Articles

Tariff Talk

Categories: Distribution & Supply Chain, Government Affairs

Tariffs are taxes or import duties imposed on items imported from one country to another. Typically, they are applied in situations where one country wants to help protect its manufacturers from foreign suppliers making similar products but charging less.

Sometimes these tariffs are quite nominal, maybe five percent. In such situations, one country may be trying to discourage another from selling products at a lower price and encourage a compromise that works for both entities.

In other situations, tariffs can be much higher. When this happens, the goal is not necessarily to keep the penalty in place indefinitely, but to change another country’s behavior. This appears to be what is  happening in the United States currently with the tariffs being suggested and in some cases already imposed on various countries.

While good certainly may come of it, there are also concerns, including whether the tariffs will be increased or expanded to more products, how long they will last, and how much they will impact specific industries, including the professional cleaning industry.

What we do know now is that the tariffs are starting to be felt by some industries, and the longer this policy plays out, the higher the possibility that these tariffs will have a direct impact on the cleaning industry and its supply chain. Imported materials, whether finished products or components used in the manufacturing process, may experience price increases due to the increased tariffs.

Impact

Let’s take a look at how tariffs can impact a jansan manufacturer, and, in turn, the rest of the supply chain from distributors to end-customers.

For example, consider a U.S. manufacturer of carpet extractors that has its equipment made overseas in what is sometimes referred to as “contract manufacturing” or “contract branding.” The actual manufacturing of the product is outsourced to a foreign production facility, but when delivered, the machine has the look, feel, colors, and logo of the original manufacturer.

Now suppose a 25 percent tariff is added to those imported extractors. If the machine had previously retailed for US$5,000, tacking on the tariff charge will bring that amount up to $6,250.

There are several possible steps the U.S. manufacturer and its distributors may take to market the machine under these circumstances, including:

• The U.S. manufacturer and its distributors will pass the added costs on to the end customer.
• The foreign manufacturer will absorb the costs, reducing its profit margins.
• The U.S. manufacturer will absorb the costs, reducing its profit margins.
• The distributor will absorb the costs, reducing its profit
  margins.
• A share-the-pain scenario will unfold with some of the additional costs being passed on to the end customer and distributors, and with the rest to be absorbed by the two manufacturers.
• The U.S. manufacturer will look for ways around the tariff. For instance, importing the extractors to a third country instead of directly to the United States. This will work if there are no tariffs on extractors coming from that nation, avoiding the situation entirely.
• The manufacturer will shift production to another company in a country without any or at least lower tariffs.
• The manufacturer will move manufacturing to the United States.

This last step may be one of the underlying goals of a country’s tariffs; however, that can prove a steep path for some manufacturers to embrace as the costs of starting a new manufacturing plant or even expanding an existing one can be considerable as is the cost of hiring new people to work in the facility. In many cases, even with the tariffs, it can still be less costly to have the products made overseas and then imported. As a result, one of the other possibilities discussed are more likely to be carried out.

Addressing Future Tariffs

When a tariff situation happens quickly, it catches many manufacturers and distributors off guard, making it more likely that companies will follow one or more of the scenarios above. But how should future tariff issues be addressed?

Typically, when a manufacturer decides to outsource production, it sends out a request for proposal (RFP), which includes information on what it wants to be manufactured, what standards and criteria are to be followed, etc. In exchange, the third-party manufacturer provides a price for making the machines.

What manufacturers should do is address tariffs, both current and potential future ones, in their RFPs starting now. This means addressing such concerns as how will the additional costs be absorbed, and by whom. If the costs are to be split, what are the agreed upon percentages? Can the manufacturer cancel the arrangement if tariffs are imposed and prices rise and, if so, how much notice is required? And even if you cover all these, realistically, the best option may be to have a Plan B: Another manufacturing source for the product in case the tariffs make doing business with that supplier financially unwise.

Distribution Effects

Distributors may be in the most challenging situation when it comes to tariffs. Smaller distributors will have difficulty absorbing the cost. Also, some smaller distributors purchase through larger distributors to get the volume discounts that come with larger buying power. If the larger distributor passes on the additional costs, it may be difficult for the smaller distributors to absorb the costs or pass them on to their end customers. Smaller distributors may be priced out of the market and no longer be able to afford to carry the product affected by tariffs.

In such cases, being a member of a distribution sales and marketing group might be one of the best options to help cushion the situation. Representing many members and working with manufacturing partners, such organizations often can negotiate from a position of strength, sometimes more effectively than individual distributors. At the very least, a program can be worked out so that no one group in the supply chain shoulders the full burden of added costs.

About the Author.

Michael Wilson is vice president of marketing for AFFLINK™, developers of Rest Assured, a bundle of products designed to protect human health at home, in school, and at work. He may be reached through his company website, www.afflink.com.