Trump Administration’s Tariff Threats Turn to Reality: What Happens Next For The Toy & Game Business…?
THREATS OF TARIFFS BEING IMPOSED WERE MADE: HERE COMES THE REALITY
A few months back I wrote here about the threat of tariffs on trade from the incoming Trump administration. Now tariffs are a reality. President Trump announced 25% tariffs on Canada & Mexico, and 10% on China. Then following engagement between the leaders of Mexico & Canada, tariffs have been paused or postponed for now based on commitments made on various issues by those leaders to President Trump’s apparent satisfaction.
No such pause has been applied so far with regards to tariffs on China, and China has now reacted with some tariffs and commercial counter measures of their own. This topic therefore merits some analysis to understand what is happening and how it is going to affect the world of Toys & Games.
THE UNEVEN TARIFF BATTLE WITH MEXICO & CANADA
The economies of Mexico, Canada and the USA are very intertwined. Just in the automotive sector alone, car components tend to go back and forth across the borders of these 3 North American countries until they become part of a finished car. So any tariffs are going to be at least disruptive, and in all probability, have a significant inflationary effect on the U.S. economy, and therefore on the disposable spending power of U.S. consumers. This would not be good news for consumers who are still fighting their way out of a cost-of-living crisis, and it is not good news for the rest of the world to see potentially reduced spending in the world’s biggest Toy & Game market.
The hard reality of this situation though is that even though an escalating tariff war would be likely to harm U.S. consumers and the U.S. economy overall, it is not a fair fight. The U.S. is so much stronger economically, diplomatically and militarily that in the end Mexico and Canada are very likely to compromise and give President Trump at least most of what he demands, certainly enough for him to be able to declare a ‘victory’. That seems to be what has caused the delay of the tariffs on the other North American partners here. It would be better for the Toy business if these tariffs were never introduced, and hopefully if President Trump can declare a victory to his support base, these tariffs may not be go ahead.
In recent years, many North American focused Toy Cos have ramped up production in Mexico in particular – Mattel’s biggest factory is now in Mexico, Lego have a production facility there as do MGA. So tariffs would likely have a very difficult impact on the Toy business, here’s to hoping that they are not ever imposed, and that the leaders of the North American nations can find amicable solutions without the need for tariffs, and that he next 4 years of the Trump administration sees amicable relations between these closely bonded countries.
THE MAIN EVENT: TARIFFS ON CHINA & CHINA’S COUNTER MEASURES
The much thornier issue from the perspective of the Toy & Game industry is Trump’s 10% tariffs on China which have now gone into effect, triggering counter measures from China in term of tariffs on some energy imports from the USA, and the threat of greater restrictions on a few major U.S. businesses operating in China.
Whereas Mexico & Canada are ultimately likely to capitulate to U.S. demands, China is not. China’s leadership reportedly see themselves in strategic competition with the U.S.A. to break what they see as the U.S. hegemonic hold on global power via military, diplomatic and commercial strength. To that extent, China has already massively reduced their reliance on exports to the USA and have focused on building up export business to other countries around the world, as the following diagram shows. China’s approach will be to try to compete with the U.S. directly and via grand strategy, they are far less to deal with this current trade inflagration via personality and relationships with U.S. counterparts.
At the Spielwarenmesse-Nuremberg show last week, I sat in half a dozen meetings between Toy & Game companies and their factories, and in each of these, the customer was asking for cost reductions due to downward retail pressure on pricing. 10% tariffs added to goods from China are not going to help to increase demand/drive growth in the Toy & Game aisles of retail. And much as I have been a proponent and facilitator of the growth of production capacity outside of China, the reality is that the vast majority of Toys & Games – maybe as much as 80% of global supply are still coming from China, so this will definitely have a negative impact on the Toy business overall.
RISK OF FURTHER TARIFF ESCALATION
Chinese leadership and the nation of China are culturally predisposed to avoiding ‘losing face’, in other words, they will be culturally prevented from giving in to whatever demands President Trump wants to make. In a power struggle, China cannot afford to look weak against the incumbent global power they are seeking to compete with or even usurp.
The risk then is that further tariffs will be placed by the Trump administration against goods from China, so we could be starting with 10%, but ending up much higher. This is not scaremongering, this is a risk we need to consider and potentially diminish with our actions, because the big companies that dominate mass market retail where most of the volume of sales comes from in our business, are run by accountants and risk adverse corporate executives, as such they take decisions based on measured assessments of risk, and for the next 4 years, the risk of tariffs and trade wars flying back and forth between the USA and China looks high.
And also bear in mind, that is without any conversation about perceived risk of military flare up in or across the Taiwan strait, which would have a massive impact on Sourcing for Toys & Games. If trouble flared up in the Taiwan strait, then sanctions and other strong economic counter measures would most probably come into play, and shipments would be disrupted, if not prohibited. The Toy & Game business, as well as the rest of the world, really needs peace to reign.
IMMEDIATE EFFECT ON THE TOY & GAME INDUSTRY?
There are some obvious immediate effects from the tariffs imposed and threatened so far:
1). There are numerous alternative (albeit much smaller) Toy production hubs seemingly off the radar for tariffs at this stage:
a). Vietnam
b). India
c). Indonesia
Therefore we can expect to see uplift in demand from these countries (which in fact my company has definitely seen since President Trump was elected).
2). Further cost pressure on factories in China to mitigate the impact of the 10% tariffs. This is quite likely to push the least viable factories out of business and will make others choose to diversify or completely change their product categories they are producing. In other words, the impact of these sanctions is likely to reduce capacity in China for Toy & Game production to a small degree.
3). Increased retail pressure to move production away from China. Some retailers have been particularly aggressive about this, reportedly Walmart has committed to sourcing $10bn of merchandise from India for example, and I know from my factory partners in India that Walmart is all over them currently. https://corporate.walmart.com/news/2020/12/10/walmart-commits-to-sourcing-10-billion-of-india-made-goods-each-year-by-2027
4). Retailer downward price pressure – whether it is realistic and reasonable or not, if there is cost inflation, mass market retail will pressure costs down. This will not be easy for anyone.
LONG TERM EFFECT ON THE TOY & GAME INDUSTRY?
Fundamentally, by implementing tariffs on the world’s Number one Toy & Game production hub, President Trump is accelerating the ebbing away of production from China. This is arguably a good thing for China’s economy, because with worker wages at $800 or more per month in China now, this is a nation better suited to producing high end items such as real cars versus Toy cars!
The problem is for the Toy & Game industry which is still so reliant on China’s vast expertise, experience and supply chain for Toy production. These are turbulent times and I foresee the turbulence increasing, not reducing alas.
The function of Sourcing has not been as complicated and challenging for 40 years. The ‘ostrich with head in the sand’ approach is unlikely to be a successful formula for managing the challenges.
CAN WE HELP YOU MANAGE THIS ONGOING SUPPLY CHAIN DISRUPTION?
If you would like to discuss what is going on with Sourcing right now, and explore options to address the challenges with us, we are offering free, no-obligation advisory calls for a limited period of time, just DM to set up a call.
TOY & GAME BUSINESS CONSULTANCY
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