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Walmart says tariffs ‘will increase prices’ for shoppers

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Walmart says tariffs ‘will increase prices’ for shoppers
What started as a campaign promise from Donald Trump, as part of the “America First” policy unveiled during his 2016 presidential run, has now escalated into a full-blown trade war between China and the USA. As US trade associations like the American Apparel Association report that increased tariffs are actually hurting retail outlets across the USA, retailers are concerned about the future. Individual retail outlets like Walmart are also weighing into the debate by reporting that Trump Tariffs will increase the costs of its products for shoppers.

 

Many are now asking what the real cost of the Trump Tariffs is and how US retail outlets caught in the crossfire are likely to be affected as tensions between China and the USA show no sign of abatement.

 

Trump Tariffs

 

Trump Tariffs emerged as part of an economic policy to replace longstanding multi-lateral free trade agreements with bi-lateral trade deals in a bid to reduce the US trade deficit, stimulate industry within the USA and create more jobs. The prevention of outsourcing was another motivation behind the shifts in economic policy as Trump hoped to use the new tariffs to discourage US industries from outsourcing their operations to countries where labour is cheaper. The transition to a bi-lateral trade deal between the USA and China has seen the widespread imposition of tariffs across a wide range of goods imported into the USA from China, and reciprocal tariffs being placed on US goods imported into China. As a result of the policy shift, the USA has also withdrawn from many longstanding trade deals including the Trans-Pacific Partnership. Most recently Trump has signalled that he wanted to end the North American Free Trade Agreement with Canada and Mexico, but US withdrawal was prevented as a result of a largescale renegotiation of the terms of the existing deal. Early 2018 saw worried diplomats from many countries seeking to enter into talks regarding trade. These measures largely failed, and the US persisted with its plans to impose substantial tariffs on goods imported into the USA.

 

The trade war extends beyond the relationship between China and the USA. India, Canada, Mexico and the EU have all been hit with increased tariffs. Several countries have pledged to recoup losses associated with tariffs, for example in 2018, India imposed $240 million worth of tariffs on US goods imported into India. Canada followed suit and imposed retaliatory tariffs on imported US goods.

 

Some of the first tariffs to be imposed were by the USA in 2018. These affected the sales of washing machines and solar panels. In January 2018, Trump announced that he would be imposing a 30% tariff on solar panels, which would fall to 15% after 4 years. Many have interpreted this as an attempt to damage China’s position as the world’s top manufacturer of solar panels. US tariffs on imported steel and aluminium followed. Concurrently, policies were implemented throughout the USA to help those worst affected by the trade war, including a program whereby farmers could recoup losses through a “commodity credit” assistance program, which some have likened to programs used during the Great Depression.

 

Tariffs imposed on Mexican imports to the USA have been linked, by Trump to the influx of illegal immigrants from Mexico into the USA. In May 2019, Trump stated that tariffs on Mexican imports into the USA would gradually be increased until illegal immigration from Mexico to the USA stopped. Illegal immigration has since been set down as a condition to be agreed before any trade deal can be established between the USA and Mexico.

 

In late 2019 a fresh wave of US tariffs has been announced, with Trump declaring that $112 bn of Chinese imports into the USA, including nappies, shoes and food are to be hit with a 15% import duty. This announcement is part of a plan to impose a 15% tariff on $300 bn of tariffs on Chinese imports before the end of 2019. The response from Beijing has been to impose retaliatory import duties on $75 bn worth of US imports, which includes a 5% tariff on US crude oil.

 

The most recent round of tariffs has caused the most anxiety for retailers and experts have suggested that the trade war escalation has the potential to add further costs to the cost of living in the USA. However, whereas Trump has hailed the measures a huge success, economists have instead suggested that the trade deficit has increased, the cost of living in the USA has increased, prices have been increased in many retail outlets, trade has been reduced on a global scale and economic growth has been damaged as a result of the economic policy to renegotiate longstanding trade deals.

 

US companies have weighed into the debate about the implications of the trade war and some have rebutted Mr Trump’s claim that China pays the tariffs. In 2019, 200 footwear companies including Nike and Converse suggested that the tariffs are being passed on to the average US customer, with new duties alone creating a price hike of up to 67% on some shoes. A further suggestion was made that the tariffs on shoes alone could add up to a $4bn additional cost for consumers of footwear and footwear firms have expressed concern about how the sales of footwear throughout the 2019 Christmas period would be impacted. The concerns of the footwear retailers have been echoed by the American Chamber of Commerce, who have suggested that “tariffs are paid by consumers and harm business”.

