What’s the Deal With Tariffs and Promo?

Last updated: 02-01-2020

Read original article here

What’s the Deal With Tariffs and Promo?

The Phase One trade deal between the U.S. and China injects some optimism into the tariff discussion, but doesn’t erase the price pressures felt by the promo products industry.

After months of threats, tweets and negotiations, the United States and China signed a trade deal that marks the first official steps to a resolution in their ongoing trade war. And while the “Phase One” deal (which was signed on Jan. 15) is viewed by promotional products executives as a positive development for the industry, there remain some fundamental challenges that are likely to linger throughout 2020. Here’s a breakdown of where things stand – and where they may be headed.

Illustration of U.S. President Donald Trump and Chinese President Xi Jinping

-- A reduction in tariffs from 15% to 7.5% on $120 billion worth of Chinese imports. “The fact is that tariffs are bad for our industry and a reduction in them is good for us,” said Craig Nadel, president of Top 40 distributor Jack Nadel International (asi/279600).

-- Commitments from China to purchase $200 billion in U.S. imports over the next two years.

-- Measures to prevent Chinese companies and the nation’s government from coercing American firms into divulging technology and trade secrets as a condition of doing business in China.

-- Besides the 7.5% on $120 billion worth of Chinese imports, 25% tariffs remain on more than $250 billion of Chinese imports. The 7.5% tariff applies to categories such as apparel (including T-shirts and jackets) as well as pens, while the 25% tariff hits bags, drinkware, chargers and more.

-- That’s the million-dollar question, and there isn’t a clear answer at this point. President Donald Trump’s administration has said there are no plans to remove or reduce more tariffs before a “Phase Two” deal is reached. Even if a comprehensive new trade agreement is eventually agreed to with China, it’s possible not all tariffs will be lifted, U.S. Treasury Secretary Steven Mnuchin has said.

-- According to analysts and experts, most likely not until after this year’s presidential election. Phase Two talks are likely to center on difficult, controversial issues that include Beijing’s government-backed subsidies to Chinese companies. Trump administration officials have indicated that there’s no timeline for the Phase Two deal to wrap up. “It’s unlikely there will be substantial progress or any type of rollback in tariffs before the elections,” said David Nicholson, president of Top 40 supplier Polyconcept North America (PCNA, asi/78897). “President Trump is balancing two competing interests – maintaining a tough stance with China and ensuring the economy keeps growing. I suspect he views the current position as a reasonable compromise of the two.”

-- It’s possible that prices could eventually be scaled back on a limited number of product categories that saw a reduction in the levy rate from 15% to 7.5%. Still, it’s unclear if that will materialize. What’s more, tariffs remain on a broad swath of imported promo products, and suppliers are continuing to grapple with increased costs. As such, in the short term at least, distributors can probably expect some product price increases. Here’s what leading industry executives had to say on the issue:

-- “I believe we’ll see price reductions likely some time in the second quarter, after suppliers have worked down their inventory and after Chinese New Year,” said Eddie Blau, CEO of Top 40 supplier Innovation Line (asi/62660).

-- Terry McGuire, senior vice president of vendor relations at Top 40 distributor HALO Branded Solutions (asi/356000), said: “The impact of reduced tariffs … should be positive in the lowering of costs for several products. We have tracked pre- and post-tariff costing on most products from our key suppliers. We will be working with them on a timeline to return to pre-tariff costs.”

-- “It’s important to remember that the tariffs on a huge range of categories and products are still in place at the original levels,” said Jonathan Isaacson, CEO of Top 40 supplier Gemline (asi/56070). “This will continue to impact a very large number of industries, including promotional products. Given this, there will likely be very few, if any, price rollbacks for our industry.”

-- “The Phase One deal does very little to mitigate current tariffs,” said Nicholson. “I suspect there will be little impact as a result. The price increases imposed by suppliers will have to remain in place to cover the continuing tariffs. This will continue to impact budgets and the perceived value of our products, neither of which is positive for industry growth.”

-- “We evaluate pricing annually and determine if we will make an increase on Jan. 1,” said Melissa Ralston, chief marketing officer at Top 40 supplier BIC Graphic North America (asi/40480). “This year, we postponed to Feb. 1 to increase prices reflective of the 7.5% tariff rate.”

-- The tariff-driven pricing pressures have accelerated a push by both suppliers and even distributors that source directly abroad to move more production out of China. Expect supply chain diversification to continue regardless of what trade arrangements Beijing and Washington D.C. make. “Other promo companies will slowly continue to do what we’ve been doing,” said Joshua White, general counsel and senior vice president of strategic partnerships at Top 40 distributor BAMKO (asi/131431). “They’ll diversify their supply chains and expand their product sourcing footprint out of China to places like Vietnam, India and Bangladesh.”

-- The deal meant that additional 15% tariffs on approximately $160 billion of Chinese imports (that were supposed to be instituted on Dec. 15) were never actuated. There’s currently no plan to institute those levies. Had those duties gone into effect, the promo industry would likely be looking at even more price hikes.

-- The deal signaled that tensions between the U.S. and China appear to be decreasing. That could create more market certainty. End-buyers could feel less impact from (and less worry over) the trade war, thereby making them more willing and able to invest in ad specialties. “Any injection of optimism into the marketplace has a positive economic impact, and that positivity should be quickly reflected in industry sales,” McGuire said. Nicholson added: “If the economy can stay on track, business investment, which suffered last year, is likely to pick up. That should indirectly benefit our industry.”

-- Normalizing relations between the U.S. and China could ultimately help settle the pricing instability that has affected promo as a result of the trade war. “We have communicated that our expectation is for greater price stability this year given the recent progress in trade talks,” Nicholson said.

-- There could be increased opportunities to sell promo to U.S.-based exporters that are benefitting from China’s commitment to purchase $200 billion in U.S. products and services.

Read the rest of this article here