How Trump's Tariff Could Cause an eCommerce Boom... Just not in America

Trade policy has been in the public conversation more this year than in the last 10. Today marks the day when an executive order affecting $200 Billion of mostly consumer goods from China see their tariff rates increase to 10%. President Trump’s stated goals for these Tariffs are to protect American jobs and grow our economy. As events unfold, the policy will continue to be judged for its efficacy.

With so many macro trends - increasing internet penetration, urbanization across the world, increasing consumer comfort levels in online ordering, and the shift away from Retail to eCommerce - how will escalating tariffs impact the digital economy?

What would a world look like if tariff rates were 100%?

President Trump hoped that tariffs would realign global supply chains. He’s right, but perhaps not in the way he had hoped.

Before we dive into that question, we need to define a few things. Most of us are aware that a tariff is a tax on imported goods. There is a global classification system called the Harmonized Tariff Schedule (commonly referred to as HTS) which essentially acts as a social security number for your goods or commodities. These codes can get very specific so that a purse with a leather outer surface (HTS 4202.11.00) is treated differently from a purse with a cotton outer surface (HTS 4202.12.40). Countries place restrictions and set tax (called duty) rates based on the HTS code and county of origin, which is further broken out between countries the US has granted a “Most Favored Nation” or MFN status (China, South Africa, Germany), has specific trade agreements with (NAFTA, CAFTA, etc), and everyone else. Historically, if we sourced our purses from China, we would pay a duty of 8% on the leather purse and 6.3% on the cotton.

Congrats for making it through all of that.

Now in theory, anyone who buys anything outside of the country would be liable for the appropriate duties, but to reduce complexity with customs and to prevent people from standing in line for hours to pay $2 in taxes on the $30 shirt they bought in Costa Rica, the government sets minimum thresholds for when they will begin to collect taxes.

This threshold is called the de minimis value and it’s probably the most important tax term for global ecommerce you’ve never heard of.

De minimis values are set by each country and range from 20 CAD ($15 USD) in Canada to unlimited or tax free in Hong Kong. In 2017, the US increased the de minimis value from $100 to $800. This means that no duties or taxes are collected for individual shipments imported by a single person on a single day up to that amount.

$800 seems like a good amount right? It’s more than enough to let a suitcase filled with cheap souvenirs or the casual importer through, while at the same time taxing cars, steel, or other big ticket items.

Let’s suppose that I have a D2C leather purse company where I have the product produced overseas and distributed and shipped to the customer from a fulfillment center here in the United States. Furthermore, if each purse costs me $75 to produce and I can fill a container with 1,000 purses I have an average PO value of $75,000. Since all 1,000 purses are imported in a single shipment above $800 I would owe import duties on the value of the goods. Using the historic rate of 8% we would owe $6,000 in duties or $6 per purse.

What happens when the duty rate is increased to 20%, which is widely expected after today’s initial new rate of 10%? Well mathematically, we know that the duties would increase to $15,000 or $15 per unit.

This is a lot to swallow on a per unit basis and is close to the tipping point of needing to radically realign your supply chain.

Rather than accepting a lower margin or passing the tax onto the customer, what if I just skipped paying duties all together? Instead of shipping the product via ocean to a fulfillment center in the US and then paying for final shipping to the customer, I could move my fulfillment center to Hong Kong (the biggest air cargo hub in the world) and ship to any country in the world in as fast as 2-3 days. My single shipment of 1,000 purses essentially will be broken up into 1,000 individual shipments and as long as the sale price to the customer was under $800, I would owe no duties.

Tariffs don’t need to be all that high for the business case to start making sense, especially when you consider the cost of freight in and final shipping to the customer. Published (read non-negotiated) rates for a 2lb shipment from Hong Kong to NYC range anywhere from $33 for a 2-3 day delivery. For the time being, lower rates can be had by using the postal service as USPS currently collects below cost payments to deliver small packages under 4.4 lbs. As Bloomberg reported last month, the Trump administration is looking to rewrite the international rules behind governing law (the Universal Postal Union UPU) to close this loophole.

Clearly, there will be challenges for any company that relocates their fulfillment operation overseas, but they may not be as bad as you might think. The time zone difference would work in your favor, as orders would basically come in during the day in the US and be fulfilled that night (day in Hong Kong) and in some cases may result in a better customer experience. Returns could be handled by a domestic FC which could then inspect and resell the inventory duty free as well.

The true victim of the tariffs will be traditional retailers - those who are dependent on bulk shipping and distributing inventory here - and could be a further source of price disparity between goods sold online and offline. Tariffs may be a disaster for Walmart, but a boon for Walmart.com.

The impact could be even more dramatic among online retailers. In an era where customers make decisions on Amazon based on dollars and cents, imagine the advantage a company who is able to consistently offer a 10-20% discount - or an increased margin by that amount - over their competition?

So what would a world look like with 100% tariffs? The likely scenario is that there would be a stark contrast between which products would be sold in physical stores and which would only be available online. Right now we live in a world where manufacturing and distribution can be decoupled through various geographic locations, and high tariffs would force production and distribution back into the same locale. The truth is, not all manufacturing jobs are going to come back to the US, which means that some distribution will have to go there, like Bangladesh for your shirts and China for your new iPhone. It’s a lot easier to move distribution, than to relocate an entire manufacturing operation.

It’s impossible to predict the future, but while we can expect a short term bump in prices or a dip in demand, markets and Supply Chains will readjust and consumers will get what they want. Instead of bringing back manufacturing jobs to America, I would expect an eventual outflow of warehousing jobs to Asia.

The internet shrank our world and our parcel carriers have grown too efficient to suggest anything otherwise will happen without fundamental changes to our regulations that go beyond Tariffs.

Aaron Alpeter is an accomplished Supply Chain executive formerly with Unilever, Hubble Contacts, and Sustain Natural. He is the Founder of Izba Consulting, a boutique supply chain as a service firm geared toward Startups between their Seed round and their Series B.