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Sunday, September 22, 2019

Art Licensing Editorial: The U.S./China Trade War and its Impact on the U.S. Art Licensing Industry

This is NOT an optimistic article and the information in it is depressing. There are hundreds and hundreds of articles on the Internet that discuss what is anticipated and what is already happening to the U.S. economy due to the U.S./China Trade War. The purpose of this article is to inform artists that license art (licensors) on why the trade war and the increase of tariff is negatively impacting the U.S. manufacturers/wholesalers, retailers, consumers, and ultimately licensors in the Art Licensing Industry.

Note: The information in this post that is “quoted" from Internet articles have a symbol and a number placed after the "quote “ to notify you what article the quote came from. They can be found in the Resources section at the bottom of this post. Also, any red bracketed [text] are comments by me.

The term manufacturer that the U.S. uses in the art licensing industry is not really accurate because not all the companies that artists license their art to literally manufacture the products. Many companies hire other companies (mostly outside the U.S.) to manufacturer products according to their specifications.  A more accurate word is wholesaler instead of manufacturer and is used in this article.

U.S./China Trade War 
"The US and China are locked in a bitter trade battle. Over the past year, the world's two largest economies have imposed tariffs on billions of dollars worth of one another's goods. US President Donald Trump has long accused China of unfair trading practices and intellectual property theft.  In China, there is a perception that the US is trying to curb its rise. Negotiations are ongoing but have proven difficult. The two sides remain far apart on issues including how to roll back tariffs and enforce a deal. The uncertainty is hurting businesses and weighing on the global economy.” ❊1

A tariff is a tax or duty that the government places on a class of imported goods. Tariffs on exports are very rare. In theory, tariffs makes the foreign products more expensive and is meant to encourage or safeguard the domestic industry which does not have to pay the tax. The tariff is collected by customs officials and goes to the government.  

Tariffs in the U.S. are now placed on almost all imported products.  The increase in the May 10, 2019 tariff  “. . .  affects U.S.-bound goods that leave China after that time, not shipments in transit.  It affects more than 5,000 goods, including industrial chemicals, electronic circuit boards and a range of consumer products. Affected products include a variety of furniture, clothing, electronics, handbags, luggage, hardware, bicycles and bicycle helmets, shampoo, perfume, dishes, bed sheets, meat and cereal.” ❊2 

The ". . . list of items to be tariffed has come in four stages. The first two lists have 25% tariffs. The third list started at 10% [9/14/18] and escalated to 25% on May 10, 2019.  This is in addition to any existing duties your product may have. So for example, if your product has an existing 8% duty, the new rate would be 8% + 25% = 33%.  . . . List 4, not yet in place, will encompass all products not currently hit by List 1, List 2, or List 3” ❊3 But because there are so many articles about what the Trump Administration was and is  planning and what actually occurred, it is confusing in knowing what is correct and what is the amount of tariff each imported product is actually paying.  The ❊3 article seems to have the most up-to-date information and does have links to the tariff product lists.

Increase of Tariff Affecting Shipping
The raise in tariff has impacted the cost in shipping products and a delay in getting the products to wholesalers and retailers. Wholesalers and Retailers started purchasing an increase of products from China to avoid the tariffs increase in 9/14/18 and again with another tariff increase in 5/10/19. "Maersk’s data indicated China’s shipments to the U.S. had grown 5 to 10 percent in the third quarter [2018] compared to the prior year as retailers built up their inventories to avoid any new levies, Skou said, according to Reuters.” ❊4

The problem is that it “ . . . is leading to record volumes at the Port of Los Angeles [and other west coast ports]. As a result, containers are starting to stack up, potentially creating the same congestion headaches the port went through a year ago [2018] during the first round of tariffs.” ❊5   Also, the extra vessels waiting to offload containers and labor shortages are causing port berth congestion and delays.  Not only that but local warehouses are filling up or have filled up while waiting to send the products to buyers.  Thus, the containers will be stuck at the ports causing more congestion. Note: Port Congestion is the term commonly used to describe the situation where vessels have to queue up outside a port and are waiting for a spot so they can load or offload.  Ports have a limited amount of dockage and in most cases capacity does not match demand.

