Blame Us If Tariffs Hurt Our Business
I am not about to predict the global economic situation under the next administration. We have seen a trend over the past 8 years in rolling back some of the global liberalization of trade policies. I do expect the weather ahead to be turbulent. External turbulence means there is little you can do to control the influence on your business. Considering that over three quarters of what is sold in the promotional industry is manufactured offshore, or has components that come from offshore, we are at the mercy of international trade and the complications within such as tariffs, quotas, and trade wars.
If there is an increased blanket tariff on all goods from China, then we will be hit on nearly all the electronics we sell and almost all the traditional hardgoods. The future may see tariffs placed on other nations as well as on fabrics and clothing from elsewhere.
In 2023, the United States imported about four hundred billion dollars of merchandise from China, our largest trading partner. A 20% tariff on top of the four hundred billion will give our government 80 billion. Perhaps it cuts down our debt to the very nation we are applying the tariffs on.
Economics 101
Any student of economics knows that a tariff is a percentage fee (payable to the United States government) placed upon an item exported from the targeted nation. The fee, or tariff, is based upon the declared export value (not catalog listed sell pricing). If an item is exported at $1.00 and a 20% tariff is burdened on that item, then the landed cost is $1.20 plus shipping and any other “normal” fees and duties to be paid. We need to add freight/shipping costs to get our final landed cost. Freight has never returned to pre Covid rates and probably never will. Increased freight and increased tariffs mean a significantly increased landed cost.
Sourcamania
Promotional products are inexpensive. In the past 25 years, since the arrival of Ali Baba, Global Sources and others, there are more small suppliers to buy from and many distributors have opted to buy direct from China. The latter is not without danger, but also has rewards.
While it is theoretically possible, it is highly improbable that promotional product suppliers will, or financially can, absorb an increased tariff. They simply do not have the margins to absorb an increased landed cost. Most consumer products (other than luxury brands) are marked up 100%. As an example, a landed cost of $5.00 turns into a selling price of $10.00. However, in our industry we have value added for branding and often packaging. That precipitates a more significant increase in list or selling prices to cover the increased COG.
Distributors must be prepared for suppliers to pass on the cost of tariffs in terms of wholesale costs. Suppliers must get ahead of the possibility of increased tariffs by looking for cheaper sources in other non-tariffed countries or for domestic manufacturers. This is not an easy task as China has a monopoly on certain items.
Blame Us
Let me assign blame. WE are to blame. When I started in our industry nearly 60 years ago, every supplier owned the models and molds and had their proprietary line manufactured here or under their control in Italy or elsewhere offshore. Seeking cheaper product costs, WE moved it all offshore. Soon after, WE began giving up design and development and went to trade shows in China where tens of thousands of ready to supply promotional products are displayed. There was no longer a need to develop your own. One of my now retired fellow top twenty-five suppliers would bring back hundreds of novel items for testing. He did not own a mold or manufacturing line for any of those products. In 1980, he did. His product line was proprietary.
We Cannot Go Back
While it is possible to bring some manufacturing back home, we will, once again, need to develop and invest in our own designs, our own models and molds before production. All along the process of returning to domestic supply, there are significant increased costs in everything from raw materials, overhead, and labor and manufacturing facilities. The bottom line … it will still not be cheaper to make it here, in most cases.
We know that if prices go too high there is sales resistance and buyers will look for alternatives. That is precisely what a distributor can do before tariffs become real. Look for items not made in China and other high tariff nations. Identify alternate items with stable pricing and value. Unlike necessities, buyers can float from item to item and simply find a functional product to brand.
Recipe For Disaster
We are coming out of a dramatically high inflation. It should be settling down to a rate between 2-4%. However, add that inflation (rent, labor, utilities, insurance, etc.) to pending tariffs and some products will simply price out and some of your sources of supply may go out of business. Warning: check your source of supply for solvency. Suppliers requiring money up front is not unusual, but if tariffs are enacted, you may want to get to a comfort level knowing your $5,000 deposit up front is protected and there is no imminent bankruptcy.
Going Direct
This is a mine field, and it is littered with disasters that have put distributors out of business. Still, if the trade war is upon us, cutting out any intermediary you can makes sense. Sure, we have all seen TEMU. That is exactly what they do, the same product that is exported to Best Buy is waiting for you directly from TEMU. They cut out the importer and use a shipping advantage to keep prices “ridiculously” low. Direct importing allows a distributor to sell a given product close to the net they would pay a supplier. Maybe not, the math is wrong. There are factors to calculate before you make your selling price.
Do Not Forget Quotas
Quotas and tariffs protect domestic industries by artificially raising import prices in the domestic market. However, in our business, we do not have domestic manufacturing for our products. Quotas restrict the quantity of a good imported from another country, with absolute quotas setting hard limits on imports. Quotas are complicated. Unwittingly, an order you place directly to China may be over the import quota. There goes your profit and your solvency.
Grin & Bear It
Sales will not disappear. You will still make your profit. Some will buy at higher prices; others will seek alternative items. For items that are in long term programs, and you know they are made in China, seek alternate sources now. Challenge your suppliers to disclose where the products you order are made.
Our business model works. We can thrive despite global economics. Your creativity will be challenged.
Joel D. Schaffer, MAS is CEO and Founder of Soundline, LLC, the pioneering supplier to the promotional products industry of audio products. Joel has 48 years of promotional product industry experience and proudly heralds “I was a distributor.” He has been on the advisory panel of the business and marketing department of St. John’s University in New York and is a frequent speaker at Rutgers Graduate School of Business. He is an industry Advocate and has appeared before the American Bankers Association, American Marketing Association, National Premium Sales Executives, American Booksellers Association and several other major groups. He has been a management consultant to organizations such as The College Board and helped many suppliers enter this industry. He is a frequent contributor to PPB and Counselor magazines. He has facilitated over 200 classes sharing his industry knowledge nationwide. He is known for his cutting humor and enthusiasm in presenting provocative and motivating programs. He is the only person to have received both the Marvin Spike Industry Lifetime Achievement Award (2002) and PPAI’s Distinguished Service Award (2011). He is a past director of PPAI and has chaired several PPAI committees and task forces. He is a past Chair of the SAAGNY Foundation, Past President of SAAGNY and a SAAGNY Hall of Fame member. He was cited by ASI as one of the 50 most influential people in the industry.