Although retailers are still faced with tariffs on some Chinese imports, the "phase one" trade deal between the U.S. and China will provide some relief to retailers' margins, particularly in categories such as toys, video games and consumer electronics, according to experts.
"Tariffs remain a headwind and we continue to monitor the situation but to the extent that the agreement resulted in a lower tariff than was [anticipated], then it seems more manageable," Tom Forte, a senior research analyst at D.A. Davidson said in an interview.
As part of the phase one trade agreement with China, President Donald Trump tweeted on Dec. 13 that an anticipated tariff of 15% on Chinese goods including toys, laptops and video games will not be imposed. That batch of tariffs was due to take effect Dec. 15. China said the deal still needs to undergo a legal review, while both countries would need to sign the agreement before it takes effect.
A 25% tariff on approximately $250 billion worth of Chinese goods, including industrial vacuums and construction equipment, will remain in place, while the tariff on approximately $120 billion worth of other Chinese imports will be slashed to 7.5% from 15%, the U.S. Trade Representative Office said in a Dec. 13 statement. This batch of goods with reduced tariffs includes toys and laptops.
U.S. imports of the Chinese goods that now face the smaller 7.5% tariff under the deal dropped by 29.7% year over year in October, according to Panjiva. Shifting production out of China and negotiating deals with manufacturing partners are some of the strategies companies are utilizing to minimize the impact of tariffs on their business.
Imports of televisions dropped 67.8% year over year in October, representing the biggest drop in imports of all products affected by the reduced tariffs, according to Panjiva.
Consumer electronics retailers such as Best Buy Co. Inc. that would have been significantly affected by the Dec. 15 tariffs will be one of the main beneficiaries of the trade agreement according to analysts.
UBS analyst Michael Lasser said in a Dec. 12 note that Best Buy will be avoiding "a big risk." The Dec. 15 tariffs would have affected some of the retailer's top products including gaming consoles, phones and computers.
"Now [Best Buy] can more easily navigate without the burden of added tariffs," Lasser said.
Best Buy did not respond to S&P Global Market Intelligence's request for comment.
Seaborne imports from China associated with Best Buy dropped to 74.9% in the four months to Oct. 31, from 77.3% in the same period in 2018, according to an analysis by Panjiva.
For toy companies including Mattel Inc. and Hasbro Inc., the pressure of tariffs — especially the potential drag on margins — and the risks of demand inelasticity will likely be avoided, Stephanie Wissink said in a Dec. 13 note.
"Trump's removal/delay of Dec. 15 tariffs is a reprieve for toy companies," Wissink said. "We expect some of the operational response to tariffs to remain, [especially manufacturing] diversification and domestic shift in inventory," Wissink said.
During an Oct. 22 post-earnings call, Hasbro executives told analysts that in an effort to mitigate the existing tariffs on toys, retailers were shifting from placing direct import orders, where they took ownership of the products in China, to domestic orders, which allows them to take ownership of the products in the U.S.
Hasbro and Mattel did not respond to Market Intelligence's request for comment.
Retailers still tasked with uncertainty
Although the U.S. removed and lowered tariffs on some goods, retailers still have to deal with the uncertainty of whether tariffs will be fully removed, according to Johan Gott, a principal with A.T. Kearney in the consumer and retail practice.
"Are you betting that this is indeed a first step towards a comprehensive deal that can abolish all the tariffs that have been put in place for the last two years or is this sort of a temporary reprieve? And I think that is what makes it so difficult," Gott said in an interview.
Following the announcement of the trade agreement, retail groups such as the National Retail Federation and the Retail Industry Leaders Association praised the move but urged the Trump administration to reach a final deal with China that removes tariffs and provides companies with more certainty in 2020.
Panjiva is a business line of S&P Global Market Intelligence, a division of S&P Global Inc.