Retailers expect to face significant challenges while also potentially reaping some benefits on the trade front in 2019, as Congress takes up a North American trilateral trade deal and the Trump administration continues talks on three bilateral trade deals and navigates ongoing tensions with China.
The biggest threat to supply chains is the ongoing tit-for-tat tariff war between the U.S. and China, which is currently in a 90-day suspension period, as negotiators try to reach a permanent agreement to ratchet down tensions.
"Three-month tranches of delays is no way to run a retail supply chain," said Hun Quach, vice president of international trade for the Retail Industry Leaders Association, or RILA. "Our companies are deciding what to order for the next holiday season now and not knowing whether or not tariffs will be imposed on things like toys and consumer electronics is causing a lot of consternation among our members."
The Trump administration has imposed various batches of tariffs on a total of $250 billion of Chinese imports, while Beijing has countered with tariffs on $110 billion of American exports.
Some consumer products, including patio furniture, handbags, mattresses and remote controls, have been targeted thus far, though some retail groups are concerned that many more everyday products will be subject to steep tariffs in 2019 if talks go south.
U.S. and China continue talks on tariffs
U.S. and Chinese officials wrapped up three days of talks in Beijing on Jan. 9 without reaching a deal. If the two countries fail to hammer out a deal on the tariffs, the U.S. is ready to impose a 15% tariff rate increase on a $200 billion batch of Chinese imports imposed in September.
Peter Allgeier, president of international trade at consulting firm Nauset Global LLC and a former Deputy U.S. Trade Representative under the Bush and Obama administrations, is not confident that the core issues at the heart of the U.S. Section 301 investigation that triggered the tariff war — China's forced intellectual property transfer and trade theft practices — will be resolved in this negotiation period that runs through March 2.
"That's a legitimate objective, but there's no way they're going to do that in 90 days," Allgeier said in an interview. "[Trump's] pattern has been to impose tariffs, so I suppose he would increase the 10% rate to 25%. I think he's more likely to double down."
Perhaps most worrisome for retailers is the possibility of additional tariffs on $267 billion of Chinese goods, which President Donald Trump has threatened to impose since early September.
"If they push all the rest of the chips in the middle of the table, it would have to include us," said Matt Priest, president and CEO of the Footwear Distributors and Retailers of America, who said he is still optimistic about a positive outcome. "But we still have some landing strip to go before we get there, and we hope we can still find a way to land the plane at this point."
China supplies about 41% of apparel, 72% of footwear, and 84% of travel goods to the U.S. annually, so those products potentially facing new tariffs in 2019 would be particularly costly for American businesses and consumers, warned Rick Helfenbein, president and CEO of the American Apparel & Footwear Association, or AAFA.
"Trying to move all of that will be costly," he said. "Right now people don't feel it. But come the end of the first quarter and second quarter, the price will be going up fast."
United States-Mexico-Canada Agreement
Congress is set to take up The United States-Mexico-Canada Agreement, or USMCA, which also has implications for regional sourcing and supply chains. At stake is $1.2 trillion of trade between the three countries, and any failure by Congress to pass the legislation could result in Trump carrying through on threats to withdraw from the existing North American Free Trade Agreement, or NAFTA.
The USMCA, which would modify the provisions of NAFTA, faces several hurdles in Congress that could delay or possibly derail the legislation. Both chambers of Congress must pass the USMCA legislation and it has to be signed by Trump, as well as the legislatures of Mexico and Canada, before it can take effect.
One complicating factor is the recent seating of the new Democrat-controlled U.S. House of Representatives, which includes more progressives who could call for negotiations of labor and environmental provisions, including the potential for yet-to-be-crafted side letters, Quach said.
"Democrats will want to have their voice heard and tweak things a bit," Helfenbein said. "But I think after some back-and-forth, the USMCA will go through. And to be perfectly candid, Trump has exhausted everybody. It will probably go away by the second quarter."
If Democrats block the USMCA from passing in the House, Trump could still follow through on a complete withdrawal of the existing NAFTA.
"If [Trump] tries that, there are going to be a lot of legal questions on whether he can do that on his own," Allgeier added. "It's going to be a rocky road."
Bilateral trade deals: EU, Japan, U.K.
The Trump administration will continue pursuing bilateral trade agreements with the EU, Japan, and the U.K. this year.
Quach of RILA said that while the three bilateral deals, if ultimately approved and implemented, would provide benefits for many companies, a successful deal with Japan would be particularly beneficial for retailers.
"From a rules-based perspective, there is much to gain there in the harmonization of product safety, regulatory, agriculture and customs procedures," Quach said.
Goods trade with Japan was $204.1 billion in 2017, according to the Office of the U.S. Trade Representative, making Japan the United States' fourth-largest trading partner.
Washington has made reducing the $68.9 billion goods trade deficit with Japan a priority, including more market access for American automakers in the Asian nation. Several auto and policy experts warn, however, that making gains in the auto sector in Japan might not be feasible due to lack of demand and strong existing Japanese brands including Toyota Motor Corp. and Honda Motor Co. Ltd.
Several Senate Republicans and Democrats have come out in support of the three trade deals, though Senate Finance Committee Ranking Member Ron Wyden, D.-Ore., has called for setting the bar "high" for labor rights, environmental protection and digital trade in any such deals.
A successful trade deal with the EU would also put an end to a separate trade spat that led to tariffs on billions of dollars of goods in 2018. Automakers in particular could benefit, as Trump has threatened repeatedly to impose 25% tariffs on European car imports, justifying it on grounds of national security.
Talks with the European Union and Japan can begin in January under U.S. fast-track rules, although talks with the U.K. cannot start until at least March 29. Unlike with the EU and Japan, the U.S. ran a $14.2 billion goods trade surplus with Britain in 2017.
Helfenbein of the AAFA said he is optimistic that discussions and meetings with those three partners face a smoother path than those with China in 2019.
However, Dan Ikenson, director of the Cato Institute's Stiefel Center for Trade Policy Studies, said it has become difficult to speculate on trade success and strategy under the Trump administration.