A 45% tariff on all Chinese imports; that’s what Donald Trump promised supporters. Subsequently, U.S. ecommerce entrepreneurs who use Chinese manufacturers may be wondering: Are we about to be thumped by Trump?
What’s the answer? Will the ecommerce sector suffer under Trump’s administration?
(Can we be blunt? Good. Thanks.) Look, if you voted for the Republican candidate, you’re probably thinking, “Everything will be great, including ecommerce markets! Sellers have nothing to worry about!” If you didn’t cast your ballot for the real estate scion, your thoughts probably veer somewhere near, “It’s the end of the world as we know it, especially for ecommerce entrepreneurs!”
The truth, history consistently proves, likely rests between the two extremes. So, in that spirit, let’s chuck partisan rhetoric into the recycling bin and take a few minutes to dispassionately assess whether or not a Trump presidency will have a destabilizing effect on ecommerce businesses.
First things First: What’s A Tariff?
Are tariffs the same as taxes? Technically, a tariff is a type of tax; specifically, a tax on imported goods and services (in rare instances). According to Investopedia: “Tariffs are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers. They are one of several tools available to shape trade policy.”
Tariffs are typically a per unit charge, remitted during international custom inspections, and have three primary purposes:
- Increase the cost of imports, to stimulate domestic demand for the same product;
- Shift currency appreciation values; and
- Create government revenue.
Tariffs are not one-size-fits-all measures and have far-reaching financial effects.
(Housekeeping Note: Since we’re talking about the possible effects of Trump’s presidency on ecommerce businesses, the discussion will focus on issues related to imported goods.)
Second things Second: The Current State of the Ecommerce Scene
According to the U.S. Commerce Department, for the sixth year in a row, the ecommerce sector is skyrocketing. 2015 figures show that online product sales accounted for a third of the country’s retail growth — and that number jumps significantly if fuel and automobile acquisitions (which aren’t readily available to buy online) are struck from the calculation.
Last year, online sales totaled $341.7 billion, a 14.6% increase from the previous year.
In 2015, alone, Fulfillment by Amazon sellers shipped over a billion items to more than 185 countries. As such, traditional big-box retailers, like Wal-Mart, are beefing up their ecommerce offerings to compete with established third-party retail platforms like Amazon and Jet.
Why is the online retail sector growing like bamboo? In a word: globalization. Anybody who is willing to roll up their sleeves, do the research, pick the right product, and exert some elbow grease can build an online retail operation.
Some people may ask, “But how? Doesn’t it cost a fortune to get products manufactured? Isn’t significant startup capital required?”
Not anymore, thanks to websites like Alibaba.com.
Alibaba.com: The Chinese Ecommerce Site Loved By U.S. Sellers
An online marketplace of out China, Alibaba is a popular supply chain stop used by throngs of U.S. ecommerce businesses. Think of Alibaba as an online Costco; users can purchase products, in bulk, for less.
Even more enticing? People with product invention ideas can shop for Chinese manufacturing services on Alibaba. Why use overseas fabricators? Cost. Items commissioned from Asian manufacturers are significantly less expensive than stateside alternatives.
The Catch-22 of Today’s Ecommerce Environment
So, as you’ve probably already surmised, the current ecommerce setup is a classic catch-22.
Globalization, technology, and the implementation of free trade principals have fueled entrepreneurism by lowering startup costs — which, in turn, has bolstered the economy.
But then there’s the flip side.
All those manufacturing jobs, which were once manna for a stable middle class, sailed overseas, leaving economically devastated regions in their wake.
So now, as a nation, we find ourselves saddled with a Sophie’s choice: Do we hamstring the aborning ecommerce market — and subsequently small business growth — by keeping import fees to an absolute minimum? Or do we hike tariff prices in an attempt to save traditional manufacturing jobs, in an increasingly competitive global market?
The President’s Tariff Power
What’s the next piece of this puzzle? Presidential privilege. Does the U.S. President have the power to impose tariffs without legislative oversight or approval?
If this were a shock jock podcast, we’d ominously answer, “Yes.” Because technically, yes, both the 1965 Trade Expansion Act and the 1974 Trade Act give POTUS significant leeway to negotiate import-export agreements, including tariff rate hikes.
But what, exactly, constitutes “significant leeway?”
How The Trans-Pacific Partnership Plays A Role
Enter the TPP, or Trans-Pacific Partnership. During the campaign we heard it mentioned — a lot — though typically in passing.
And it’s no wonder that the candidates didn’t dig deep into TPP on the trail.
An excruciatingly complex treaty, the agreement particulars don’t lend themselves well to stump speeches. But for this discussion, let’s turn our attention to the Trade Preferences Extension Act — a provision tucked away in the TPP. Passed in 2015, the statute allows sitting Presidents to draft and present trade bills to Congress. According to the edict, Congress can then either approve or disapprove the President’s measure, but not amend or filibuster it.
Which Way Will Representatives Role?
With a majority Republican Congress, the likelihood of legislators waving through a tariff increase, in the name of job stimulation, is high.
