By: Brooke Walters, Corporate Marketing Manager at Ford Audio-Video
We have a potential mess on our hands, and it falls under the specter of imposing tariffs. It is no secret that the AV industry sources products and components from overseas and the largest supplier of those is China. Manufacturers who source products from China have already been hit by tariff increases ranging from 10 percent to 25 percent. But the looming tariff proposed for February 2019 is yet another 25-percent increase and that would hit a much broader swath of Chinese-sourced products. File this under “breaking news”. As I am writing this in late February, there is a temporary hold on the imposition of the additional 25% tariff imposed on Chinese goods by the USA. What we do know is this: many manufacturers in the AV channel use parts and products made in China, and the current and potential tariffs either have or will hit them. It is safe to say that those increases will be felt along the entire sales chain. For context, I thought I would shed some light on tariffs.
This story dates back to the Tariff Act of 1930, which is commonly known as the Smoot–Hawley Tariff after its two legislative sponsors. The Act implemented protectionist trade policies raising U.S. tariffs on over 20,000 imported goods in an attempt to protect U.S. jobs during the onset of the Great Depression. The Act had the opposite effect on the U.S. economy due to the retaliatory tariffs enacted by other countries, just at the Great Depression was beginning. According to sources, “the consensus view among economists and economic historians is that the passage of the Smoot–Hawley Tariff exacerbated the Great Depression.” Today it behooves us to look through the lens of what history has taught us?
Not to be too alarmist but the issue of increasing tariffs leading to a trade war is serious stuff and not to be ignored. The best-case example is what we saw with the Canada and Mexico trade agreement. The worst-case scenario is that a trade war ensues, the stock markets around the globe react negatively, and the trickle-down effect reaches each of us as consumers but more specifically in the AV community.
At their core these new tariffs are meant to pressure China into changing or discontinuing longstanding unfair trade practices that are detrimental to the American economy. The administration has accused China of stealing American intellectual property and wants Beijing to make amends by buying more American products, opening itself up to more U.S. investment, and putting an end to the alleged theft. There are few that deny the validity in the claim of unfair trade practices on the part of China, but it is the process of finding a “solution” via tariffs that has so many concerned.
It is no shock that China is retaliating with tariffs of their own (i.e. farm products have already taken a big hit), hence the trade war. This begs the question of who wins and who loses? The cost of finished goods and components brought in from China will increase. While a small portion of these increases can be absorbed by a given company doing the importing, the majority of costs in increases will be passed on to the end user through the sales channels. The simplistic answer is to just make all these products in the USA, but business experts claim that the U.S. simply doesn’t have the ability to competitively produce replacements for all of the Chinese products that would be affected by the new tariffs. The downside for China is the slowing down of their economy. It is safe to say that nobody emerges as a winner in this scenario.
The business community shows very little support for the tariffs. The National Taxpayers Union sent an open letter urging the president to reconsider his tariff policy. The letter was signed by over 1,100 economists representing an assortment of think-tanks, research institutes, and universities including Harvard, MIT, Amherst, Swarthmore, The University of Chicago, Penn State, and The University of Wisconsin. At this point the concern shown by experts has had little effect on this current version of trade policy so only time will tell.
As AV professionals, what are we to do in the face of this threat? Being forewarned is being forearmed. Here are some suggestions:
- If you are a manufacturer immediately seek alternate sources that are not affected by tariffs.
- Negotiate the most favorable price possible to mitigate the effect of increases on your company, your resellers and their end users.
- If you are a reseller find out who sources products and components from China and what price increases, you can expect to see.
- Look for alternatives that are not affected.
- Have early conversations with your clients about possible price increases.
As an industry we are not accustomed to big price increases. For a long time, there has been stability, but we are in a new and unsettling era of uncertainly. Who we work with and who they source their products from will take on a new meaning.