Talk of a full-scale trade war between the US and China may sound dramatic, but the latest tariff applied to Chinese goods will have a major impact on the costs of materials coming to the US. The full list of affected goods, available here, includes fresh food and dry goods, consumer goods like hats and handbags, as well as a large list of manufacturing materials such as glass, aluminum, gold, electrical parts, and machinery.
Manufacturers, distributors, and B2B or B2C sellers of optical lenses, cameras, LCD screens, photographic film or other imaging equipment will be particularly affected by this tariff increase: the list of affected goods includes over 40 product categories related to these industries.
Other industries that may be affected by this increase include:
- Aerospace engineering and manufacturing
- Lasers and Optical components
- Robotics and Machining
Background and History of U.S. & China Tariffs
While upsetting, this tariff increase has been brewing for some time.The original Trump-era tariff increases began to take effect in the summer of 2018. The full list of products is officially split into 3 parts, titled as List 1, List 2, and List 3. Lists 1 and 2 were subject to a 25% tariff as of July 6, 2018 and August 23, 2018, respectively.
The tariffs on List 3 goods became effective in September of 2018 at a 10% rate, and were originally scheduled to increase to 25% as of January 2019. This January date was postponed to March 2, 2019 as China continued its attempts to renegotiate the nature and breadth of the new tariff structure.
On Sunday, May 5, President Trump tweeted that the 10% rate would increase to 25% “shortly”. On May 9, 2019, the Office of the US Trade Representative issued a Notice of Modification formally confirming the President’s statement that, “the rate of duty will increase to 25% with respect to the products…covered by the September 2018 action.” Based on conversations we’ve had with a legal team, this means the products outlined in List 3 were impacted. (Source)
Learn more about the direct implications on companies with products in List 3 by in our Q&A session with attorney, Casey E. Holder of Baker Hostetler.
How to Break Bad News to Customers
If your business is set to feel the pinch of this cost increase, it might feel like one tweet just kicked the legs out from under your business model. Ambiguity about national economic policy, the nature of cost increases, and even the availability of certain materials all contribute to a feeling of unease when reacting to these situations.
Your immediate response to news like this is critical. Your customers rely on you as a source of truth about your product. You’ll need to craft a communication strategy and get in touch early to advise on the anticipated impact to customers. A price increase is never fun to hear about, but effective and honest communication allows you to maintain a trusting relationship with your buyers.
- Devise and communicate your response strategy internally. If the product price is increasing, decide ahead of time which current orders can be honored. The situation will need to handled differently if you have new one-time orders versus recurring orders and already negotiated contracts.Try to anticipate customer questions and prepare responses to each.
- Talk to your biggest customers personally, first. Schedule phone or face-to-face time with important contacts whenever possible to discuss the news. Present the problem as something you are facing together: the cost increase will affect everyone in the industry. Follow up by stating clearly how you will respond.
- Notify all of your customers with an email or newsletter communication, so there are no pricing surprises when a repeat customer visits your website. Remember to frame the situation as something you will be dealing with together. When your customers respond with questions, attend to them quickly.
- When you do break the bad news, do it directly and transparently. Don’t beat around the bush or hint at promises you may not be able to keep. Be clear that you will be following the situation closely and will keep them informed as you get updates.
Staying Prepared
Now that you’ve handled the immediate crisis, it’s time to start planning for next time. Unplanned exigencies will always happen, so take the current situation as a lesson and apply it towards the future.
- Review your profit margins. A tariff increase from 10% up to 25% represents a sizeable shift in overhead. Take time to review your current profit margins and decide how much, if any, of the cost increase you can afford to absorb. Small companies who may already be operating on a thin profit margin may need to consider alternative options such as changing suppliers or bulk ordering. Marketing analytics can also help you understand how much of a cost increase your consumers will tolerate.
- Lock in rates with suppliers. Whenever possible, negotiate long-term contracts with suppliers that guarantee a steady product pricing structure for the life of the contract. This is another spot where the ability to order in bulk can work in your favor. Work to maintain positive, long-term relationships with all of your suppliers—and use this to your advantage whenever your contract is up for renegotiation.
- Stay informed with the latest news in your industry. Many small business owners rely on RSS feeds, newsletters and lists of blogs to stay informed. This is a crucial activity, but it also isn’t enough. Keep your ear to the ground by subscribing to trade journals and industry-related magazines. Many progressive business owners are also using SEO tools to track important keywords and monitor industry trends. (We use Google Alerts). Meet with your employees to leverage their collective intelligence on the latest buzz in your industry. Soliciting surveys from customers can also provide surprising insight into business trends, if you know the right questions to ask. Finally, keep a close eye on your competitors: even if you missed something important, there’s a good chance somebody else picked up on it. Do you need help staying on top of industry trends? Contact Launch Team.
Events like the tariff increase are never easy to manage, but creating and maintaining a contingency plan allows you to remain focused on supporting your customers through the challenge, instead of scrambling to save face. Utilize the strategies and tools provided here to help you cultivate and protect your customer relationships now and in years to come.
If you're ready to learn more about the legal implications of this change, check out our Q&A session with attorney, Casey E. Holder of Baker Hostetler.
