In the past several years, the US has begun imposing tariffs on products imported from China. With the most recent round taking effect in September 2019, all products made in China are subject to tariffs ranging from 10%-25%.
Proponents of the tariffs claim that these tariffs are effective negotiating tools to force China to reform their trading practices. Critics argue that the tariffs will end up harming US companies and consumers in the form of higher prices. Meanwhile, supporters of the tariffs argue that the impact of the tariffs will be paid for by the Chinese.
I am the owner of an online business that sells electronics products. Virtually all of my products are manufactured in China, imported and then sold through my online ecommerce store. I thought I would share some of my experiences and how the tariffs have and have not affected my business.
My Business Model & Profit Margins
I currently work with 20+ suppliers who are based in China. Each supplier specializes in the particular product category, and there are no suppliers anywhere else in the world that are able to produce these products at the same price point and quality.
My products are made-to-order, meaning that I come up with the specifications and requirements for each of my products. The products are not completely custom, and use existing manufacturing processes and machinery, but the specifications are unique to my company and brand.
My gross profit margins are approximately 75%. This means that on average, for an item that costs me $25 to manufacture in China, I will sell the item for $100. I realize that to the typical consumer this almost sounds like they are getting scammed, but this is fairly typical of most retail businesses. Like all businesses, I also incur additional overhead costs like marketing & advertising costs, warehousing and general office supplies. Whatever is left over is my net profit, which typically ranges from 40-60% of my sales.
My business is by no means representative of the American economy, but I did want to share some of my experiences with the tariffs. Below, I’ll go over some of the claims made, and explain whether or not they have held true for me.
The tariffs will lead to higher prices for consumers: FALSE
To date, I have yet to make any adjustments to what I charge my customers. In short, none of my consumers would have noticed anything change since the tariffs were introduced. The primary reason is that the tariff amounts have been relatively low when considering the economics of my business model.
How can this be? As I noted earlier, all businesses have other costs in addition to the cost of their Chinese-made goods, plus the profit they need to make. So when people talk about the impact of a 25% tariff, this does not mean that the prices that consumers will see will also go up by 25%.
While this will depend on the particular company and their profit margins, in my case, offsetting a 10% tariff requires a 2.5% increase in my sales price, and a 25% tariff requires a 6.25% increase. I recognize that many businesses do operate with much lower margins, but in my case, the price increases I would need to impose on my customers is negligible. As such, I’ve simply chosen to keep my prices the same and absorb the cost, out of my own profits.
To put things into perspective, because my company operates as an LLC, the tax reforms enacted for the 2018 tax year have effectively reduced my income tax burden by 5%. Since the tariff revenues go to the federal government anyway, I simply see the tariffs as another form of income tax that offsets the prior income tax cuts.
The tariffs will be paid for by China: PARTIALLY TRUE
While some of the products I import from China incur a 10% tariff, some of the products are at a much higher 25% tariff rate. For products with a 25% tariff rate, I have had a strong case to ask my Chinese suppliers for pricing discounts.
Since the tariffs were introduced, I have been successful in negotiating lower pricing with the majority of suppliers who ship me products in the 25% tariff category. As is expected, most suppliers are at first reluctant to concede on price, but after discussion, we typically end up sharing the burden of the tariffs down the middle, with their discounts typically ranging from 10%-15%. We do have an agreement in place where the pricing will revert to where they were before, should the tariffs be removed.
I believe my suppliers have been receptive to providing discounts for two reasons. First, Chinese manufacturers build their business models on mass production, which means that they are able to profit only when products are manufactured in high quantities. Therefore, placing large orders with them is a huge motivator, and the expectation of smaller orders is the last thing they want to hear. When I make the argument that the tariffs may require me to impose higher prices on my customers, they immediately understand that this could mean that I place smaller orders with them.
