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China has decided to retaliate against the US’ tariff hike from 10% to 25% on $200 billion of Chinese goods by taking $60 billion worth of US goods that previously had tariffs of 5-10% and placing those items into four new tariff groups: 25%, 20%, 10%, and 5%, The New York Times reports.
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Neither the US nor the Chinese tariffs will take effect in full immediately. The Trump administration declared that the US tariff hike will only apply to shipments that left China from last Friday onward, and the heightened Chinese tariffs won’t take effect until June 1, giving the two countries a short period to come up with a deal.
Here’s what it means: Higher tariffs on US goods are bad news for both Chinese consumers and US businesses that sell in China.
Increased prices on goods from the US will limit Chinese consumers’ purchasing power regarding those items. The trade war has already been taking its toll in China, which saw its slowest industrial output growth in nearly three years (5.4%) and its weakest retail sales growth since 2003 (8.1%) in November.
Now, if prices on US goods shoot up, consumers are likely to buy less of those goods, further discouraging retail growth in the country. And for US retailers or brands that sell in China — on Alibaba’s Tmall or Taobao platforms, for example — less enthusiasm for US goods will drive down sales, damaging international revenue growth.
The bigger picture: Meanwhile, the US’ tariff hike on Chinese goods will stick US companies with a tough choice between raising prices or endangering margins.
- Retailers can choose to protect their margins by raising costs for consumers.With the new 25% tariffs slated to affect $40 billion of goods that are imported from China and purchased directly by consumers, sellers are going to face heightened costs for popular items like clothing, luggage, handbags, and furniture, The Wall Street Journal reports. To protect their profits, retailers can choose to raise prices for consumers: For example, a price increase of 2.7% at Kohl’s or 2.6% at JCPenney could offset the tariffs for those retailers, according to data from Bank of America Merrill Lynch cited by The WSJ. However, higher prices are likely to discourage customers from making purchases, negatively impacting transaction volume.
- Alternatively, businesses can absorb the costs themselves to avoid discouraging customers. If the absolute priority for a retailer is to minimize the impact of tariffs on its relationship with customers, it could choose to absorb that impact itself. This strategy would shield retailers’ customers from feeling the effects of tariffs but would prove injurious to those companies’ profit margins: If retailers don’t raise prices, the new tariffs could shrink retail earnings by 39% in 2019, according to analysts from Bank of America cited by The WSJ.
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See Also:
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- Amazon’s not entirely done in China
Source: Business Insider – feedback@businessinsider.com (Gregory Magana)