China tariffs could push fragile U.S. retailers to cut jobs and close stores

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  • The fragile retail industry is bracing for higher costs ahead of 10% U.S. tariffs on Chinese imports due to take effect Sept. 1.
  • New tariffs could mean more store closings for the U.S. retail industry, which has already shuttered more stores so far this year than it did in all of 2018.
  • Retailers are already cutting jobs tied to bankruptcy at the highest level in a decade, slashing almost 43,000 positions this year through July — a 40% increase from last year.   

The deepening of President Donald Trump’s trade war with China — especially a threatened 10% tariff on $300 billion in consumer goods imported from China slated to take effect Sept. 1 — may mean more job cuts and store closings for some already fragile retailers just as the holiday season approaches, experts say.

U.S. importers, not China, would pay the new 10% tax if it goes into effect, and retailers worry that could hurt consumer spending, slowing the economy and hurting their bottom lines. Until now, previous rounds of tariffs have largely been absorbed by the companies that must pay the tax. 

The latest round of tariffs hits consumers more directly than those imposed by the White House so far. And U.S. retailers are already cutting jobs tied to bankruptcy at the highest level in a decade, slashing almost 43,000 positions this year through July — a 40% increase from last year, according to a report from outplacement firm Challenger Gray & Christmas.

“We have seen a number of retailers filing for bankruptcy, closing locations and cutting workers, and indeed, the majority of bankruptcy cuts occurred in that industry,” said Andrew Challenger, a vice president of the firm, stated in the report released last Friday. 

U.S. store closures so far this year have already exceeded those for all of last year, according to a recent report from Coresight Research, which follows the retail industry. Some 7,673 store closures have been announced vs. 5,864 for all of 2018, according to that report. All told, the retail closures in 2019 could easily double 2018’s total — extending beyond 12,000, Coresight estimated..

Fewer imports, fewer sales?

The latest round of tariffs on China — the fourth under Mr. Trump — hits companies that are far more dependent on imports and have thinner profit margins, from sellers of footwear and clothing to electronics to bicycles to Bibles. 

If the cost of the goods rise, retailers may import less, retail industry analysts at UBS wrote in a note to investors last week. That means fewer goods to sell. It may also mean lower profit margins if consumers are unwilling to pay higher prices or companies decide not to pass on the added cost. 

“For many retailers, a 20% to 30% decline in imports of tariffed goods leads to lower sales,” the UBS analysts wrote. That, along with an inability to pass on all of the cost to consumers “could easily lead to accelerated consolidation in the retail space (read: store closings and job losses),” they wrote.

Less room for debt payments

Another worry for retailers: The ability to pay billions in debt. The industry is already dealing with increased spending needs to invest in online operations and cope with the changing way the U.S. consumer shops through e-commerce giants like Amazon.

In retail, a company’s ability to operate each day can closely rely on its ability to borrow cash from lenders or even vendors to get merchandise on the floor before consumers buy. Black Friday during the holiday season, for instance, originally got its name because that’s when retailers traditionally were “out of the red” and began making a profit for the rest of the year. For smaller retailers, such short-term loans can be tied to an ability to hit sales and profit forecasts.

If companies now have to pay for tariffs, they could also be in danger of running awry of terms of those loans, according to executives who spoke last week on a conference call arranged by Tariffs Hurt the Heartland, a group of associations and companies opposed to Mr. Trump’s tariffs.

If forecasts for profits change, “accommodations have to be made, we may have a higher cost of borrowing, we may trip [loan] covenants,” warned Jay Foreman, CEO of Boca Raton, Florida-based Basic Fun! Toys, whose toys include the classics Lite Brite and View-Master. 

That means job cuts, he added. “We would typically tend to try to offset those decreases in our margins by lowering our overhead. And that’s basically what we’re doing,” Foreman said.

Some retailers told Foreman they will immediately pass on the higher costs to consumers, while others are looking to split it with the companies that import products, like his Basic Fun! Toys, Foreman said in the call. 

Questions about currency manipulation

The White House vowed last week to take strong action if China devalued its currency with the purpose of “neutralizing tariffs.” Indeed, the Treasury Department officially labeled China a currency “manipulator” after the yuan, its currency, declined in value following the U.S. tariff threats. And Mr. Trump has implied that a lower Chinese currency could mean imports end up costing companies less. 

But such currency movements haven’t cut costs for U.S. companies much so far, analysts at Goldman Sachs argued this week in a note to investors. 

A devalued yuan at “first glance” might seem to lower costs of Chinese goods for U.S. importers, the Goldman analysts explained, “but U.S. international trade is invoiced mainly in dollars and prices tend to be sticky.” That results in just a “modest” price change for importers, “especially on consumer goods,” the Goldman analysts wrote. 

American consumers and businesses are taking the biggest hit in the form of higher prices and costs so far, recent research suggests. In May, a study from the Federal Reserve said Mr. Trump’s China tariffs could cost the average family $831 a year. 

The upcoming tariffs on consumer products, while less than the 25% Mr. Trump initially had threatened earlier this year, mean the average tax on imported Chinese goods still would exceed 20%, according to a recent estimate from the Peterson Institute for International Economics.

 

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