Second, partially as a response to the trade tensions (and perhaps other reasons), the dollar has strengthened by nearly 10% against the RMB since tariffs were first introduced. As do most US-based buyers, I pay my suppliers in USD, after which they will convert this into RMB. When the dollar gets stronger, I can purchase more Chinese goods for every dollar I spend. Therefore, even without the tariffs, in theory, I should have been able to negotiate a ~10% discount simply due to the exchange rate fluctuations.
So, who’s paying for the tariffs? Both the US importer/retailer (me) as well as the Chinese supplier share the tariff impact, but with currency fluctuations, perhaps the US importer/retailer is shouldering more of the burden.
On this topic, I would also note that before agreeing to a price discount, several of my suppliers have suggested some unscrupulous solutions. The most common suggestions include: shipping the products via Vietnam through a third-party freight company, and lowering the declared commercial invoice value such that the 25% is assessed based on a lower value than what I actually pay.
These suggestions have made me uncomfortable and question the integrity of my suppliers, but I also know from experience that this is common practice in China and is not even thought of as fraudulent in their world of business and politics. The unfortunate reality is that an alternative Chinese supplier is equally likely to condone such solutions, and doing business with China simply requires stringent oversight on quality and business practices on the part of the buyer.
The tariffs will bring jobs to American manufacturers: FALSE
Politics aside, manufacturing products in the US would be far preferable to me because it makes the logistics and communication that much easier. With my higher profit margins, I believe I would be able to compete against other products in the marketplace.
The tariffs have been a strong motivator for me to seek US-based suppliers, but unfortunately, I have not been able to find a viable supply chain alternative for a Made in America solution. I believe there are two primary reasons why this would not work for me.
First, the products I sell are complex electronics that are made up of hundreds of sub-components, which are themselves made mostly in China. The factories I work with in China already have dozens of relationships with their suppliers, and already have an established supply chain that works like a well-oiled machine. If I were to find a US-based factory to assemble my products, I would essentially need to reverse engineer the existing supply chain and figure out how to source the individual components. This would be a huge time investment on my part, and would potentially lead to production delays and quality issues.
Second, even if I were able to successfully source the components and have a US-based factory assemble my products, it is very unlikely that I would be able to market my products as “Made in USA” due to the global origins of the individual components. To do so would require me to ensure that each of the dozens of components in each product are also manufactured in the US, and this would require me to go all the way up the supply chain. For a small business like myself, this is simply impractical.
I could perhaps make a “Assembled in USA” claim which is less difficult to implement and verify, but from a marketing perspective, this does not seem like something consumers would be willing to pay a large premium for.
Longer Term Outlook
I’ve found that it is simply impossible for me to shift my supply chain to a US-based factory without the entire ecosystem also migrating to the US. Especially for electronics products, the upstream suppliers that manufacture the components and chips need to first shift their supply chain to America before consumer products can also be made domestically. With so much of the electronics supply chain embedded into complex webs and networks that span dozens of countries, this would be an enormous undertaking.
When launching my business, I decided to only pursue high profit margin products. I was cognizant of the many risks of doing business with overseas partners. In addition to import tariffs, currency fluctuations, shipping costs and delays were all things that I knew were variables that could affect the way I operate my business, and I planned accordingly by having a higher profit margin to fall back on if needed. If a business were to fail due to these tariffs, I would argue that the business was simply unprepared to operate in an environment where risks are an inherent part of doing business.
My business’ role is not simply an importer or reseller, but to deliver real value to customers through focusing on providing products with unique specifications and features that meet the demands of relatively specialized applications. The result is that the value I deliver to customers is far more than just the cost of my goods manufactured in China, and my success in growing my business with a high profit margin attests to that. In other words, even though the products themselves are manufactured in China, these tariffs are a tax on only a small portion of my business.
As a business owner, I would of course prefer that the tariffs are removed, but for the time being, I’ve chosen to accept the tariffs as an additional cost of doing business, and will be able to do so for the foreseeable future.