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Tariff response strategies for the US-China trade war

Easing the impact of geopolitical upheaval on retail and consumer products

Adjusting to the new reality of tariffs

Chatter about US tariffs on China-made goods grew to fever pitch in early 2018, leaving retailers and consumer products companies wondering if the talk was more a bluff than reality. Turns out it wasn’t a bluff. Initial tariffs have already increased dramatically, and more are scheduled to go into effect this year.

The state of affairs as of September 12, 2019 is that the US government has placed USD 250 billion of China-made goods under a 25 percent tariff and has announced an increase to 30 percent to begin on October 15, 2019. The remainder of China-made imports—worth USD 300 billion—partially went under a 15 percent tariff on September 1 with the rest announced to go under the same tariff on December 15. Conjecture abounds as to what happens next.

Astute US retailers and consumer products companies are finding ways to mitigate the impact of tariff hikes. Negotiating with suppliers has shown that China-based manufacturers are willing to bear much of the tariff costs. By executing smart price changes—increasing prices on items less central to their value proposition—US companies are investing in keeping customer prices low. US companies and their suppliers are also accelerating contingency planning should US-China trade become untenable.

How much tariff cost will consumers absorb?

The US economy is doing well, with steady growth, low unemployment, and little consumer price inflation above normal. The lack of inflation is so acute that the US Federal Reserve lowered interest rates this year, a move that tends to inflate the economy. Gross domestic product (GDP) growth is healthy. The US Consumer Price Index (CPI) is low compared to the last 20 years, and could conceivably drop even lower. After an initial decline driven by trade tensions, US consumer confidence rebounded in July 2019.

While the US economy overall appears to be suffering little from the tariffs, some economic indicators are signaling trouble on the horizon.

But suppliers—on average—have been over-estimating the effects of tariffs on their costs by nearly twofold. In extreme cases, some suppliers expect retailers to raise their prices by the same percent as the tariff. But a 25 percent tariff doesn’t translate to a 25 percent consumer price increase, not even close: if a retailer buys from a US supplier that buys and imports from a China-based manufacturer, the 25 percent tariff increases the cost of goods to the supplier, not the retail sale price. The weakening of the Chinese currency, along with subsidy and rebate programs, results in an even lower effect on the consumer price.

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Meet the authors

Steve Laughlin

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, Vice President & General Manager - Global Consumer Industry

Nathan Cheng

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, Associate Partner, Digital Business Strategy, Global Business Services

Brian Love

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, Partner, Digital Strategy, Global

Jane Cheung

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, Consumer Industry Research Lead, IBM Institute for Business Value