How the US Trade Tariffs Will Affect Amazon FBA Sellers [Part One]
Estimated reading time: 10 minutes.
An Interview with Paul Grey of ExportX [Part One]
with Karen Brady
ExportX is an international ecommerce business representing more than 50 brands of products from Australia and New Zealand, selling with Amazon and FBA since 2008 in the USA, Europe, Asia and Australia.
ExportX has been importing goods to the USA for more than 10 years and has long experience with customs clearance and tariffs in dozens of product categories.
If you’ve been too busy lately to think about the Trade Wars then you’re not alone. Yesterday’s news fades quickly and drilling down to really get the picture straight takes determination and precious time. So I thought that I’d do some sleuthing for Amazon sellers and A2X users, and in addition to my research, ask sellers what they were considering in relation to these tariffs.
The idea behind tariffs is to protect industries and corporations from foreign competitors. US tariffs already existed on a long list of imported goods: dairy, tobacco, and vegetable products, for example. Then there’s the “chicken tax”, a 25% duty on small truck imports, which has been in place for many years.
Why New Tariffs?
It’s about changing the playing field. President Trump stated, “We use tariffs to negotiate trade deals”.
For the rest of the world, their year kicked off on June 14th (2018) with the World Cup. In the US? That kickoff was in January.
If you have been considering using or selling solar panels, you’ll probably know that Chinese solar imports were hit hard by 30% tariffs.
Then in March, there were the US metal import tariffs. This started a tit-for-tat, but China faced difficulty in responding on a scale equal to Trump’s new tariffs because its annual imports from the US total about $130 billion, while its exports to the US total more than $500 billion.
Still, China introduced 25% tariffs on US autos in July, and stopped purchasing US-produced soybeans.
Elsewhere, the EU reciprocated on US steel levies, and Canada officially slapped tariffs on more than $12 billion worth of US goods. In September, still more US tariffs were introduced - $200 billion worth of goods and, to up the ante, China added duty on $60 billion worth of US imports, including aircraft and coffee. The US threatened a 25% jump right after the winter holidays.
In just over a month from November to December, China had lowered tariffs on US autos from 25% to 15%, and resumed buying US soybeans.
Trade Deficits & The Accounting Perspective
Trump stated that “we have a trade deficit of $500 billion a year”.
To set things straight though, for an Amazon seller in the US operating in a foreign marketplace, “import” represents a “purchase” and an “export” means a “sale”, so how, then, is a deficit expressed in terms of balance-of-payments?
Erica York of The Tax Foundation expressed that the so-called trade balance “shouldn’t be viewed as an indicator of economic health”.
A current account (or trade) deficit is simply another way of stating that we have a capital account (or trade) “surplus”. So, a trade deficit is really an “accounting identity”.
That being said, the impact of these tariff changes will have to be tracked and accounted for by sellers dealing in a variety of imported products. What options do US Amazon sellers have to offset the effects of the current tariffs? How can those sellers, who rely on imported Chinese goods, adapt to the increased costs incurred from the tariffs?
The forum for Amazon sellers isn’t quite decisive, but below are some of the more obvious options:
- You raise your prices to cover the extra costs.
- You stop selling these items.
- You absorb the costs and continue to sell at a lower margin of profit.
- You source your items elsewhere.
Stephanie Asymkos of gobankingrates.com noted pretty much the same thing:
“For businesses slapped with tariffs, there are few choices to make up the losses: slash costs, maintain costs while the bottom line takes a hit, or pass the higher costs on to customers.”
I then talked with Paul Grey, Founder of ExportX to get his input on strategies to help with this cost-crunch.
Q&A with Paul
A2X: Raising item prices seems both a logical and counterintuitive response at the same time. What’s your thoughts on this one?
Paul: Yes, some Amazon sellers have been considering other options, such as buying a lot more stock ahead of higher tariffs coming into effect. This would be trading off cash flow and storage costs, and risk of obsolescence, against the advantage of locking in a lower tariff component of Cost of Goods Sold.
A2X: Online accounting sources recommend closer scrutiny to the P&L, profit margins by SKU, and the reasoning behind product sourcing, in an effort to decrease the impact of tariffs. What level of scrutiny do you recommend?
Paul: In pricing, it’s deceptively easy to work up a costing without reconciling to actual costs in the P&L, which risks missing some significant costs or not attribute these properly in the pricing calculation. Reconciling everything is the way to avoid this common mistake.
For example, many businesses would account for international freight and customs clearance as part of the cost of inventory, and apportion those costs to each product line by weight, by volume, or by value. But there’s another freight component, the cost of transportation from the port of entry to warehouses or FBA facilities. If FBA inbound transportation services are used for that part of the supply chain, those costs will be buried in the Amazon merchant account.
A typical margin calculation risks missing this cost component, whereas a smart merchant reconciling their Amazon fees would pick it up and apportion it appropriately in their costings and pricing calculations.
A2X: Are there affordable, automated solutions out there for small and medium sized sellers?
