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The US-China trade war could hit these consumer goods

MarketWatch logo MarketWatch 5/13/2019 Quentin Fottrell

There are some things parents can’t avoid buying.

The U.S. increased tariffs on $200 billion of Chinese goods to 25% from 10% Friday, following three rounds of tariffs last year. They account for roughly 50% of all Chinese exports to the U.S. on everything from hats to toys. The Chinese government retaliated Monday. Starting June 1, China said it will also raise tariffs to as high as 25% on about $60 billion worth of U.S. imports, involving around 5,000 products from frozen fruits to vodka.

Many consumer goods manufacturers and retailers were taken aback by the news. “The tariff increase inflicts significant harm on U.S. industry, farmers and consumers,” Jacob Parker, vice president of the U.S.-China Business Council trade group, said in a statement. “It will decrease the competitiveness of American companies, reduce the efficiency of their global supply chains, and reverberate through the U.S. economy. Pure and simple, this is a tax on the American consumer.”

Francine Lamoriello, executive vice president of global strategies at the Personal Care Products Council, the trade association for America’s cosmetics and personal care products industry, said products like soap, manicure items and deodorant were all on the list goods affected by the tariffs — and all “part of the daily lives of American consumers.” China’s retaliation, announced Monday, ”makes our products that less interesting,” he said.

Increased tariffs on Chinese goods will hike prices for consumers goods, analysts say. The latest tariffs will add another $500 a year in costs for the average U.S. household, Katheryn Russ, an economics professor at the University of California at Davis, told NPR. Another estimate says the tariffs announced last year will cost consumers an average of $767 per year.

Related video: White House economic adviser says "both sides will suffer" in trade war (provided by CBS News)

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Millions of Americans will stick with their old washing machine, television and computer monitor, and refrain from buying new clothes and furniture (unless, of course, they’re buying a house). But they may have a harder time avoiding the shops for their kids’ birthdays and during the busy holiday season when children expect new electronics and toys. The tariff hike could increase the cost of Apple’s iPhone XS by $160, Morgan Stanley analyst Katy Huberty wrote.

The U.S.-China trade talks appeared to be making progress before this latest roadblock. However, Mitul Kotecha, an analyst at TD Securities said that Trump may feel “emboldened” by the strength of the U.S. economy and, for the most part, the equity markets. “We had thought that a trade deal between the U.S. and China was close to being agreed and markets had become rather sanguine about the issues,” he wrote. “Indeed, headlines over recent weeks had been encouraging.”

Consumers may not agree. The Peterson Institute for International Economics said 23% of Trump’s tariffs were placed on consumer goods. “Consumer goods made up only 1% of the products of the first $50 billion of imports from China subject to his announced tariffs,” the institute said. “The explanation for this shift lies in the fact that there are fewer and fewer such supply chain elements left to target. Consumer products are much of the imports from China that were left.”

Retailers have been working to mitigate any adverse impact from President Trump’s trade war with China, but the latest move by Trump appears to have taken many of them as a surprise, Christopher Prykull, an analyst at Goldman Sachs, said in a research note. “We also note that tariff risk had generally disappeared in our conversations with investors, which could introduce some volatility in shares of retailers more exposed.” Ultimately, Trump is also trying to strong-arm toy companies like Mattel to move their production out of China, analysts say.

Companies won’t immediately increase their prices, said Jon Gold, vice president of supply chain and customs policy at the National Retail Federation. “Retailers will try to endure as much of the costs as possible but 25%, they can’t absorb all of that,” he said. Products currently shipping to the U.S. for sale won’t see hiked prices, but some products may become more expensive in the summer, such as back-to-school items, he added.

The toy industry was able to weather the tariffs last year, as the products were mostly finished and prices were set by the time the tariffs were announced. But this year will likely be quite different for manufacturers, retailers and consumers, toy industry watchers said. Individual toys are obviously not on the list of products affected, but some raw materials and chemicals are — including lithium batteries, popular in millions of toys and, for instance, the chemicals that make Silly Putty.

Toy manufacturers may want to speed up their shipments, in the event the president moves forward with a possible fourth round of tariffs. Retailers are already producing toys and getting ready to ship them for the summer and holidays. If, however, fourth round of tariffs was implemented prior to their arrival date that would hurt retailers, manufacturers and consumers, said Steve Pasierb, president and chief executive officer of the Toy Association.

Industry consultants are bracing for a tough holiday season, and many . Toy prices this holiday season will be higher, said Jackie Breyer, editor-in-chief of the Toy Insider, a toy review site. Even before last year’s holiday season, Breyer told MarketWatch last year when the first round of tariffs were announced, “2019 is a whole other story.” Electronics are among the hottest holiday toys and birthday gifts and, as such, analysts say this could impact retailers including Walmart, Home Depot and Best Buy.

“If your shoes and clothing costs more, there may not be money left to buy toys,” Pasierb said.

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