The Negative Impact of Amazon on the Economy

By Sergio Retamal

No one is denying the value created by Amazon for worldwide customers. After all, it provides an enormous amount of choice and unmatched convenience to online shoppers. Yet, you can't, and shouldn't, overlook the profound negative impact of Amazon on the U.S. Economy.

Every time this 800-pound gorilla enters a market segment, it exerts tremendous pressure on margins and prices, reshapes the shopping dynamics, and disrupts the supply chain. Starting with books, Amazon kept on penetrating other product categories one-by-one, causing bankruptcies, forcing others out of business, and killing jobs.

Amazon’s case is very similar to what China has done to the rest of the world. Its low cost manufacturing and labor enticed a large number of entities around the world to set up production there. However, with the novel coronavirus outbreak, the pitfalls of this heavy concentration have become apparent, paralyzing hundreds of companies around the world.

It’s high time that the U.S. government anticipates the threats associated with Amazon’s ever-increasing dominance. Let’s discuss the negative impact of Amazon on the economy:

How Amazon Forces Others Out of Business

To achieve its core objective of grabbing market share from just about every other player, Amazon provides massive subsidies to its delivery mechanism. Based on the analysis of the firm’s financial results by GeekWire, it incurred $7.2 billion in losses on shipping costs in 2016 alone.

It seems to have its own rules. Strangely, Amazon’s investors don’t require the retail giant to make any real money, which is why it remains well below comparable corporations in terms of profit-making.

While Amazon is able to survive with huge losses for years, it leaves other market players in an untenable position of either lowering their prices to unsustainable and uneconomic levels or conceding their market share to Amazon. Most have opted for the former, and are paying the price. Amazon may be able to sell all that stuff at a loss and make it up on volume or tax savings, but other players cannot.

Consider the pharmaceutical industry that Amazon had been eyeing for years. Its acquisition of the online pharmaceutical company, PillPack, has threatened all other players in the industry. Amazon's shipping expertise combined with PillPack’s online presence has eliminated the need for customers to visit pharmacies to fill prescriptions.

As expected, shares of CVS Health Corporation, Rite-Aid Corporation, and Walgreens Boots Alliance plummeted drastically, costing them a combined market share value of $12.8 billion.

Another example is Macy’s, an iconic American department store chain that was founded in 1858. In July 2015, it was trading at an all-time high, above $69, and today, it is somewhere around $5.06.

The biggest blow to the retailer came from the launch of Amazon Wardrobe, a customized fashion service that served to eliminate any doubts customers had about shopping for clothes online. Like Macy’s, other department stores, such as Kohl’s Corporation and Nordstrom Inc., are faced with a similar situation.

When you think about the market for boutique items, Etsy likely comes to mind. The popular online marketplace used to dominate the market, until Amazon expanded its handmade brand in 2015. Amazon’s seizure of the market share squeezed Etsy’s margins to a point where its product listings kept on increasing, yet profits kept on falling. While its handcrafted appeal helped to recover to a great extent, the future remains very uncertain.

Aside from these established firms, thousands of other small- and medium-sized enterprises from numerous industries were also forced to close down as Amazon entered with its fierce single-handed competition and penetrative pricing strategies.

There are various legal and illegal means through which Amazon is able to survive on losses. The most important factor is that it doesn't have to pay taxes. According to the Institute of Taxation and Economic Policy, for the second year in a row, Amazon did not pay federal income tax even though it was worth $793 billion.

On top of that, Amazon happens to be the largest market for knock-off Chinese products. These products are sold directly on Amazon ship, where the firm is able to evade taxes by misclassifying or undervaluing items. On top of that, thousands of sellers on Amazon sell millions of unsafe products, illegal/knock-off products, and items violating copyright regulations. Amazon maintains no checks and balances on these problems. Based on some sources, much of the money generated from the sale of illegal items on Amazon is channeled back to fund the criminal enterprises in China.

These issues make it even more difficult for the U.S. and EU companies to survive. Lowering the quality compromises safety standards, and vice versa, while the knock-off Chinese products continue to sell on Amazon. Hence, a major reason why Amazon is the biggest killer of jobs in the U.S. is that it offers the largest platform for the Chinese black market that kills the local competition, which is forced to lay off workers.

Job Destruction by Amazon

The business model that Amazon religiously follows has destroyed hundreds of thousands of American jobs in various industries, including bookstores, department stores, consumer electronics, toy stores, and many others. As large retailers such as JC Penny and Sears closed down stores, they laid off thousands of workers.

Sears was critically close to complete closure in 2018, when its parent company filed for bankruptcy. But after winning its bankruptcy auction in 2019, it decided to remain open, but with only 425 stores.

Likewise, both Macy's and Walmart have been rapidly switching to Amazon's e-commerce model. As they began to establish their own e-commerce stores, they also shut down hundreds of brick and mortar stores around the U.S. Hundreds of thousands of jobs were lost with those closures.

The process of forcing market players to rely on e-commerce platforms is also being replicated in the grocery industry. It’s no secret how regional grocery chains have been rushing to establish online food sales and delivery over the past few years. With that, jobs in the local grocery stores were also lost.

All told, millions of jobs were lost due to the closure of small- and medium-sized businesses as Amazon continued its expansion across the U.S. Amazon may have more than 2.5 million sellers today, but that number stands nowhere close to the countless number of people who lost their jobs over the years.

Finally, there have been several controversies around Amazon's exploitation of its workforce. According to officials, Amazon doesn't pay its employees well, which means that society ultimately pays for all those extra services they provide to online buyers.

Possible New Takeovers

Shipping with Amazon (SWA) is a recently launched delivery service that picks up orders directly from other businesses and ships them to their customers. This launch has put Amazon into direct competition with the major U.S. shippers, FedEx and UPS. If it manages to keep up with its habit of undercutting prices lower than its competitors, the negative impact of Amazon on the economy could be massive.

If you’re using Alexa, then you’re aware that Amazon is a major innovator and driver of Artificial Intelligence (AI) technology. Currently, Alexa, Amazon’s intelligent bot, responds to simple user voice commands such as “turn off the lights” or “order this from Amazon.”

The software will increasingly become more intelligent to fulfill user commands and embedding itself into people’s daily lives. Yet, the real devastation of AI on jobs will be clear by 2030 when, according to McKinsey, at least 50% of all companies will implement some degree of AI.

If Amazon continues to occupy every vital industry with no one to stop it, the U.S. economy will become heavily dependent upon the monopoly. If it continues to be subsidized by the stock market and protected by the U.S. tax code, there will be a time when the retail giant will directly affect inflation, investment, jobs, and the economy as a whole.

Conclusion

To sum it up, Amazon's market dominance is eroding opportunity and fueling inequality. The power concentration is endangering competition, democracy, and communal life. We’ve seen how the retail giant uses its market power to kill competition and take over one industry after another.

Its aggressive entry into different markets, combined with the benefits associated with the sale of illegal Chinese products, makes it largely responsible for the destruction of jobs in the U.S.

Considering how Amazon continues to enter new markets year by year, it’s not long before it starts impacting the U.S. economy directly. Reliance on a single corporate giant carries extreme risk for an economy, especially one as large and diverse as the U.S. Thus, the U.S. government must act now to break Amazon’s power do

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