Kohl's is concerned about impact of tariffs.

The Truth About Tariffs

by SCB Staff

Talks of tariffs and trade wars have dominated the news lately as the U.S. negotiates abroad over everything from immigration deals with Mexico to intellectual property protection (or lack thereof) in China. Though a deal was reached with Mexico earlier this month, an agreement has yet to be made with China. Even if the two countries do reach amicable terms, what kind of an impact will these types of trade wars and levies have stateside?

“If the trade war challenge continues for too long or the U.S. experiences a retaliating move, long-term, this could have a significant impact to our economy,” says Richard Chichester, president and CEO of Faris Lee. “Trade war political discussions and the positioning behind that puts the global economy at risk. If these discussions are not managed well, they could easily throw the U.S. and world economy into a significant contraction.”

The Impact to the Economy

The good news, according to Chichester, is that these talks are actually bolstering the U.S. economy in the short-term.

“The near-term impact has been relatively good for the U.S.,” he notes. “It’s causing a boost in consumer confidence for the average American that really doesn’t understand the economic impacts of these discussions or threats.”

Fundamentally, the U.S. is in a good position as unemployment is at a record low despite May’s less-than-stellar jobs report, while consumer confidence – and spending – remain positive.

“The U.S. economy is weathering these talks extremely well,” Chichester notes. “Consumer sentiment is still historically high and consumers are still disciplined but active. As long as the consumer has faith in the economy, the economy will continue to expand.”

The Fed is also here to help support and maintain this momentum, though Chichester isn’t sure this is a good thing. Federal Reserve officials have already suggested the organization may lower interest rates to mitigate any negative effects from the trade war and the politics associated with them. This comes after the Fed had agreed to hold rates steady through the remainder of 2019 following its last rate hike that sent the market tumbling in late 2018.

“As recently as 2018, the Fed was targeting 3 percent, or what they then defined as ‘neutral,’” Chichester says. “Then, the Fed saw the impact it had once rates crossed 2.5 percent and the whole market took exception and everything went in the other direction. There was already a question of whether the Fed had overplayed its hand. Now the Fed says it will reduce rates if necessary. That’s a shocking comment coming from the Fed. The most recent consensus among economists now is that we could go as low as 1.75 percent by late 2019 and possibly as low as 1.25 percent by the first quarter of 2020.

Chichester finds this logic problematic for a few reasons. First, he does not believe it is necessary, as the U.S. economy is healthy. Second, he believes it takes away a useful tool that could supply some breathing room during an actual slowdown, leaving the Fed with very few options other than to take rates negative. It also continues to encourage too many companies to incur more debt at a time when many are already overexposed.

“Our U.S. economy doesn’t support any type of rate cut in my opinion,” he continues. “The Fed is acting politically from a [stock] market point of view. It will juice the economy in the near term, yes. They’re completely right, but they’re going to do that at a significant cost that we’ve been managing for multiple years. The U.S. is built on debt and cheap debt.”

Ralph Lauren is exploring options to mitigate impact of tariffs.

Ralph Lauren’s CEO noted during the company’s first quarter earnings call that the company has a “large exposure” to tariffs. He said the company is “working on different scenarios” to mitigate the impact to goods, customers and profits.

The Impact to Retailers

This level of debt becomes an issue when threats over tariffs and trade wars have the potential to bring an economic slowdown, if not an outright recession.

“We still have the government incurring exceptional levels of borrowing,” Chichester explains. “Long-term debt is becoming an ever-increasing and significant issue. And, if you look at non-financial corporations’ debt, it’s very significant.”

Tariff threats also come just as many retailers are figuring out how to flourish in the new shopping environment. Companies are already contending with the costs associated with integrating new technology, streamlining an omnichannel platform, and creating the proper balance between their brick and mortar and online avenues. Now, they may have to account for levies imposed on imported goods and services from countries like China as tariffs have the potential to rise by another 25 percent.

On top of that, these tariffs are often met with retaliatory efforts. This was the case in the last round when the U.S. raised tariffs on $200 billion worth of Chinese goods and China countered by raising tariffs on $60 billion worth of American goods.

These taxes have far-reaching impacts for many retail categories, particularly electronics, footwear, handbags and furniture. Costs may hit the product supplier first, but are typically passed onto the retailer, which must then decide whether to take the profit hit or pass the increases onto customers.

It also leaves companies that manufacture in China with a big decision — do you stay or do you go? Companies like Columbia, Dollar Tree, Ralph Lauren, Walmart, J.C. Penney, Costco, E.L.F. Cosmetics, Kohl’s, Williams-Sonoma and Everlane have publicly acknowledged the effect that increased tariffs will likely have on their profits and products. Home Depot anticipates a $1 billion impact to its business if the latest round of tariffs are imposed.

China’s loss could be other countries’ gains if companies do jump ship. Namely, Vietnam and Sri Lanka, though increased tariffs may also drive business back to the U.S. Chichester notes, however, that tariffs shouldn’t make or break any one retailer, even if their supply chain is impacted.

“Some retailers are highly challenged because of what’s going on in retail, that is just what it is,” he says. “Successful retailers really need to understand the business of brick and mortar and omnichannel. They really need to build a business plan of harmonized retail.”

The Impact to Consumers

The higher cost of goods from retailers that decide to remain in China and opt to pass the costs onto the end user is the most obvious impact that consumers face if these tariffs come to fruition. Aside from potentially lower interest rates, however, there are other, less obvious impacts to Americans. The biggest is the potential loss of jobs, particularly in the retail and manufacturing sectors. The Perryman Group estimates job losses could exceed 117,000 in Texas and 50,000 in California alone.

“We’re really dependent on shipping channels between Asia and the U.S.,” Chichester notes. “The markets they would affect the most would be ports that happen to be in major economies, including Houston and the ports of Los Angeles and Long Beach, California.”

He says, “California is by far the most dominant economy in the U.S., with Texas and New York rounding out the top three. So, this could be a domino effect. If any trade wars affect the supply chain, whatever happens in these states could have a pretty significant effect on the whole U.S. economy.”

Still, with all the uncertainty, Chichester remains hopeful the two countries will leave the door for communication open.

“The fact that we’re still having conversations with China is positive,” he says. “If we push too far and China pushes back too hard, the repercussions could be disastrous. Assuming we can manage this carefully and with diplomacy it should send a positive, good signal that reaffirms the U.S. economy.”

Reaffirming the current state of the economy could be a key to maintaining its current level of strength, Chichester further adds — at least in the eyes of consumers.

“The consumer is comfortable, disciplined and active,” he continues. “This is important, as consumers make up three-quarters of the economy, so their attitude, sentiment and activity is critical. The good news is that I don’t see any changes to this in the near term.”

— By Nellie Day. This article was written in conjunction with Irvine, Calif.-headquartered Faris Lee Investments, a content partner of Shopping Center Business. For more articles from Faris Lee, click here.

You may also like