With the Office of the U.S. Trade Representative announcing the increase of tariffs on imported Chinese goods from 10 percent to 25 percent on $200 billion worth of goods, and a directive from the executive branch to increase tariffs on an additional $300 billion in Chinese goods, how will publicly traded companies’ earnings be impacted?
According to a May 10 press release from the office of the United States Trade Representative (USTR), tariffs of 10 percent on imported Chinese goods, consisting of $200 billion, increased to 25 percent. The press release also indicated that the remaining amount of Chinese imports, about $300 billion, will now be subject to tariffs. Based on a June 14 USTR press release, hearings on implementation of the additional tariffs on Chinese goods will be held during the second half of June. This, as the press release notes, is being considered in addition to the pre-existing $250 billion in Chinese tariffs.
Based on a recent publication from the International Monetary Fund (IMF), the United States-China trade war has had an ongoing impact on both U.S. businesses and consumers of Chinese imports. When it comes to Chinese imports headed for the United States, there has been a record amount of American importers increasing their orders to hedge tariff rate increases or additional products subject to tariffs.
The IMF's piece found that increased tariff costs have been passed onto consumers by American businesses in some instances. One example the piece noted is increased consumer prices of washing machines due to increased tariffs on Chinese imports. In other instances, however, companies have decided to accept reduced profit margins versus increasing the prices of other imported Chinese goods subject to higher tariffs.
How This Impacts Consumer Spending
Analysis of recent economic data reveals that American households consume between 1.5 percent and 2.5 percent of goods imported from China. Using midpoint of 2 percent and a mean consumption rate of $60,000 per American household, the additional tariffs would cost a minimum of $300 more per household for the same imported Chinese goods.
According to a Trade Partnership study conducted in February 2019, the calculation of Chinese steel and aluminum tariffs plus the 25 percent rate of the initial $250 billion of imported Chinese goods – would result in the average American household spending $767 more.
When it comes to recent and longer-term consumer surveys, the news is mixed; however, it doesn't portend well over the long-term, especially if the trade issues persist. This is based on survey results from the University of Michigan for June 2019.
The survey found that "consumer sentiment" fell after May’s gain because of both a slower increase in job production and the tariff situation, including the real potential for Mexican tariffs and ongoing Chinese trade issues. It also found that many consumer respondents thought the nationwide economic growth would slow, thereby creating fewer new jobs.
This trend is evident from the survey. In June of 2018, 40 percent of respondents looked poorly at tariffs, compared to 21 percent of those surveyed in May 2018, and 35 percent in July 2018. The respondents similarly indicated, without prompting, that 19 percent of consumers would buy ahead of tariff implementation during the start of June 2019, compared to only 12 percent doing so in May 2019, and 21 percent of those surveyed doing so in March of 2018. Overall, "real personal consumption expenditures" is expected to increase by 2.5 percent in the year ahead.
The survey’s Sentiment Index improved because consumers said they're planning to make more "large household durables" purchases sooner to stave off the impact of increased tariffs. This aligns with other experts referenced but can be argued as pulling demand ahead with the potential for fewer future sales.
While there’s no way to predict future sales, for companies reliant on Chinese imports and consumers facing higher costs due to tariffs, consumer sales could very well be lower in the future.