Tariff whiplash: The US truce with China offers hollow relief
Summary
Don’t expect US shoppers to celebrate. Much damage has already been done by the US-China trade war. Price hikes on account of supply disruptions could combine with uncertainty and recession fears to keep retail demand low.
The interim trade deal between the US and China struck in Switzerland marks a dramatic volte-face after weeks of simmering tensions. But don’t expect an equally breathtaking about turn from US consumers. Amid the uncertainty about economic growth, job cuts and inflation, it will take time for shoppers to regain their confidence. Even if they do, there are some reasons why the pain for retailers and consumer goods groups may be prolonged.
Under the latest US-China agreement, the combined 145% US levies on most Chinese imports were set to decline to 30% by 14 May. The new rate is still unhelpful, but it’s a lot better than the threatened levy, which would have made some products, including toys and Christmas decorations, simply uneconomic to sell in America.
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Retailers, suppliers and consumers will still have to share some pain. For Americans, that means some level of price inflation on the mostly non-food items that come from China. Take clothing, for example. At 145%, retail prices for the mid-market knitwear and coats that are typically manufactured in China may have had to increase by 20% to 30%. Price hikes should now be less.
The accord should encourage retailers to restart paused orders, or ship goods they’ve been holding in China in anticipation that a deal would be reached. Even before Monday’s announcement, there were signs that trade had begun to pick up; that should mean fewer gaps on shelves this holiday season.
But the disruption will take time to work its way out of the system. Take toys. Many should have been manufactured by now. Even if production restarts immediately, Santa might not be bringing some items. The bigger risk is a tsunami of goods arriving in mid-market department stores when they’re no longer welcome; heavier-weight spring jackets and knitwear, for example, after temperatures have already risen as summer approaches.
This is exactly what happened in 2022, when supply chain snarl ups in the approach to the 2021 holiday season led to loungewear and small appliances landing six months later, when consumers had already moved on. This led to a mountain of inventory that stores were forced to discount. If the same happens now, it will test the resolve of retailers to resist markdowns.
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It doesn’t help that consumers have rushed to purchase over the past few months in anticipation of higher prices. Cars were the favourite target of those seeking to beat the hikes. But Americans also shopped for home furnishings, electronics, clothing and footwear. Big expensive purchases like a car or sofa won’t be repeated, and may sap the funds available for other types of outlay.
When it comes to clothing, shoppers typically spend to a budget. If they’ve bought sneakers or a patchwork quilted jacket already, many won’t buy again.
Some US consumers may be reluctant to splurge for a different reason: they still feel nervous about a recession. Across the income spectrum, it’s clear that many are cutting back. The most pressed are already acting as if the worst is here: for example, reusing cooking oil one more time.
But the more affluent are feeling the pinch, too. McDonald’s said the pressure from inflation and interest rates that’s been hurting poorer Americans for the past few years was now “spilling over" into middle-income customers.
Last week, for example, Sweetgreen cut its annual guidance; clearly $16 salads are off the menu. Chief financial officer Mitch Reback said same-store sales were positive in March, but turned negative in April “coinciding with the tariff announcements." He told Bloomberg News that April has traditionally been a month when the chain’s performance picks up as temperatures rise; “this is the first time we haven’t seen that lift."
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US luxury goods demand has also weakened, according to Citigroup’s monthly credit card data, turning negative in February, March and April after recovering in December and January.
While the S&P 500 has bounced back from its ‘Liberation Day’ lows, we splurge on a Gucci handbag or Rolex watch when we feel wealthy and upbeat about life. After the dislocation, it will take time for any feel-good factor to return.
Meanwhile, we must remember that this accord with China is only temporary. And let’s not forget that levies on other important manufacturing nations, such as Vietnam, are only paused rather than being completely off the table.
An escalation of the trade war may have been averted. Not so the tariff whiplash for consumers. ©Bloomberg
The author is a Bloomberg Opinion columnist covering consumer goods and the retail industry.
