Trade Tariffs and Cross-Border Shipping – Part Two
Published on Jun 19, 2019
In our first article of this 5-part series on trade tariffs, we discussed what types of tariffs shippers encounter. Today, we will follow up with the second part in the series as we look at how those tariffs impact retailers.
However, it is important to keep in mind that this impact is not exclusive to retailers. Actually, international shipping between the US, Canada, and Mexico – and the tariffs charged between the three countries impacts several independent industries uniquely. It's just that when tariffs are inconsistent, increase, or decrease, the industry that is impacted most is the retail space. All goods sold at these retailers make their way to the stores via the supply chain. Therefore, in all actuality, tariffs impact the entirety of the logistics space just as hard.
So without further ado, let's start breaking down some of the ways that tariffs significantly impact the retailers we all use!
How Big is Retail in the US?
According to the US Bureau of Labor and Statistics, in 2016 there were nearly 3.8 million retail businesses in the United States. That massive number includes brick and mortar buildings and e-commerce retailers.
This industry employs around 29 million people and supports an additional 42 million jobs (including logistics). Furthermore, it brings in $2.6 trillion in sales.
Retail in America is HUGE. It is the source of most of our consumables, vehicles, technology, and it keeps us alive. Literally, everything we purchase through retail is moved through a supply chain at some point.
In 2017, retailers in the United States imported more than $125 billion worth of products from Mexico and almost $55 billion in products from Canada. When tariffs increase or change due to whatever reason, it makes a huge difference in the daily operations of retailers here in the US.
What Happens to US Retailers When Cross-Border Tariffs Increase?
It might seem that 10% of total sales isn’t that big, but it’s the products that represent that small percentage that makes a huge impact on the US economy. The majority of goods that are imported from Mexico include this top 10 list:
Vehicles: The United States imports $115.5 billion or 25.6% of total Mexican imports worth of consumer vehicles that are sold in the United States.
Electrical equipment and machinery: Each year, the US brings $81.9 billion worth electrical machinery or equipment that is made in Mexico.
Computers: Did you know that the US imports $75.4 billion in computers and computer hardware made in Mexico?
Mineral fuels - oil: $29.7 billion
Medical Equipment and Supplies: $19 billion
Housing materials, furniture: $10.6 billion
Plastics and Textiles: $9.5 billion
Vegetables: $7.2 billion
Iron or steel: $6.7 billion
Gems and precious metals: $6.7 billion
As tariffs to import these goods increases to American retailers, it stimulates many retail businesses to consider looking for different suppliers of these raw materials or supplies. Retail operations make their revenue by selling merchandise to consumers with a certain profit margin.
For those not aware, the profit margin is determined with some simple math. Here is a practical example:
Let’s say that you’re at the local grocery store and you’re looking for avocados from Mexico. The sales price is $1.00 per avocado, but the retailer buys them for a total cost of $0.50 per avocado. This equals a 100% profit margin, as the retailer will make the same amount of profit as their cost of goods. When tariffs on imported goods from Mexico increase, the price at which the retailer buys the avocado will increase, let’s say to $0.60 per avocado. In order to maintain profitably – the retailer now has to pass those price increases to their customers. In the end, the customer now pays $1.20 per avocado as a direct result of the increase of trade tariff costs.
Avoiding the Ripple Effect of Tariffs
Since consumers always look for the best deal, when these prices are too high for them, they’ll choose a different retailer. Losing customers is never a good thing which reduces sales of that retailer, and has a rippling effect on employees, cutting costs, and negatively impacts the business.
In order to avoid this problem, retailers simply search for different suppliers. Of course, the next time around, a supplier that is based in the United States. While this helps the US-based business, the way it impacts the Mexico-based avocado grower is huge.
However, it also impacts the US supply chain:
Increases demand for LTL or FTL shipments within the US
As demand increases – the supply of available carriers and drivers reduces
The cost of LTL and FTL shipping increase to US consumers
While the avocado example is a small example, it is also very telling on a much larger scale. The impact of rising tariffs on Mexican imports doesn't just affect Mexico. It has a wide-reaching reciprocal effect on the worldwide supply chain.
Trade tariffs are big business right now. Being knowledgeable about what to expect goes a long way in this heated debate. That's why we are writing this 5-part series. We want to empower shippers and anyone working within the logistics industry with the knowledge to scale their business in the face of rising rates and regulations.
We are all in this together, after all. Without you guys, we wouldn't even be able to be in business. So, when our clients succeed, so do we!
In the next article of our series, we’ll discuss how cross-border tariffs impact manufacturers. Stay tuned!