Chain Store Age offers discussion on NAFTA TPP and Retailers.
In his 1987 book "The Art of the Deal," then developer Donald Trump wrote about the value of starting a negotiation with a dramatic and even unrealistic proposal. That makes one ponder how much of President Trump’s strong language is just bluster and how much might be indicative of a true departure from policy orthodoxy.
That, of course, remains to be seen. What isn’t up for debate, however, is the potential for Trump’s politico-economic brinksmanship to have a potentially profound impact on the retail industry. Will that impact ultimately be beneficial, catastrophic, or somewhere in between? And what can retailers do to prepare and protect themselves in the meantime?
One of the issues that has gotten a great deal of press is President Trump’s decision to take the U.S. out of the 12-nation Trans-Pacific Partnership (TPP) trade agreement. While this is certainly a high-profile move, I think the practical impact for retailers is going to be fairly limited. To a large extent, the U.S. withdrawal from the agreement is largely symbolic. It states that when it comes to negotiating trade agreements, the U.S. plan is to operate alone rather than as part of a coalition.
What happens next should be of more concert to retailers and center developers. Free trade agreements like the TPP help keep prices down for a wide range of goods that would be significantly more expensive if they were produced in the U.S. The Trump administration has not just withdrawn the U.S. from the TPP, President Trump has very publicly threatened a 35% increase in tariffs. The economic impact of such a move – or anything remotely close to it–would be something between devastating and catastrophic. American consumers get a high percentage of goods from China and other Asian markets (97% of U.S. clothing comes from China). The global marketplace is truly integrated, and if a large increase in tariffs were to occur, retailers that ship from Asian countries would be in real trouble.
The biggest concern would be the impact on consumers. Such an increase would ultimately lead to dramatically higher prices on goods that consumers buy and use everyday, and they would be the ones bearing the brunt of that price increase. Of course, that would put a crimp in retail sales that would be felt by retailers, as well. In theory, this kind of tit-for-tat tariff would require retailers to radically restructure their manufacturing facilities, processes and supply chains as they shift operations in an attempt to keep their products affordable.
In reality, however, this would be close to impossible. While shifting some large manufacturing processes out of Asia would be a formidable – but doable – proposition, retail is a very different animal. Retail has a much longer lead time (warehouses are jammed months in advance of the holiday shopping rush, for example), and the expense and logistical complexity of turning the ocean liner of retail production and supply chains around would be enormous. It’s highly questionable whether the U.S. even has the structural capacity to make such a shift. In other words, we literally don’t have the physical bodies able/willing to step in and satisfy the labor requirements.
While it may seem like a similar dynamic exists with the North American Free Trade Agreement (NAFTA) – another international agreement Trump has publicly derided and intends to renegotiate – there are some important differences that retailers should be aware of. So far at least, the retail impact of Trump’s very public criticisms of NAFTA has been negligible. No duty rates have changed, and no shipping patterns have changed. I honestly don’t foresee anything happening in the near future that would be particularly damaging to the retail space. Trump’s newly released “A Better Way” tax plan – which proposes a 20% border tax – does have the potential to be a significant economic blow to U.S. retailers. The fact that our North American trade relationships feature more large-item manufacturing, means that adjustments would be a more feasible form of action, and the overall retail impact would ultimately be less dramatic than similarly confrontational tariffs in Asia.
The bottom line is that we as Americans have high expectations: we like (and expect) the best product for the lowest amount of money. Implementing the kind of tariffs that President Trump has discussed would raise brick-and-mortar retail prices in a way that just doesn’t make sense for Americans. Actually following through on this kind of tough talk would be simply shooting ourselves in the foot. Now, that said, Trump’s saber-rattling could have some beneficial impact – and potentially put us in a better trading position. He is correct in the sense that it isn’t an even playing field right now. President Trump’s bellicose language about currency manipulation and other extracurricular behavior by international players does have some basis in authenticity. Some tough talk could end up leading to renegotiations that could put the U.S. in the better position going forward.
In the meantime, the unfortunate conclusion is that options for retailers are somewhat limited. Modest supply chain shifts make sense as a kind of proactive diversification of production. However, the reality is that the scale, scope and structure of the current global retail production and supply network would make any substantive change logistically impractical and prohibitively expensive. Until President Trump actually does pursue a policy of trade reciprocity, U.S. retailers are really just in a wait-and-see mode. That uncertainty obviously isn’t ideal, but without some dramatic shift from the Oval Office (and the caveats about the potential impact of a major international crisis), it’s likely that the usual cyclical nature of the retail industry is likely to persist in the months and years ahead.