 

Despite the widespread discontent and criticism, Trump has not deviated from his policy, which remains in place and will continue to tax the import of certain products and raw materials as they enter the USA. This has raised a number of questions, including which industries are the worst affected by the tariffs?

 

Which industries will be hit the worst?

 

It is clear that the trade war will not impact all industries equally. Factors like how much of a company’s supply chain is sourced from China, how much merchandise is purchased from China and how much merchandise on the retailer’s overall inventory is affected by the tariffs will all dictate how heavy the impact of the trade war will be, or as some experts are putting it “how high exposure to tariffs is”.

 

Based on the level of information that is currently known about what items are being taxed as part of the trade war, experts are suggesting that certain industries are more likely to be adversely impacted, and first on the list of industries most likely to be adversely impacted are apparel stores. These are deemed to have one of the highest levels of exposure to the tariff increases, mainly due to the amount of merchandise apparel stores source from China. An example is Ralph Lauren, which sources 25% of its product inventory including sweaters, polo shorts and footwear from China.

 

Home improvement stores including Home Depot and Lowes also reportedly have a high exposure to tariffs and as a result the negative consequences of the trade war. Economists have suggested that furniture sellers and footwear brands, many of which are heavily reliant on China for their raw materials and their merchandise are also in line for some of the worst fallout from the trade war.

 

Also high on the list of retailers most exposed to tariffs include any sellers of electronics, for example Best Buy, and Dollar Stores like Walmart who source much of their merchandise from China.

 

Dollar or discount stores have been badly hit by the trade war, mainly due to the already low prices being charged for much of their merchandise. Whereas most retailers can handle a slight increase in their prices, dollar stores are less likely to be able to reduce price across a wide range of product categories because of their high volume, low cost business models. Dollar Tree, for example, which charges less than $1 for most of the items it sells, is especially vulnerable to the trade war because there is much less traction on price in its high volume, low-cost business model. In fact, Dollar Tree has recently reported that it will be selling some products for more than $1, as a direct response to the escalating trade war.

 

How will discount stores like Walmart fare in the tariff war?

 

Walmart is a US retail store which operates a network of discount stores, hypermarkets and grocery stores across the US and globally. In 2019, Walmart operated more than 11,000 stores in 25 countries. According to the Fortune Global 500 list, Walmart is the world’s largest company in terms of its revenue. Moreover, it is the world’s largest employer, with 2.2 million employees in 2019. Walmart sources two thirds of its goods from within the USA, and one third from abroad.

 

Of utmost concern to Walmart in terms of the tariff war between China and the USA is Walmart’s position as a low-cost retailer. This is because tariffs are driving up costs for affected items across a range of product staples sold by the brand. The latest round of tariffs in particular, which impose taxes on over 100 everyday products sold within the USA is impacting Walmart more significantly than prior rounds of tariff hikes. Walmart CFO Brett Biggs has suggested that “increased tariffs will increase prices for customers”. Otherwise experts have suggested that the tariffs could hit Walmart profits and potentially lead to the closure of Walmart stores and job losses.

 

Other discount stores operating globally have expressed similar concerns to those expressed by Walmart. Discount retailer Home Depot has suggested that the fresh round of tariffs on Chinese imports to the USA could add up to $1bn of additional operating costs for its business. Another example, Kohl’s, has warned that its operating costs have increased, and its projected profits have decreased as a direct result of the tariffs and the fact that it presently imports 20% of its merchandise from China.

 

These pressures have reportedly caused retailers to make a stark choice between absorbing the costs of the tariffs and accepting the associated financial losses or taking the decision to pass all of the tariff costs on to the end customer, thus risking a depreciation in sales. Such was the level of concern within the footwear industry that US footwear companies Nike, Adidas, Foot Locker and DSW wrote a letter to the Trump administration in 2019, stating that their stores have taken the decision to pass much of the additional cost caused by tariffs, along to their customers. The letter stated that the tariffs on shoes imported from China would be “catastrophic” for consumers as well as the footwear industry as a whole.  

