BY JAY FOREMAN, CEO, Basic Fun
Tariffs hitting exports from China: what is Basic Fun going to do?
Certainly, we will wait and see how this plays out over the next few weeks. We hear goods departing China as of March 7th will face a tariff upon arrival. That gives us five weeks plus two or three on the water before we and our customers are going to get billed 10 percent on the import value of the goods. That gives plenty of time for Trump and Xi to make a deal. My hope and belief is that there is a very big deal to be done between President’s Trump and Xi, and I believe they will make one at some point.
In the meantime, if the 10 percent sticks given that our prices with vendors and customers are locked in we will have little ability to demand discounts or pass along increases in the short run. That will mean that small and medium size companies like ours that don’t have leverage will have to absorb the tariffs against our bottom line. That will mean lower profits for companies like mine that don’t have the leverage to immediately pass along the tariffs or demand price concessions from vendors. It will likely hold true for many larger companies as well.
In the mid- to longer-run, though, the cost of the tariffs will absolutely be passed along to the consumer. Tariffs just become of cost of goods. That’s one of the big reason inflation spiked during the Biden administration. The effects of the last round of China tariffs were delayed by Covid, but exploded once Covid subsided and they never came back down and that was on a handful of categories not across the board. When we go to negotiate the next round of our manufacturing purchases, we’ll try to pressure our vendors to reduce our costs. However, typically contract manufactures work on very tight margins, so they won’t have that much to bend. Companies like mine will have to increase prices when we quote our customers for Q4 and for 2026. Prices will go up if tariffs hold.
In the end if the 10 percent holds, it will most likely be a combination of our vendors working a bit tighter, us taking a lower margin and our customers accepting some increases. Prices on goods from China will rise but clearly not as much as those from Canada and Mexico if those deals don’t get done. We all also have to look out for what might hit other markets when Trump is done with the big three. Is Vietnam next with a 10X trade deficit to the US? We’ll be keeping our fingers crossed for a deal with China.
One thing I believe is important for the administration to consider is that it’s not easy or even possible to win on all fronts. You can’t lower inflation if you enact policies that increase prices. You won’t see interest rates go lower if inflation stays high. You won’t reduce the deficit if tariffs reduce profits and GDP. You can’t bring production back to the US if the labor force is shrinking and you are exiting low cost labor from the country and closing the border. If you cause a recession in China, Canada and Mexico, you risk blowback on the US with fewer exports thus less business for US exporters. You can’t impose tariffs and not expect retaliation. You can’t break down an established supply chain and not expect problems with quality, value and reliability of delivery. You have to take care that if you break all the dishes and furniture that you don’t end up eating and sleeping on the floor!
Indulge my while I remind you of the lessons of unintended consequences. In the late 50’s and early 60’s, China had a small problem. There were a lot of sparrows around the cities and countryside. They were eating some of the grain in the fields and crapping on statues of Mao in the cities. So, the Chairman and supreme leader Mao ordered all the sparrows to be killed. So, hundreds of thousands of people were ordered and encouraged to catch, kill, or drive off the sparrows. The initiative was a huge success! The problem that wasn’t considered was that those sparrows just didn’t eat grain or crap on statues they also ate locust and grasshoppers in the countryside and flies in the cities. With no predators, the locusts ravaged the countryside causing famine, and flies swarmed the cities cause diseases. Hopefully, we are not going to suffer too much from forgetting to measure twice before cutting the wood and the shoot first ask question later approach to government.
The roller coaster never seems to stop. Good luck to us all!
Jay