Cargo availability continues to be a leading problem as extra vessels and resultant labor shortages are causing berth congestion and delays.  Thus, once the products are removed from the container it is mostly sent back to China empty. "The fastest growing segment of container traffic at the port are so-called “empties,” containers that arrive full of imports but leave empty to go back to China to pick up more goods (it costs the shipper or the import/export company $250 per empty). The number of “empties” is up 21%.”  ❊5    

"Freight prices for containers going from China to the U.S. have surged 128 percent from a year ago as of the beginning of December [2018], according to data from Freightos, an online freight marketplace. The price of shipping a container from China to the United States has risen dramatically in the last year due to uncertainty surrounding trade tensions between Washington and Beijing. . . .  The U.S.-China tariff battle is even affecting the air cargo industry: Recently, the president and CEO of airport ground-handler and catering solutions provider SATS told CNBC his company has seen changes in routes due to the trade war.” ❊4 

It does not apply right now because of the extra products being shipped to the U.S. from China but for the future the trucking industry feels threatened by the U.S./China trade war. "Trucks are the main transportation for most foreign goods arriving at the large West Coast ports in Los Angeles, Long Beach and Oakland. Higher tariffs mean fewer ocean shipments, less port activity and the need for fewer drivers to haul that freight to distribution centers. . . . As the economy slows down, trucking is going to feel it because businesses hunker down and cut back on investment and production and lay off workers.” ❊6

Wholesalers (manufacturers) and Retailers
Many wholesalers and retailers have their products manufactured in China so the increase in tariff is costing them more to have their products manufactured. "Larger companies have more flexibility in placing orders before tariffs take effect, but placing large orders ahead of schedule is a financial burden many small firms can’t afford. Those that do are getting their products later than expected due to congestion at the ports, further straining small businesses’ bottom lines.” ❊7 When the tariff was increased to 10% in 2018 at least the large wholesale and retail companies were able to absorb the increased tariffs and not raise prices on their products.  But now that it is at 25% many will be forced to raise prices. Note: Already, stores that raised the price of high end products are losing customers. Information is from ❊8

It is interesting to read what plans and strategies some of the home goods chain stores are using in adapting to the raise in tariffs. For instance," Macy’s Inc is adopting a no-price-increase strategy for the rest of 2019, despite some risk". Target Corp. and Kohl’s Corp feel they are prepared to take on the increased tariffs but didn’t mention their strategies. Ross Stores Inc. is opting to first wait-and- see what their competitors are doing. Information is from ❊9  Target Corp. in a later article did say that one strategy they are using is not accepting new product cost increases from their suppliers. Information is from ❊11

"While higher tariffs will affect businesses of all sizes, they are particularly onerous to small businesses . . . Small businesses are more vulnerable to a lot of the risk and uncertainty created by trade wars than are larger enterprises . . . They have much less leverage in shifting product sourcing to another country, for instance, or spacing out the timing of shipments in order to avoid when the tariffs hit.” ❊8  

Wholesalers and retailers that have China manufacture their products are delayed in receiving their products due to the congestion at ports. Some of the products do not arrive soon enough to be sold to consumers for different seasons and for holidays such as Easter, Halloween, Thanksgiving, and Christmas. Retailers that purchased the products from wholesalers are returning those products to the wholesalers. And wholesalers and retailers (purchased products from China) that did not arrive on time are most likely drastically reducing the prices to be sold to consumers through discount companies.

Even gift and home goods manufacturers in the U.S. may need to purchase essential parts for their products from China and other companies overseas to be able to manufacture their products.  For example, not enough or the right kind of fabrics for pillows and paper for greeting cards, decorative bags, and gift wrapping paper may be not be available in the U.S. and must be purchased from China.  Thus, these U.S. manufacturers are also impacted by the increase in tariffs and right now the ports congestion.