 

Many economists have also suggested that the tariffs imposed on imported Chinese goods are effectively a sales tax which raises costs for consumers. Moreover, early indications from retailers including Walmart, Nike and Home Depot suggest that consumers will have to bear 100% of these additional costs. Experts have observed though that weaker currencies in emerging markets could offset some of the damage, and some retailers may choose to absorb the additional costs, rather than pass them on to the consumer.

 

Several incidental problems have been identified in respect of the new tariff regime imposed by Trump, including difficulties with supply chain operation, raw material acquisition and the planning of inventories in the months after the tariff imposition. In fact, many experts believe that we have not yet seen the worst of the problems associated with interruption of supply chains, because retailers largely plan their inventories in advance, and many will have months of stock and merchandise already purchased and in storage. Some savvy retailers and those retailers with larger cash reserves may additionally have planned for the first few months of the tariff increases by buying additional stock, giving them more time to acquire new lines of stock and adjust to the new regime. Simeon Siegel summed this uncertainty up by suggesting that “retailers are living on the edge of a tweet to plan for the long term”. She added that retailers were already experiencing tough economic conditions with rising transportation and labor costs.

 

Experts have noted that Walmart is likely to be impacted by these logistical issues more than most retailers because it imports 26% of its merchandise from China. Discount chain Target is likely to fare worse, as it imports a higher proportion of its merchandise, 34%, from China. Other retailers are in an even more precarious position, for example Bed, Bath and Beyond imports 53% of its merchandise from China.

 

Retailers across the USA, including Walmart are responding to the tariff regime through increased analysis of prices and auditing of their supply chains. Walmart, for example is using a tool dubbed the “Cost Change Scenario” to help it plan for changes and cost variations. This tool allows Walmart suppliers to allow suppliers to submit costs that are directly attributable to the tariffs imposed by the Trump administration. The tool is being used in relation to most Walmart product categories and allows Walmart executives to more quickly determine the overall costs of imported goods, and then set an appropriate price for the products on Walmart shelves. Otherwise, Walmart has stated that it is negotiating with suppliers in China, as well as finding new suppliers from outside of China, in an effort to avert a deepening of the existing crisis.

 

Impact of the US-China trade war on a global level

 

The trade war is no doubt an attempt by Trump to create a new world economic order, fix domestic US problems like unemployment rates and generally improve the position of the USA relative to other countries. But, how has he fared in these objectives and how are countries outside of the USA and China affected?

 

Current estimates suggest the trade war has cost China $35bn in the first half of 2019. Chinese firms have seen their exports fall by more than one quarter compared to previous measures, with the hardest hit sector being computers and office equipment which has experienced a decline of $15bn. Other industries including chemicals, furniture, precision instruments and machinery have been significantly impacted by the trade war.

 

Conversely, smaller countries (dubbed by some experts as “trade war winners”) like Taiwan have seen rapid and significant increases in exports of their products, as a direct result of the trade war. Taiwan, for example has reported a surge of $4.2bn in exports since the tariffs were imposed. Other so-called trade war winners include Mexico, the EU and Viet Nam who have benefitted from the trade war in terms of increased exports to the tune of $3.5bn (Mexico), $2.7bn (the EU) and $2.6bn (Viet Nam).

 

Although some studies have suggested that there are “winners and losers” in the trade war as a whole, many influential commentators for example UNCTAD’s Director of International Trade and Commodities have suggested that the whole trade war is a “lose, lose” scenario, surmising that the debacle is likely to lead to higher prices for Chinese customers, losses for US exporters and trade gains in other countries.

 

Increased prices for shoppers?

 

It is probably too soon to tell what the long-term implications of Trump’s attempt to carve out a different macro-economic landscape, not just for the US but for countries in established trade relationships with the US will be. However, the short-term implications don’t bode well for the future.

 

One of the most concerning impacts of the escalating trade war between the US and China is the fact that shoppers will experience increased prices, as retailers pass on the extra taxes to the end customer. As the trade war escalates retailers will have to decide whether to pass 100% of the extra taxes on to the end customer, or to try to bolster their sales by absorbing some of the extra costs within their own business models.

 

The industries likely to be the worst hit, based on current information include footwear and clothing retailers, dollar stores (due to their high volume, low-cost business models), electronics sellers, furniture outlets and sellers of electronics.   

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