US-China Trade War and Beauty Industry

US-China Trade War and Beauty Industry

In view of current affairs between China and the U.S., the US-China trade war seems to be a long-lasting one. We will discuss what is happening, and the prospect, and how beauty industry should cope with the situation.

Part 1

Tariff Increase and its Impact on the Beauty Industry


Everybody says high tariff on Chinese import will have a heavy im-pact on beauty industry across the board. Let’s dissect the impact on beauty supply products, especially hair products and cosmetics.

Impact on Human Hair Products
If higher tariff were to be imposed, hair products are among the most vulnerable beauty supply products. Among them, human hair products are the most vulnerable. China is the largest player in the raw hair international trade. For example, in 2018 China was the biggest exporter of HS 670420, a human hair wig, while Indonesia was its counterpart for HS 670411, a synthetic hair wig. Most of the wigs were imported through ports in New Jersey. As Chinese goods contribute largely to the supply of hair products, a 25% tariff would add significant increase to the wholesale price. In turn, retail price would increase thereafter.

Weak Yuan Can Buffer Some of Tariff Impact
For wholesale companies who carry stock in high volume may delay the impact of tariff with weak Yuan as a buffer. Nonetheless, in a long run, they need to start thinking about importing from other countries including India, Bangladeshi, and Vietnam for hair products. Just to find and talk to suppliers in a new region, pay a visit to promis-ing candidates, collaborate on product specification, place an order, and receive shipment would take at least six months. Upon the imposition of higher tariff on Chinese imports to the U.S., Yuan is anticipated to be devalued. Yuan exchange is tightly con-trolled by the Chinese government who heavily intervenes in currency exchange market. Although China has been under a lot of pressure from the U.S. against manipulating exchange rate, it would likely re-spond to tariffs with devaluing Yuan. In this case, the price of im-ported goods would be lowered. At least a portion of increase in price due to tariff can be absorbed by the exporters, and some of the rest will be by weak Yuan. Therefore, the eventual increase in price will be less than 25%.

Straight from Beauty Industry Insiders
Beauty supply retailers in various regions including Chicago, Los Angeles, New York City, Georgia, and Florida all expressed their concerns about the tariff. Most of them were inclined to reduce the procurement on hair products if price soared and were to focus on reducing inventory. Most wholesales we spoke to said they would wait and see how the situation would unfold. Most of the businesses who partici-pated in the interview believed the impact of high tariff would not fall on a single victim as it applies to all imported hair products. An executive officer of a hair company in New Jersey said “though no single company benefits from the tariff or vice versa, some companies who carry higher volume of human hair products might feel it harder” and added that “the worst scenario is that consumers spend less on human hair products due to the tariff”. An interviewee from a hair company in the West region talked about its current procurement policy which he explained “we are not placing orders unless necessary because Indonesian manu-facturers’ extra capacity may run out at some point that are un-known to us.” The imposition of tariff would hold importers liable for 25% the value of imports as tariff that needs to be advanced before clear- ing the customs in addition to small customs clearance fees that have been the only required  payment for exempted goods includ-ing hair products. This imposes additional financial burden on wholesales companies. As such, wholesales with poor cash flow may be hit harder.

De Minimis Exemption on Hair Products
Another issue on hair products lies on the continuation of de minimis exemption for cross-border e-commerce goods valued under $800 per shipment. As hair products tend to have lower proportion of ship-ping costs, they are more vulnerable to cross-border e-commerce. Hair products sold at beauty supplies will reflect the increase in im-port cost due to the tariff. On the other hand, exempted goods purchased through cross-border e-commerce may stay the same as they are not affected by tariffs. It would produce different results for some e-commerce sellers who are wholesalers importing goods from China in bulk. On the other hand, if consumer purchases goods directly from China, the items as long as they are under $800 per shipment would be exempted from tariffs. In general, beauty supply retailers would have disadvantage on price competition compared to cross-border e-commerce. So far, the government has been silent on tariffs on cross-border e-commerce goods. However, the beauty supply industry as a whole would benefit from tariffs on de minimis shipments. An organized effort of the hair industry for a change in de minimis exemptions is becoming necessary.

