Walmart Warns It Will Be Forced To Raise Prices Due To Trade War

Via ZeroHedge

One of the reasons why the US economic response to Trump’s trade war with China had been lukewarm at best, is that US consumers had not been subject to any of the inflationary consequences of the escalating tariffs between Washington and Beijing. That, however, is about to change: overnight Walmart issued a warning in a letter to U.S. Trade Representative Robert Lighthizer that it may have to raise prices due to tariffs on Chinese imports, CNN Money reported.

“The immediate impact will be to raise prices on consumers and tax American business and manufacturers,” Walmart said, according to the CNN Money report.

The letter came two weeks after Walmart asked the Trump administration to walk back its plan to put tariffs on Christmas lights, shampoo, dog food, luggage, mattresses, handbags, backpacks, vacuum cleaners, bicycles, cooking grills, cable cords and air conditioners.

However, the administration was unmoved and on Monday, it pressed forward with 10% tariffs on those products and $200 billion worth of other imports from China. The tariffs, which take effect next week, will jump to 25% at the end of the year, and target far more consumer goods – some $78BN according to DB calculations – than the first phase of $50BN in tariffs, that had relatively little impact.

Other retailers and consumer goods companies, including Ace Hardware and Joann fabric and craft stores, also lobbied the administration. Target said the tariffs will “hurt American consumers,” and said working families will pay more for school and college essentials like notebooks, calculators, binders and desks. And while administration generally ignored the concerns, it did spare bicycle helmets, high chairs, car seats and playpens from the final list. It also left off Apple Watches and Air Pods, a reprieve for Apple.

Target and Walmart will now face a tough choice: They can absorb the higher costs from tariffs by taking a hit to their profit margins, or they can pass some of the price increases on to their customers.

“Either consumers will pay more, suppliers will receive less, retail margins will be lower, or consumers will buy fewer products or forego purchases altogether,” Walmart warned in its letter.

The National Retail Federation, a trade group, estimated that a 25% tariff on furniture would cost Americans $4.5 billion more per year, while a 25% levy on travel items like luggage and handbags would cost an additional $1.2 billion.

As a reminder, washing machines were an early example of how tariffs filter down to shoppers. The Trump administration imposed a 20% trade penalty on washers earlier this year, and laundry equipment prices spiked over 16% in recent months.

Walmart will have to wrestle with the price question in a big way: of the company’s $500 billion in sales last year, about $50 billion was linked to Chinese imports or investments in Chinese businesses, estimated Greg Melich, a retail analyst at MoffettNathanson.

Needless to say, for the company which promises “everyday low prices”, raising prices is anathema to Walmart, a company that controls 10% of the US retail market and has a customer base of low- and middle-income Americans.

“Given that Walmart was such a huge source of cheap products for low income customers over the years, this really hurts the very people that Trump professes to help,” said Sucharita Kodali, a retail analyst for research firm Forrester.

In addition to prices, Walmart is facing a different threat: collapsing supply chains.

As CNN notes, Walmart’s American suppliers rely on parts from China to assemble and finish production in the United States. For example, Lasko fans, which are assembed in the United States and sold at stores, rely on motors from China. The same with bikes: Each mass market bicycle requires 40 individual parts to make, all of which are imported. “Tariffs on these parts would make U.S. manufacturing uncompetitive and drive up the price of bicycles for children and families,” Walmart told Lighthizer.

And while the company has been working to buy more bikes from American manufacturers, not enough are made in the United States to meet demand. Even with 25% tariffs, buying bikes with Chinese parts will still be cheaper than suppliers shifting production entirely, Walmart said.

One of Trump’s prerogatives with pursuing trade war is to push companies to manufacture more goods in the United States. But the National Retail Federation says the administration’s thinking is flawed and carefully planned supply chain plans can’t be redrawn overnight.

Retailers order their products six months to a year in advance, and they are left scrambling to find new options for 2019.

“The [administration] continues to overestimate the ability of US companies to shift supply chains out of China,” the trade group said in its own letter to Lighthizer. “Global supply chains are extremely complex. It can take years to find the right partners who can meet the proper criteria and produce products at the scale and cost that is needed.”

Case in point: the United States imported close to $220 million worth of dog leashes last year, and more than 80% came from China. And $474 million worth of lights for Christmas trees were imported to the United States last year, 85% of which were from China.

So while Walmart is already locked in for the coming holiday season, Christmas lights will probably be more expensive next year.