Note: Many of the Internet articles mention the loss of jobs due to the U.S./China Trade War.  But these articles were written in 2018 before the tariffs went into effect and are more predictions than what is actually happening.

"Almost certainly. American retailers and manufacturers were largely able to absorb the 10% tariff – narrowing their profit margins – negotiate offsetting price cuts with Chinese suppliers, import a big stockpile of goods before the tariff took effect, and spread the added cost across many products. But a 25% duty is too much to camouflage with such tactics and a big chunk of it is expected to be passed to U.S. shoppers . . . 

The new 25% tariff, combined with earlier duties imposed on $50 billion in Chinese shipments and on steel and aluminum, would cut U.S. employment by 934,000 and cost the average family of four $767 a year, according to a study by the Trade Partnership. So far, the existing 10% tariff and the other duties have caused barely a ripple for the U.S. economy, trimming growth by an estimated tenth of a percentage point in 2019 if they stayed in place, according to Oxford Economics. But the boost in the tariffs to 25% would triple the impact to three-tenths of a percentage point if sustained, crimping an economy that was forecast to go about 2.2% this year.” ❊10

Art Licensing Industry (licensors)
As mentioned in the Wholesalers (manufacturers) and Retailers section, extreme congestion at the West coast ports is happening this year and causing delays of products being sent to U.S. wholesalers and retailers. Some of the produces are arriving so late that they are not in time to be sold prior to the seasons and holidays. The price on those products not arriving on time will probably be drastically reduced and sold to consumers through discount companies. Unfortunately if that happens, licensor royalty earnings on those products will be VERY low.  Hopefully the congestion at the ports next year will decrease immensely and wholesalers will receive the products on time so that consumers will purchase the products and licensors will earn larger royalties.

Note: Some product collections, for example home goods, may consist of different types of products.  For instance, a kitchen collection could consist of tabletop ceramic-ware, tea towels, and placemats.  Those products may be manufactured in China by different companies and shipped the U.S. at different times. Thus, some of the products in the collection could arrive in time to be sold. But, the other products in the collection may be delayed and very little sold if at all.

Of course, it is too soon to know how bad the rise of product prices will actually affect the U.S. economy and what the impact it will do to the art licensing industry.  Only time will tell!

The above post mentions quotes from the following articles. I recommend that you read these articles because they contain a lot of important information you should be aware of.

❊7 Tariffs hit consumer wallets” - see comments by Jordyn Dahl, Linked News Editor 9/6/19

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  1. Scary news about US economy. "Manufacturers at home and abroad have faced waning demand and more canceled orders as they struggle to cope with a global economic slowdown, exacerbated in part by the trade war between the world’s two largest economies” according to the article "U.S. manufacturers experience worst month since 2007-2009 Great Recession, ISM finds” published 10/1/19.

  2. Scary news continues. "The Dow Jones Industrial Average was slumping Wednesday for the fourth time in five days as investors continue to wrestle with slowing manufacturing data—and whether it presages a recession.” According to the article "The Dow Is Plunging Because the Market Is Bracing for a Recession That May Not Come” published 10/2/19.

  3. More and more bad news is popping up on the Internet "If you keep noticing more going-out-of-business sales, there's a startling reason: Forever 21, Walgreens, Dressbarn, GameStop, Gap and other chains have already announced over 8,500 store closings in 2019 -- way more than we saw during all of 2018.” As mentioned in “Retailers Closing Stores in 2019”published 10/1/19. This article lists the large number of chains that are closing from as little of 4 of their stores to as great as 2,100 of their stores. Shocking!!!!!!

  4. NOT good!!! U.S. retail sales unexpectedly declined in September for the first time in seven months, according to data released Wednesday, suggesting that consumers — the main pillar of economic growth — are starting to become shaky according to the article "U.S. retail sales unexpectedly drop — a warning sign for the economy” Oct. 16, 2019