The Retired Investor: For Whom the Tariffs Toll

As the flow of container ships to the U.S. slows and the number of trucks needed to distribute Chinese goods declines, retail shelves will soon begin to empty. Unless the tariff war is reversed, consumers should expect shortages.

 

Tariffs (so the story goes) will fuel a U.S. manufacturing renaissance, leading to higher middle-class wages and more stable families and communities. This manufacturing resurgence will promote research, development and innovation leading to economy-wide productivity gains.

 

History and most economists indicate that tariffs will not deliver the desired benefits. But let's not be naysayers. After all, most Americans believe that our trade relations with the world have been overly generous since at least World War II and need some right-sizing. The problem is that even if all of what the administration hopes for comes true, it will take years, if not decades, to achieve. In the meantime, we have to deal with the impact of tariffs in 2025.

 

The economy has already begun to slow due to tariffs registering its first down quarter since 2022. By the end of May, we should begin to see layoffs in the transportation and retail sectors. As tariffs set in within a few months, the first signs of scarcity will show up in toys, low-cost clothing, foot ware, dog toys, and budget home goods. Unfortunately, many American big box retailers are also our most popular go-to stores. Most of them, such as Walmart, IKEA, and Home Depot, have significant imports from China.

 

Last year, China accounted for 37 percent of all U.S. apparel imports and 58 percent of U.S. footwear imports. According to the American Apparel and Footwear Association, the average tariff rate for those imports from China was roughly 18.5 percent, although additional duties have substantially increased that number. If you add another 145 percent to 160 percent in duties, the total can be above 200 percent.

 

It is one reason my wife just ordered a new pair of hiking shoes from Amazon. She worries that they won't be available or, if they are, the costs will double before the end of the summer.

 

A neighbor who regularly purchases heavily discounted consumer goods from Temu, an online marketplace operated by the Chinese e-commerce company PDD Holdings, canceled her latest order after the price of her product rose from $10 to $40, including shipping.

 

That should come as no surprise. Chinese companies that benefited from the de-minimis tax exemption, a loophole that allowed shipments worth less than $800 to enter the U.S. duty-free, have been closed. Chinese companies have already jacked up their prices, in many cases, by more than 300 percent. American shoppers who are regular users of Chinese e-commerce sites will struggle to find replacement items that are close to the same price.

 

At this time of year, U.S. retailers would normally increase orders for the back-to-school season and the winter holidays. Not this year. The president's tariffs on China have caused companies to pull back on orders and cancel existing orders. The abruptness of the tariff hikes has left most companies little to no time to plan for alternative sources to import these goods. The National Retail Federation expects imports to drop by 20 percent in the second half of the year if tariffs continue at their current rate.  

 

Low-margin, fast-moving goods  will disappear first since the retail industry is built on speed and scale, where inventories of these items are replaced "just in time." Think tees, socks, kids' clothing, and basics. Consumer electronics will also feel the heat since many of the cheaper components are made in China. And nearly all dog toys are made in China, so stock up now unless you want to start buying marrow bones.

 

According to the New York Times story "Your Home Without China," other essential items we use daily are imported almost entirely from China (90 percent plus). They include first-aid kits, alarm clocks, toasters, baby strollers, thermoses, microwaves, children's books, charcoal grills, umbrellas and parasols, combs, flashlights, fireworks, bathroom scales, and bamboo shelves. The list goes on. By the end of the article, I realized that a good part of our daily life and its gadgets would not be possible without China.

 

What should readers do to get a jump on the coming tariffs? I suggest buying items that you already planned to purchase now. Washing machines, dryers, ovens, and electronics top that list. Most, if not all, those products are made overseas and will be subject to tariffs. To save money, switch to less expensive brands and models. In addition, shop for older models, one or two years old. For many products, seek out American-made options manufactured in the U.S.

 

Resist the temptation to panic shop unless you can't live without that matching set of dishes or some other item and are convinced there are no substitutes anywhere in the world. Holding off on discretionary purchases such as a vacation, front-row seats to an expensive concert, or frivolous spending may also be a good idea. Many economists are predicting a recession by the end of the year because of these tariffs, so it might be a good idea to wait until it's clear how tariffs will affect your personal finances. 

 

At this point, even if Donald Trump has a change of heart and reduced Chinese tariffs across the board, the disruption that has already occurred in supply chains will take weeks, if not months, to unravel. We learned that lesson during the COVID pandemic. My advice is to prepare for the worst and hope for the best.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.