(Bloomberg)—U.S. companies are scrambling to line up factories and suppliers outside of China as the trade war hikes the cost of importing everything from furniture to toilet paper. But for some products, it’s not that easy.
BBQ grills, luggage and mattresses are among a long list of consumer items that China has a near stranglehold on when it comes to supplying the U.S. While President Donald Trump’s tariffs are a potential boon for manufacturing rivals from Southeast Asia to Mexico, the reality is that shifting what can often be highly-specialized production and training new workers cost time and money.
“People are moving out of China because they are panicked,” Rick Helfenbein, president of the American Apparel & Footwear Association, said in an interview in Hong Kong on Tuesday. But “certain things are really, really hard to move.”
That has retailers from Walmart Inc. (No. 3 in the Internet Retailer 2018 Top 1000) to Target Corp. (No. 17) anxious about tariffs announced last month on $200 billion of Chinese exports, which Trump has said will be increased from 10% to 25% in 2019. The Retail Industry Leaders Association, which counts Apple Inc. (No. 2) and Home Depot Inc. (No. 7) as members, is seeking exemptions to the levies on a raft of products as companies warn that without a reprieve, they’re almost certain to pass on costs to U.S. shoppers.
‘No way’ to avoid tariffs
That hike is already being felt in the market for luggage, with Samsonite International SA (No. 152) notifying wholesale buyers of a 10% price increase even before the September tariff announcement. The company has said it will likely pass tariff costs to consumers. China makes more than 70% of the travel and sports bags sold in the U.S., making it one of the sectors most dependent on the Asian nation for supply, according to data from the U.S. International Trade Commission, a federal agency in Washington.
There is “no way” American importers and sellers of travel goods can avoid the new tariff, said Michele Marini Pittenger, president of the Travel Goods Association, which puts the industry’s total reliance on China at 84%. “Product is not easily moved, as other countries don’t have the capacity, or the capability, to produce what is made in China today.”
There are some products where China is even more dominant. The U.S. imported $353 million of bikes with 25-inch-or-less wheels last year, with 92% of those coming from China, according to the U.S. ITC. Some 90% of the world’s LED lighting comes from China, according to Morgan Stanley, and 85% of American imports of frozen tilapia fillets come from Chinese fish farms.
Trump says U.S. companies worried about the tariffs should move their production home, while a number—from power converter maker Vicor Corp. to climate-control systems company Lennox International Inc.—are looking at shifting their supply chains elsewhere. But finding other locations to establish production of items that have been so dominated by Chinese manufacturers is difficult, according to Helfenbein.
Some companies can’t move because of the challenge in finding manufacturers outside China willing to put up with the narrow margins and stringent requirements involved in producing them, he said.
“You have to think of it from the factory perspective: You want to do what’s easiest, you don’t want to do what’s hardest,” said Helfenbein. “The only reason these businesses have hung around is people who have been in them for years are specialists.”
If Trump extends the tariff hit to cover a further $267 billion in Chinese goods, children’s shoes, baby clothes and sweaters would be among items that would be hard to shift production or source elsewhere, according to the American Apparel & Footwear Association.
Manufacturers of children’s products like cribs and swings have also weighed in, with Mattel Inc. saying they made investments in China to ensure suppliers comply with safety standards required to get their products into the U.S. market.
Large retailers including J.C. Penney Co. (No. 31) and Dollar Tree Inc. (No. 221) warned before the September tariff hit that companies lack feasible alternatives to China-based suppliers. Re-routing decades-old supply chains could take years, they argued.
Smaller businesses also lobbied the Trump administration, according to comments submitted to the U.S. Trade Representative before the September tariffs were enacted:
BH Cosmetics Inc., No. 914, which imports 70% of its products from China: “The cost of moving all production activity out of China would take a minimum of 18 months and cause a major, if not catastrophic, disruption to the business.”
Sunbeam Products Inc., maker of Oster-brand toaster ovens: “There are no American sources for production of these models and no competitive foreign sources other than China…Ultimately, the increased prices will be passed on to the American consumer.”
Dorel Juvenile Group Inc., which sells strollers and playards: “Alternative sources for the items most needed to protect babies are simply not available from domestic or other reasonable-cost sources.”
While the 10% tariff may be manageable for many companies—even those operating on thin profit margins—the increase next year will see companies lose the flexibility to shield consumers from higher costs, said Kenneth Jarrett, president of the American Chamber of Commerce in Shanghai.
“Once you get the 25% tariff, that will be well beyond their profit margin,” Jarrett said. “They will have no choice but to pass those costs on.”