As articles spread, social media comments fly, and debates ensue about the recently-introduced Chinese tariffs (import taxes) put into place by the current administration, I shine some light on how the tariffs will affect Americans. This is not a political article. Aside from any political affiliation, this is an analysis of what these tariffs really mean to Americans, explained in the context of my personal business.
To start, who am I? I am Paul Hales, an audiophile since the age of 12 and entrepreneur and engineer since the age of 21, who has spent the past three decades developing US-made audio products for the consumer and professional markets. After three decades, I feel that I know the business. My latest venture – previewed at CEDIA Expo 2018 – is a new company called Theory Audio Design. Theory was conceived for the express purpose of bringing a new standard of high performance to the mid-tier lifestyle and surround sound audio market segments. To achieve the required performance/cost balance it is necessary to manufacture Theory products in China. This is a first for me, and for any of my brands, which have historically been made in the US, including my high-end Pro Audio Technology (PRO) brand professional-style residential loudspeakers and amplifiers.
To begin, I object to the current Administration’s claims to the American people that China pays the 25% tariffs. This statement is patently false. Theory, which buys and sells products made in China, pays the tax, not China. For example, if I import one of my Theory products that normally costs me $100 from my manufacturing partner, I pay $100 to my manufacturing partner and then I pay an additional $25 tax to the US Government – my new net cost is now $125 for my $100 product. The Chinese factory manufacturing my products still gets $100 from me and is utterly unaffected by the tariff at this point. Theory has paid the $25 tax, not China or my Chinese partner.
Given current retail prices, my business would not be viable if my cost of goods increased by 25% so, to make sure I remain in business, I have to increase the wholesale and therefore suggested retail prices of my products. To maintain the target gross margins for Theory and for my dealer base, I am forced to raise the retail price by 25%. So the first and immediate impact of the tariffs is that Theory products are now 25% more expensive to buy and enjoy than they would have been last month. When a consumer comes along that is willing and able to buy my product at the 25% premium, I recover the 25% tax (through the increased price), and now the US consumer has paid the tariff; still not China.
The Administration claims that they put the tariffs in place to gain leverage over China to be used in broader trade negotiations, but by definition, you cannot “hurt” China with tariffs without first hurting US companies and consumers that buy and sell products made in China. The reality is, the Chinese factory, and by extension, the Chinese economy, is not impacted by the tariffs until my orders placed with the factory decline as a result of the necessary higher selling prices of my products. Higher selling prices result in reduced product demand as fewer consumers can afford to buy them.
The big picture here is that China won’t “feel” the tariffs until sales of China-made products in the US significantly decline due to the government tax, paid ultimately by US consumers. Even then, it will take years for the supply chains to be materially affected, particularly since China sells products globally and not exclusively to the US. While we’re waiting for China to feel the impact, it is US-based businesses like Theory, Theory’s retailers and Theory’s consumers that are the ones being leveraged.
Across the board, the tariffs mean that American consumers will be able to afford less of anything made in China, which is likely a much higher percentage of everything US consumers buy than most people think. For example, the cost of that new smart phone you wanted to upgrade to just went up, for you, not for China.
According to the Peterson Institute for International Economics, the tariffs would likely translate to a $2,200 tax increase for an American family of three, obliterating the $800 tax savings that middle-income families received from the recent 2017 tax overhaul.
For my customers, the problem is compounded. Theory Audio Design was conceived for the explicit purpose of offering high value products to a broader market segment, which can no longer be accomplished at 125% of their original retail prices. The unavoidable risk to my business, and others like mine, is that my sales will be negatively impacted as fewer customers can afford my products at 125% of their normal cost; which is exactly how tariffs are designed to work.
Lastly, the notion that these tariffs will drive expansion of US-based manufacturing in any significant way in the short term is grossly optimistic. It would take years to build the manufacturing infrastructure necessary to address the issue at scale. In the meantime, large companies that have traditionally had products made in China are looking to move manufacturing to other low-cost Southeast Asian countries (for example: Indonesia, Malaysia, Vietnam, Thailand), they are not trying to ramp up in the US. Smaller companies like mine simply cannot afford to start over with new suppliers and must therefore try to survive the tariffs as long as they remain in place.
For the near and mid-terms, people like me, my business partners including my retailers, freight and logistics suppliers, and my potential customers are being sacrificed in an effort to potentially leverage China. We are the pawns in the Trump Trade War.
If that weren’t’ bad enough, unfortunately, that’s only half of the tariff story. Exporters of US-made goods to China – like my American-made brand, PRO, mentioned earlier – will experience decreased sales as a result of China’s retaliatory tariffs, in exactly the same fashion as described above, but in reverse.
No matter your political affiliation, the fact is, the newly introduced tariffs put in place by president Trump’s administration due more now to harm people right here in America than they do to harm or leverage China. The unfortunate reality is, as a result, many US-based businesses will not survive.