How Tariffs Impact Ecommerce Brands: What to Know

Tariffs have recently become the talk of the town.

OK, let’s not exaggerate, but it definitely is a top item being covered by news agencies. President Trump’s various statements about tariffs on the campaign trail (against China, Canada, and Mexico, global tariffs, etc), and his statement on his inauguration day that he will impose 25% tariffs on Canada and Mexico starting February 1st definitely show he means business. However, how it plays out in practice if other world players come to the negotiating table remains to be seen.

In this piece, I will explain what tariffs are, how they work and a bit about legal frameworks to enact tariffs. Afterward, I will dive into how tariffs can impact US ecommerce brands, as well as potential thoughts and strategies to mitigate the associated risk.

What are tariffs

OK, so what are tariffs? They are a tax imposed, generally by governments, on importing or exporting goods

Tariffs serve both as a source of revenue for the government and also, some argue, mainly to regulate foreign trade and safeguard domestic industry. Tariffs can be a fixed amount (percentage or amount per unit) or vary based on the price. They are meant to reduce foreign competition and trade deficit. So, they fit in nicely with the administration’s policy of America First by artificially making manufacturing abroad more costly.

At the end of the day, tariffs on goods leave importers with several options:

1. Bearing the additional cost
2. Passing the additional cost on to the consumer
3. Trying to negotiate the price down to cover some or all of the tariff amounts
4. Stopping manufacturing abroad (or in specific countries with tariffs), or at least moving part of the production to domestic manufacturing.

As most importers and local businesses will not want to bear the additional costs and have difficulty cutting down costs, a lot of time, the additional costs will just be borne by the end customer, which, in theory, could impact demand and hurt topline sales.

The other side of the coin is the collection of cash from tariffs, which can be used for infrastructure and domestic spending and potentially push more manufacturing to local brands. Without diving too deep here, even if the government does collect significant funds, this likely ends up as a form of regressive tax, as everyone pays the same amount.

How could they be enacted?

If the Trump administration does, in fact, decide to enact tariffs, they may use one of the following mechanisms:

• Section 301 investigations: claiming that treaty partners are not acting consistently with their treaty obligations. Six of these investigations were carried out under the first Trump administration, leading to significant tariffs on goods manufactured in China.
• Section 232 investigations: restrictions placed when imports into the US threaten or impair national security. Following this type of investigation in the first Trump administration, tariffs were placed on aluminum and steel imports.

How should you respond?

Now, assuming that the administration decides to enact tariffs, either with respect to specific countries (let’s say Canada, Mexico, and China), or a blanket tariff like Trump initially posited on all imports from around the world, and/or with respect to specific items, this can obviously impact ecommerce businesses importing goods from abroad. How should you respond to this?

1. First of all, as noted, these tariffs (in addition to collecting funds) aim to push domestic production. If possible, it could be cheaper than heavy tariffs on imported goods. Another point worth noting is that Trump has said that the corporate tax rate with respect to goods manufactured within the United States will be decreased to 15% (down from the general corporate tax rate of 21%). Again- this needs to happen, but it is worth carrying out a brief spreadsheet calculation to see if the difference in tariffs plus the decreased corporate tax will land you a more significant bottom line than continuing to import goods from abroad.
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2. Another general possibility, to the extent that certain countries are targeted while others are not (which very well might happen), is moving your production to another country. Now would be a good time to start exploring alternatives if you are currently manufacturing in Canada, Mexico, or China and trying to price the differences, considering the future tariff rates (which nobody knows). Some businesses end up “parking” their items in another country not subject to tariffs and try to skirt them this way, although this may not be strictly compliant with the law.
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3. One critical point that is worth keeping in mind is as tariffs hit, being on top of your cost structure and unit economics becomes more important than ever. If you will take a hit (or expect your customer to pay more), see where you have more leeway and how much wriggle room you have. This can only be done by getting nitty-gritty with your bookkeeping. Use a solution like Finaloop which is custom built for ecommerce businesses and delivers real-time accurate financials and insights down to SKU level. This will provide you the critical data for navigating in this uncertain environment and making informed business decisions.
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4. One last point is that tariffs generally multiply the value of the items or goods imported by a certain percentage. Even if it is too expensive to fully manufacture the items domestically, moving part of the manufacturing process to the US may be worth considering. This will offset some of the price increase, and the tariffs on items shipped into the states will be lower, as the value of the items won’t be as high, as they aren’t “finished goods” but rather, an earlier stage that still requires finishing. 

Final thoughts

To summarize, nobody knows where or whether we will meet tariffs. This all may end up being a tempest in a teapot and part of a strategy of getting various trade partners to the table. However, there is a good chance that some form of tariffs will be enacted, so it is worth getting your act together and taking a couple of the following steps:

• Review your manufacturing process
• Consider alternatives and see how much it would cost to manufacture domestically (either the entire process or just part of it)
• Look into manufacturing in other countries that may be less suspect to the upcoming tariffs
• Get accurate financials, do the math, and see what your bottom line will look like, considering various scenarios.

That’s it for now, definitely worth staying on top of the ball here!