Paul: Use A2X with QuickBooks Online or Xero to make sure that all Amazon-related costs are accounted for and reconciled. Accurate and organized pricing makes for easier modelling on duty rates.
Paul explained that the pricing model process at ExportX involves meticulously detailed spreadsheets for each product; tracking costs for manufacturing, transport, customs clearance, duties and taxes, FBA inbound fees for packaging and labelling, together with FBA warehouse storage fees attributed to a unit based on volume.
Amazon Sellers who reach out to specialized bookkeepers and accountants to set up their product costing can feel more confident in their price modeling, orders, and shipment schedules.
Sourcing away from China
A2X: Another alternative is to source products from elsewhere to avoid the new tariffs. There are a number of firms that specialize in global manufacturing and supply chain management, sourcing away from China to Mexico, Vietnam, and India. But is this an effective strategy for sellers to side-step the current tariffs?
Paul: For sellers with little product differentiation who are sourcing from any old factory, this might be an option, but it’s a major undertaking for a quality brand to move between factories and countries. New QA people, procedures, shipping arrangements would need to be set up. For instance, shipping from India via Singapore to the USA is harder and slower than shipping from China to the USA.
A2X: Do you believe that the imposition of tariffs is going to be a long or short term issue for US marketplace sellers?
Paul: It’s a long-term issue in this respect; the US has lots of tariffs and trade barriers on lots of types of products from lots of countries. Often once tariffs are in place, they can take a long time to be removed, unless there’s a political imperative.
A2X: Which sellers are the most vulnerable and why?
Paul: I’d suggest it would be low-margin sellers without the ability to adjust prices, where a 10% or 15% increase in cost of goods could wipe out their margin. If a higher tariff applies only to one country, such as China, then it’s stating the obvious to say that it’s people sourcing product from China that are at risk. Of course, a large number of Amazon sellers source products from China.
A2X: Do higher price items have greater resilience to increased duties; is this your experience with ExportX?
Paul: I’d say higher-margin products rather than higher price, or where there’s a unique design element, those products would be more resilient.
Chinese companies selling duty-free into the US
Continuing my sleuthing, I discovered an amazing fact buried in a fascinating article “US-China Tariffs: How They Hit Importers & Amazon Sellers” by ChinaImportal’s Fredrik Gronkvist.
Various countries have import duty thresholds by product value, but Chinese sellers can send drop-ship items to the US with zero duty and with significant shipping discounts for ePackages. This duty-free importation is not a loophole, it’s perfectly legal. With ExportX being located in New Zealand I asked Paul about drop-shipping from China.
A2X: Are drop-ship outfits better positioned for small item exports and is drop-ship an effective option for smaller sellers?
Paul: If there are very high duties at the border, perhaps sellers could list on Amazon at duty-free prices and, by shipping individual orders, avoid the import duty. But even if at a slightly higher price with duty, the fast delivery and easy returns of buying within the USA through Amazon Prime would likely win over most shoppers.
A2X: What influence do you think tariffs will have in the context of the global economic slowdown?
Paul: My observation is that many countries experience economic slowdowns, and for most countries, the path forward is often more trade, lower tariffs.
All this begs the question: What benefit do nations get from mutual free trade across borders?
Many analysts believe in the the positive, long-term economic effects of trade: increases in competition, innovation, productivity, employment, wages, and output. All these provide benefits that outweigh the short-term transition costs trade can cause.
Export trade enables nations to specialize in activities in which they have a comparative advantage. This leads to domestic employment gains where production is most efficient.
“There’s often inherent belief in the economic benefits of trade, promoting trade as a principle for the overall economic good.”
A2X: In your crystal ball, does the natural will to trade win through for the flow of goods, and will we establish new trade arrangements?
Paul: The USA is such an enormous part of global trade that whatever happens there, sets the tone for world trade.
The USA trade tariffs might push more countries into the orbit of China, but it seems to me that most countries are continuing to pursue free trade. Other free trade agreements persist: some are bilateral (New Zealand-China, Australia-China, etc.) and some are multilateral, such as the post-TPP resurrected Pacific trade agreement, the CPTPP.
So, we buy and we sell, we expect competition, homegrown and foreign. In a global economy, political struggle over trade and its benefits is to be expected. The current situation is changing viability and profitability of certain products.
Amazon sellers can weather this stormy period by utilizing more automation, more tracking, and refining their own costings for accurate price modeling. Recording Amazon fees is one of the building blocks to accurate costing. Helping Amazon sellers get this job done is where A2X excels.
Trusted and recommended by 100+ ecommerce accounting firms, A2X is the leading Amazon accounting app. Thanks for reading!
Paul Grey’s Tip for Amazon Sellers
Tablets are mobile shopping machines. Mobile shoppers have for the most part already moved on from websites altogether. The fact is that “m-commerce” growth is being driven by two overriding trends: Shopping with iPads and other tablets rather than smartphones, and purchasing through shopping apps rather than websites.
Links to Paul’s Blog Posts
- 90% of items sold online in the USA ship with free delivery
- US shoppers are choosing priority delivery
- 95% of shoppers will never buy from your website
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