Tariff Update: A 90 Day “Reprieve”
Some encouraging news!
A couple of minions in big-boy pants and matching red ties (Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer) met over the weekend in Switzerland with the Chinese trade delegation and actually accomplished something. It was determined that the 145% tariff on China-produced goods (and China’s corresponding 125% tariff on U.S. goods) was akin to a trade embargo that caused the flow of goods to effectively halt. And that this was really bad for both countries and the global economy in general.
Overlooking Lake Geneva and nestled on cushy sofas, the smart people agreed that for the next 90 days, the tariff would drop to 30%.
These 90 days will allow for two things to happen: a more substantive agreement to hopefully be negotiated, and time allowed for the smart people to explain to the stupid person in charge, also hopefully using small words and simple drawings, that the policy of grabbing really high percentage rates out of thin air, making hollow threats, and lying to the American people over and over and over again might not actually be successful. Evidently, we’re not raking in so much money that “we’ll all be so rich we won’t know what to do with it”. Or great again for that matter.
Maybe it was the dearth of container ships at U.S. ports that served as the needed evidence. Or the recognition that our economy was about to turn recessionary, retail store shelves would be empty by summer (80% of the products Walmart sells are imported from China), bankruptcies of small and mid size companies across the country were imminent, the jobless rate was about to spike, or even consumer prices were shooting up (that is all still likely to happen by the way). Maybe instead it was the collective pushback from Congress that did it oh-wait- Congress has been silent on all this– sorry…
Regardless of what finally got the two sides talking, the fact of the matter is that it was at least effective in the short term: the response in the financial markets was overwhelmingly favorable. Yesterday, the S&P 500 jumped 2.6%, and the Dow Jones Industrial Average was up 2%. The dollar rose against the euro and the Japanese yen, and oil prices surged by more than $1.60 per barrel. In the Toy & Game Industry, Mattel’s stock rose by 10%. Hasbro was up 7%. Even Funko’s stock rose 46%. These are dramatic swings in one day.
It would seem that Wall Street came to the same conclusion: triple-digit tariffs = bad. Smart people talking and coming to an agreement = good.
Of course, it’s anybody’s guess as to what the tariff policy will look like after August 10th, when this 90-day pause will end. It’s a foregone conclusion that tariff rates at some level are here to stay. But hopefully the positive response in the financial community, corporate America, and Congress (oh- wait- I already forgot- they do absolutely nothing and have no response to any of this) will help to prove out the point that tariffs as economic policy are not stimulative and thus only serve to raise consumer costs, stagnate growth, and increase the unemployment rate. And for good measure, let’s throw in the recognition that we can’t in fact domestically produce everything we need in our economy and shut out the rest of the world. I guess our economy is truly global after all. But perhaps at least the response to this lower tariff rate will serve as a harbinger of where the rate will end up long term.
So, what does this all mean for all of us in the Toy & Game Industry?
Well, here at GPI, we are not moving off our longer-term strategy of diversifying manufacturing resources outside of China. This will continue to be a high priority. And while the 30% tariff rate on China-produced products is still an extremely high financial burden compared to where it was just a few short months ago, it is clearly in everyone’s best interests to view manufacturing in China as currently the most advantageous option in the short term. And a couple technical points on the 30% tariff rate during this 90 day pause: the Section 301 tariffs that were put into effect during Trump’s 1st term are still in effect, and the actual tariff rate that you will be paying on the value of your goods that are imported are a function of what the prevailing rate is on the day that the goods are presented to the U.S. Customs and Border Protection (CBP) for clearance.
That said, we are working with our factory teams to expedite all preproduction processes, schedule production as quickly as possible, and also secure freight bookings as soon as possible. We heard resoundingly from our customers yesterday that even with the 30% tariff in effect, having inventory available for sale throughout the rest of this year (albeit at substantially lower levels of profitability and likely still passing price increases onto retailers and consumers) is a far better proposition than holding inventory in China while hoping for an even lower tariff rate to emerge or halting production altogether.
Clearly, we’re all still in the throes of an existential crisis, and the “tariff policy as an economic cudgel” approach to global trade is ineffective but seemingly here to stay. But weighed against the backdrop of a global trade embargo, we should all take advantage of this cooler-heads-are-prevailing pause in the triple-digit tariff rate and reconsider the current freeze on manufacturing and shipping. In other words, having inventory to sell and generating cash flow beats the heck out of the alternative…
