When businesses are unclear on what the future will bring, it often results in a “wait and see” approach before making any material investments. We see that leading into most presidential elections, as different presidential winners could have different impacts on the economy based on their promoted policies. The winner of the most recent election is touting his plan to levy up to 25% tariffs on China, and potentially other countries where he sees an imbalance on trade levels. The result of that has most business executives very worried about the future impact of any tariffs on their businesses, and hence has “paralyzed” many companies, resulting in them pushing off any material investments until the situation becomes more clear. This post will better educate you on why business executives are worried, and what this may mean for your businesses.
Why Tariffs are Generally Bad for the Economy
Tariffs are not penalties paid by the country they are being imposed upon. Instead they result in a 25% increase in the cost of those products which are imported from those countries. And guess what, when the costs of importing goes up, the importing companies in the U.S. typically raise their prices to cover the higher costs of those products. And if the U.S. importers raise their prices, it is ultimately the U.S. consumer (you and me) that end up paying higher prices at the retail stores where we purchase these products. Rising costs for consumer goods will decrease consumption, hurting the sales and profits of those products, which in turn lowers the success of the U.S. based importers, hurting their ability to re-invest in their businesses (creating new jobs), and in turn hurting the U.S. economy. It is a vicious cycle.
To try and scope the size of the potential impact, here are a few stats. Imports represent around 14% of the U.S. GDP and around 17% of total imports come from China. That in itself does not sound too bad, but U.S. GDP includes a lot of huge industries like oil and food that are not sourced from China. When you study consumer spending behavior on the goods they are most often purchasing, things like apparel, shoes, toys, electronics and textiles, around 40% of those products are coming from China. If consumers see a 25% increase on 40% of their spending, that will result in a 10% immediate impact to their spending power, further straining their ability to effectively make ends meet. As consumers will be spending the same 100% budgets they have to spend, it will only go 90% as far, forcing them to make difficult decisions on which products are kept in their monthly budgets and which products are cut. The manufacturers or importers of the “cut products”, will see an immediate impact on their revenues and profits, hurting their businesses, their ability to create new jobs and the economy overall.
A Case Study
This is not the first time the Trump administration has imposed tariffs on China. He imposed 10% tariffs on Chinese sourced products during his first administration (2016-2020). We saw the impact of this on the restaurant furniture industry. The retail cost of these products ultimately increased 10%, and the U.S. importers went looking for other sources of product (e.g., Vietnam), in an effort to try and get their prices back down. Our business was fortunate enough to pass through a 10% price increase to our B2B customers, without a material impact on our demand or profit margins.
But a 25% price increase would create much bigger headaches. First of all, customers may be unwilling to pay 25% more for those products (which could impact margins and profits), or they may push off any discretionary spending entirely (hurting revenues and demand). But in the restaurant industry, there will be a greater worry: if consumers are seeing 25% higher prices on their everyday purchases like apparel, shoes and textiles, they will feel a squeeze on their personal checkbooks, which is turn may have them spending less on discretionary purchases like going out to dinner at restaurants, which in turn will have the restaurants seeing less sales and profits, and a general inability for them to reinvest in their businesses in the form of new locations (creating new jobs) or upgrading their old locations. So, let’s hope that doesn’t actually happen.
What This Means for 2025
I think there is generally going to be a “wait and see” approach this year before companies make any material investments (creating new jobs), which in turn will stagnate the economy until the business executives feel more confident they have their arms around the situation. Trump took office in late January, and tariffs on China may not be known until the end of his first 100 days in office. Which means It could be the end of April before business executives have a clearer understanding of what actions were taken by the Trump administration and what the estimated impact of those tariffs on their businesses could be.
Then, one of two things could happen. One, the news is not as bad as they thought, and they get back to growing their businesses normally, per their original plans. Or two, they react negatively to the news, and they start to “batten down the hatches”. That could result in a decrease in spending, a decrease in investments (job growth creation), or worse, they don’t have enough cash on hand to weather the storm, and they start laying people off to lower their expenses. Once people start losing their jobs, that would negatively impact consumer spending, and in turn, further hurt the U.S. economy. I am sure rooting for path number one over path number two.
Closing Thoughts
Many of us are already seeing a general softness in our businesses, largely due to our customers employing this “wait and see” approach. Material purchases are getting “back-burnered” until business executives can get more clarity on the tariff situation. That includes both for their normal day-to-day purchases (e.g., new store growth, major remodels, big capital expenditures), and for things that can materially move their businesses forward, like mergers and acquisitions. Business buyers are more nervous right now and banks which fund these deals are being more cautious than ever in their lending decisions, making it harder for business buyers to access the needed capital.
So, if I were the man sitting at the Resolute Desk in the Oval Office, I would think long and hard before implementing tariffs. Yes, it may sound like you are punishing China and that could get you some short term sound bites with your voting base or generate additional revenues for the government. But, if you put on your long-term glasses, you could end up putting the U.S. economy into a tail spin (which we are already seeing nervousness in the U.S. stock market). Proceed with caution, both at the government level and in your own business forecasts!!
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