My Customers Don’t Pay Trump’s Tariffs Brian Tedesco Wall Street Journal 7-1-19

My Customers Don’t Pay Trump’s Tariffs

Brian Tedesco  Wall Street Journal   7-1-19



When President Trump imposed 25% import tariffs on $200 billion of Chinese goods, economists and trade pundits said the levies would pass through to U.S. consumers. As the owner of a consumer-electronics company that sources 90% of our products from China, I have a different perspective.

Most American companies won’t roll over and pay 25% more for a product. They will demand lower prices from their Chinese factory sales representative.

That’s what my purchasing department did. The moment the tariffs went into effect, we were on the phone with our Chinese factories, demanding price adjustments on our orders. Every single factory conceded.

My company is established but it’s not enormous. So why were the Chinese factories willing to accommodate our demand for lower prices?

First, pressure in the raw-materials supply chain. Standard terms in China are a 30% deposit with the purchase order and 70% or balance due upon shipment. To meet the manufacturing schedule, the Chinese factories we work with must purchase raw materials several months in advance of our order and deposit. They need to deliver to recoup the material expenses and overhead that preceded our order.

If a factory refuses our request for a price concession and we walk away, my company loses the 30% deposit—5 percentage points more than we stood to pay because the tariff. Meanwhile, the factory is saddled with an abundance of raw materials and any finished goods sitting on the factory floor. In China’s highly competitive market, it doesn’t take long to find a different factory willing to absorb the tariff.

Chinese factories also don’t want us to walk away because then they will miss their monthly shipping quotas. For the Chinese government, shipping quotas are more important than profitability. When a factory’s managers realize that they must reduce prices to maintain output levels, Beijing comes to the rescue with subsidies to prop up their margins.

American purchasing departments are well aware of China’s subsidy system, and it gives them significant leverage. My company secured an 18% price reduction from our Chinese supplier on open and future orders for as long the current tariffs are in effect. That means the bulk of the new tariffs are absorbed by the factory or the Chinese government.

Let’s break it down in dollars. Let’s say before the tariffs hit, our cost for each Bluetooth speaker was $10. After renegotiating the terms, we pay $8.20 per unit. We still pay the 25% tariff, but now it applies to the revised cost of $8.20, which puts my total cost per unit at $10.25. That extra 25 cents is far from the $2.50 that the pundits claim passes on to consumers.

Experts underestimate the leverage American companies wield in the trade conflict with China. We understand that, in the game of chicken between buyer and seller, the threat of pulling our orders puts significant pressure China’s manufacturers—and the Chinese government. Of course, certain industries and companies can exert more leverage than others. But if my purchasing department can win significant price concessions, it’s safe to assume others can as well.

Mr. Tedesco owns a consumer-electronics sales and distribution company.