. framers send some $140 billion of annual production (produce and meat) abroad, with the majority going to China. With China cutting back its imports of U.S. agricultural products and initiating its own tariffs on a host of food items, oversupply has caused prices to fall in this country. The U.S. Department of Agriculture says that farm incomes fell by around 7 percent in 2018, to the lowest level since 2006, leaving many acres idle and forcing hundreds of smaller farmers out of business. To offset lost income, the administration is providing $16 billion in new subsidies this year, on top of a $10 billion program last year-all courtesy of American taxpayers, who not only have to pay tariffs on a host of imported goods, but also have to foot the bill for farmers’ lost incomes that have resulted from those tariffs.
5. Recyclables Clog U.S. Pipelines
The United States generates more recyclable waste than any other country, with 13 million metric tons going to China annually. But China, has now substantially reduced its import of U.S. trash and imposed tariffs, such as a 25 percent tax on scrap aluminum, as well as new containment rules. Most American recycling companies do not actually recycle; they collect and make bulk bundles of waste to ship to other countries, principally China. The United States currently lacks the facilities needed to handle proper processing of recyclable materials, and procedures are costly compared to shipping waste offshore. As a result, many American cities are having to institute new recycling programs that charge homeowners and businesses monthly fees for recycling. Across the country, these fees could amount to billions of dollars, annually.
Certainly, conducting business with China has not been a level playing field. There is no denying that China gains access to proprietary information from American companies manufacturing there, does not honor intellectual property rights or have the same rules of law, participates in cyber-spying, and perhaps even steals trade secrets and technology. For anyone who has done business in Asia over the past 30 or so years, this is not news-it is the cost [risk] of doing business there. Considering China’s aspirations for the future, it is far from certain that China will follow the same path as western democracy in these regards. And if diplomacy fails outright, there is no guarantee that threats of tariffs will bring about the changes desired. Still, China and the United States have far more to gain from being friends than from being enemies.