Impact of Tariffs on Consumer Goods
A falling tariff on Chinese goods delivered to the United States could make consumers think that there is considerable relief in sight – at least in comparison to before. However, in practice, it doesn’t seem to be the case.
Temporary Tariff Reduction
The new prices are only temporary, and companies are hurrying to meet orders and create products in China on ships and aircraft, while the tariffs are at least 30% compared to 145% – and they pay a bonus to do so. This must eat into the savings that companies would otherwise see under lower tariffs.
Effects on Consumers
For consumers, this means that the price of many goods from China, America’s second import source, remains increased. The revised prices came after the US and Chinese government officials met in Geneva at the beginning of this month, which meant that both nations lower the tariffs of the other for 90 days when the conversations are continued.
Uncertainty of Tariff Reduction
But there is no saying whether the partial armed arrest will take a full 90 days. Even if this is the case, it is unclear at what level the new tariffs will be. This uncertainty is affecting the decisions of companies that import goods from China.
Increased Production Costs
Andrew Rader, Managing Director in consumer practice at Maine Pointe, a global consulting company for supply chain and operating advice, said that customers who advise him to increase the Chinese production costs across the board. Factory owners offer overtime for employees and offer other types of bonuses, which is unusual, he said. Important raw materials used in consumer goods such as plastics and metals have increased "by 10% or more".
Minimum Order Size
In addition, more factories increase the minimum order size that companies have to give up due to the orders for orders. This means that in view of the costs associated with storage, companies can be recorded in higher than written supplies, let alone more to have the products produced. Instead of three months of inventory, he said, some products worth up to six months have to pay.
Estimated Costs
After all these production costs have been benefited, Rader estimates that American companies that import goods from China pay 15 to 25% more to produce goods there. And this increases in front of the transport costs, which also increase due to the demand boost, and the 30% of the tariffs that are still present.
Passing Costs to Consumers
The additional costs that companies cover should be passed on to consumers. As with a tariff, however, this is not necessarily a one-to-one ratio in which the prices increase by the same amount as the additional expenses. This is because companies tend to absorb some of the additional costs without increasing prices in order to keep customers.
Other Considerations
However, it is not just the prices that consumers should be concerned about. Andy Tsay, professor of economy and analysis at the Leavey School of Business at Santa Clara University, said that all costs and risks that are added to the supply chain must somehow and not necessarily be expressed by increasing the final price, but possibly in a less noticeable manner. For example, more goods could go in stock because the challenges and costs that companies occur with the import of more goods from China.
Potential Consequences
Another consideration is that articles could be less common and with smaller discounts. There is also the possibility that new products do not make it onto the market. In addition, this could mean that the US consumers hold up higher prices due to the tariffs of President Donald Trump, even if he finally changes the rate.
Long-term Effects
When companies learn from this forced experiment that they have underestimated the willingness of the customers to pay for an article, it is unlikely that prices will come back all the way, even if the tariffs disappear, said Tsay. This could have long-term effects on the prices of consumer goods and the way companies operate.