HOWEVER — and it’s a big however — representatives of both the Republican and Democratic persuasions are beholden to donors — donors with serious commerce interests. And a sizable portion of corporate America is more concerned about keeping free trade avenues open than bringing manufacturing jobs back to the U.S.
But at this point, all we can do is speculate. It’ll certainly be interesting to see how the Congressional vote breaks if the new administration does present a trade agreement early on.
War, Emergencies, and National Security Issues Give POTUS More Tariff Negotiating Powers
Section 122 of the 1974 Trade Act also allows for a 150-day (5 month) window wherein the sitting President can enact an “across-the-board” tariff, on all imported goods, for national security purposes. After the 150 days, however, Congress must approve the measure or it becomes unenforceable.
The ’64 trade act is also teeming with executive trade privilege. Under the statute, presidents can:
- Unilaterally impose any tariffs “during time of war.” And no, “war,” in this context, doesn’t mean a widely recognized world war. In fact, in 1971, nearly 20 years after the Korean conflict had ended, Richard Nixon evoked the privilege, on a flimsy administrative thread, to enact a blanket 10% tariff hike. Pundits seem confident that Trump could cite U.S. Special Forces in Lybia and Syria to warrant the “war tariff.”
- Levy tariffs, on specific goods, during a “national emergency.” And again, in this context, an issue of national security could be something as simple as “we’re losing jobs.” These types of tariffs usually target specific goods. For example, President Obama enacted a 35% tariff on Chinese tire imports after taking office, and China countered with its own tariffs.
So while Trump’s ability to impose economic measures, unilaterally, may be limited, circumstances allowing, he could impose tariffs (as high as 45%) by arguing that China’s actions were causing economic harm in the U.S.
But if Trump did do that, would the impact be disastrous?
Trump’s Potential Tariffs: Possible Impact
So now that we know what can and can’t happen, let’s look at the potential impact.
If Trump imposed a 45% tariff on certain goods, like electronics or steel, then the price of imported electronics or steel from China would likely rise. Importers would then be faced with a choice: produce the goods domestically or look elsewhere. And depending on the product’s makeup, reproducing it domestically may not be possible.
Regardless, if the cost of any given product rises, consumers will be forced to choose between a) spending more on the product and less on other things, b) not buying the product at all, or c) finding an alternative.
But remember, it works both ways; if the U.S. imposes levies on a product from a specific country, and said country responds with their own tariffs, their citizens will also be faced with the same dilemma as stateside consumers. It’s the ultimate game of chicken.
It All Depends On Your Product
Bottom line: for ecommerce sellers, the potential impact of a Trump tariff really depends on the product and where its manufactured. Targeted goods could see a hike in customs fees, which would likely be passed on to customers in the form of a price increase, and depending on the good, could lead to a drop in demand. The scenario may be a bit nerve wracking for Amazon sellers that have private label products produced overseas and imported from China.
Diversify To Survive
In the event of a tariff hike on goods imported from China, Sellers in countries not saddled with the tariff (for arguments sake, let’s choose Malaysia) could — and would — swoop in and undercut American sellers. Because of this, we always recommend having back up manufacturing plans in other countries (or at least get the balls rolling).
To further gird against potential fee hikes, ecommerce sellers should consider stocking up on products before the tariff lands or finding a tariff-free substitute. Unfortunately, predicting replacement goods may require swami-like skills.
Lastly, look to expand sales in other countries. If Brits and Canadians aren’t burdened with tariff cost concerns, they may just prove to be the perfect new sales stream.
Tying It All Together
- Trump vowed to slap a 45% tariff on all Chinese imports as part of an economic stimulus plan.
- Many U.S.-based ecommerce businesses use Chinese suppliers for cost-saving reasons.
- The Executive Branch does enjoy significant trade privileges, which Trump could, conceivably, use to make good on campaign promises.
- The only obstacle to a White House imposed tariff hike is Congress. And at this point, it’s anybody’s guess as to which way it will swing. Lest we not forget, Trump’s road to the Oval Office involved a lot of anti-establishment threats; rank and file representatives could prove to be less than enthusiastic about flying the Executive Branch’s banner.
- Politicians must also answer to donors. And in many cases, those donors have a vested interest in keeping Sino-American trade avenues wide open.
Will Trump’s administration likely brandish its trade privileges during negotiations? Sure. They’re bargaining chips. In a way, he’d be a fool not to. But at some point, restraint will probably prevail, because neither the Executive or Legislative bodies want to be responsible for hurling the country into a Great Recession on account of an ill-considered, quickly implemented tariff hike.
Final Thoughts: Best Tactics
So, what’s the best tact for ecommerce entrepreneurs at this juncture? If you want to play it safe, consider moving monies to your shipping / import budget, regionally diversify your production, and start targeting buyers in other countries.
In the short term, the worst case scenario is a 45% tariff on specific goods from specific countries. In the coming months, as Trump continues to build his transition team and Cabinet, we’ll all have a clearer picture of the administration’s ethos and its likely impact on the ecommerce industry.