We expect most retail holiday items to be more expensive this year as the result of normal inflation, which is now running at 3%, as well as increased tariffs, including the elimination of the de minimus tariff rule (see below). We expect tariffs to most impact retail items imported from China or other Asian countries which have traditionally manufactured many of the toys, clothes, and household items that we purchase. These countries also bear some of the highest tariff rates imposed this year.
We expect these higher prices to dampen holiday sales marginally this year. However, employment in the US remains relatively strong meaning that most consumers still have reasonable purchasing power which we expect to support holiday shopping this season.
It appears that US retailers have done nearly everything in their power to keep from passing new tariffs on to their customers. Many importers have forced portions of the tariffs onto their suppliers abroad and are shouldering some of the tariffs themselves. Others had stockpiled inventory prior to the tariffs taking effect and have been working their way through it. However, in the coming months we expect to reach the limits of these strategies and expect prices to rise to reflect the true cost the tariffs have imposed.
*De Minimis Rule: President Trump’s executive order repealing the “de minimis” tariff rule is poised to have a significant impact on a wide range of small businesses. Some of the most impacted will be small e-commerce retailers that reach their customers through e-commerce platforms such as Amazon, Etsy, Ebay or Shopify. While many of these retailers are domestically owned and operated, many others operate from overseas and have used the previous $800 de minimis limit to flood the U.S. with incredibly low-cost consumer goods including clothing, electronics, beauty products, home goods and toys.
Impact on the Supply Chain: In addition to retailers, shipping and logistics companies will now have to handle increased processing workloads which adds cost and slows delivery times. Tariffs also impose additional work on customs agents at the point of entry. This can slow the movement of goods through the supply chain.
On the flip side, domestic manufacturers should benefit from less competition and the ability to achieve pricing power in a market that, for many de minimis impacted products, has become uneconomic to produce in the United States. However, some U.S. manufacturers could be impacted if component parts that they had previously sourced abroad now fall outside of the de minimum exemption.
What Businesses Can Do: US businesses that import critical goods from abroad should determine if it is possible to source these goods domestically or to vertically integrate their supply chains to produce these goods domestically themselves. If domestic production would prove uneconomic, business owners will need to pay close attention to the tariffs being levied and which countries they are impacting most. Working quickly to move production from one country to another could prove valuable should certain countries, such as China, receive stiffer tariffs than other neighboring countries with similar production capabilities.
Ben Johnston is COO of Kapitus.
