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Tariffs and Grocery Retailers

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What is a tariff and when is it employed?

A tariff is more or less a tax on imports (or exports, though this is less common). Tariffs are typically used for one, or sometimes both, of the following reasons:

  • To raise revenue
  • To protect an industry(ies) from foreign competition

With the Grocery Manufacturers Association and the Food Marketing Institute (FMI), along with other trade groups, asking the current Federal administration to reconsider the tariffs that have been proposed, it remains to be seen what challenges will face the retail grocery industry going forward.

What is a retaliatory tariff?

As the word implies, a retaliatory tariff is a tax that a government charges on imports to punish another country for charging tax on its own exports. The retaliation is meant to deter future similar action or to penalize and rebuke the country levying the tariff.

As the United States’ trade war heats up, other countries are retaliating and placing tariffs on a list of foods and products including (but certainly not limited to) coffee, whiskey, pork and a variety of produce. This retaliatory attitude can spread to any country that wants to penalize the U.S., including China, Mexico, Canada, European Union and even Turkey.    It is hard to assess the potential for the long term economic impact of these retaliatory tariffs.

Where do the tariffs stand today?

Up until now, the original tariffs focused on steel and aluminum so any impact on grocery costs would be in regards to products that rely on aluminum cans, such as soda and beer. Although this is likely to have little impact at this time, the prospect of the United States potentially engaging in a trade war in the future is deeply concerning, especially considering the significance of retaliation as described above. 

How might the tariffs change consumer behavior?

Increasing retail grocery prices as a result of tariffs is likely to create disruption and discord for shoppers, especially those who are price sensitive.  For example, a tax on imported seafood from China right in the middle of the 2018 holiday season, when many families spurge by ordering shrimp and other similar delicacies for their holiday celebrations would have a significant impact.  “The longer tariffs stay in place, small and midsized producers can actually face some real difficulty staying in business, because the markets overseas aren’t there and they have lower prices in the U.S.,” says Andy Harig, FMI’s senior director of sustainability, tax and trade, in an interview with Progressive Grocer.     

Conclusion

The long range impacts of ongoing trade wars are addressed by supply chain analyst David Marcotte, Senior Vice President of retail insights for Kantar Retail, as he notes, “In the long term, these actions are eroding trust. Because of the tariffs, the buyers in Mexico have been reluctant to commit to deliver without having issues at the border. The part that’s difficult to see but easy to understand is that people who buy and sell dislike having disrupted markets.  They dislike not being able to predict what next year is going to be like.”

Pricing strategies and supply chain negotiations will be a top priority in the coming year. Stay tuned for more details as they become available.

Note: Some data referenced here is from the October 22, 2018 post by Jenny McTaggart entitled, “Grocery Industry Weighs Long-Term Impact of Trump’s Trade Toughness on Supply Chain”  and in “These are All the Foods Being Affected by Trump’s Trade War,” by Whitney Filloon on September 24, 2018. 

Chris Martin, CPA
chris.martin@SobelCoLLC.com
Sobel & Co.

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