A Korean Alternative to Chinese Cosmetics
Facial mask packs that are sold at beauty supplies are mainly man-ufactured in South Korea, but most color cosmetics are made in China. Therefore, a 25% tariff on Chinese goods would hugely im-pact color cosmetics pricing. The difference here is the existence of alternatives, namely South Korea and Taiwan. China’s rise in manufacturing industry was backed by the bulk of components produced in China. In cosmetics, fair quality containers for cosmetics are produced in China at a comparatively lower price, which led to the growth of OEM manufacturing in China. For this reason, cosmetics in a low-to-mid price range are mostly packaged in containers made in China. In addition to cheap but fair quality plastic molding available in China, raw materials, plastic resins, and labor cost is low. These contrib-ute to the price competitiveness of Chinese cosmetic containers. A good number of Korean cosmet-ics manufacturers imports Chinese containers except a few containers with manufacturing difficulties. Theses Korean manufacturers can easily replace Chinese counter-parts, making easier for cosmetics wholesales to find alternatives. For this, there could be some back orders due to the switching of manu-facturing facilities. A higher manufacturing cost in Taiwan and Korea would bring about a price increase in cosmetics. In turn, wholesale prices of cosmetics could rise.

A close watch on cosmetics market price on other channels such as CVS is needed
You need to consider competing brands that are sold at a similar price range through retailers such as CVS and Walgreen when facing price increase across the board in beauty supply cosmetics. A lot of low-to-mid range brands such as Revlon and Maybelline produce their products in China, so they are on the pressure likewise. On the other hand, some cosmetics brands including Cover Girl produce their goods in America with components imported from China. They are to be under less pressure. These products would undermine the price competitiveness of certain goods sold in beauty supplies. Therefore, you need to closely watch local stores including CVS, Wal-green, and Dollar Tree that have tight connection to the community if tariff plan starts to roll. These community-based retailers are in direct competition with beauty supply retailers. If you find your pricing relatively high, you need to seriously consider narrowing your price margin to maintain revenue.

Most Miscellaneous Goods Are Made in China
A non-profit private organization the Alliance for American Manu-facturing (“AAM”) estimated 70% to 80% of goods sold in Walmart are Chinese. No statistics is available for beauty supplies, but many miscellaneous goods companies agree that many of their products are imported from China. Therefore, a 25% tariff would raise average wholesale price significantly.
Miscellaneous goods sold in beauty supplies can be divided into goods produced by sewing and by plastic molding. For goods pro-duced through plastic molding, you cannot simply take molds to an-other country due to the ownership issue as to molds. Plastic prod-ucts would likely continue to be supplied from Chinese manufacturers for this reason, so wholesale prices would have a reason to rise.

Smallest Impact on Miscellaneous Goods
On the other hand, many fabric items sold at beauty supplies can be produced alternatively in Vietnam, Indonesia, Sri Lanka, and so on. Therefore, wholesales companies would move their factories to other countries rather than raising the production cost. Mr. K who has run a sewing factory in Vietnam over the past 15 years told us “people say Chinese manufacturers are looking into Vietnam-ese sewing plants, but due to the consistent growth of Vietnamese manufacturing industry, they wouldn’t be able to find a factory site near populated cities.” “The farther you are located from the cities, the difficulties to find labor intensifies,” he explained. He also said, “though we were expecting increase in volume of orders in Vietnam due to price increase in Chinese goods, we only received slightly more inquiries, and no significant increase in orders.”Many miscellaneous goods sold in beauty supplies are safe from competition from community-based retailers such as CVS and have a higher margin, so the impact of tariff on Chinese goods would be comparatively low. US-China trade war is a big incident which can have a lasting impact on beauty supply industry. A concerted wisdom and effort of the beauty supply industry has never been more urgent.

Part 2

Trade War Cross-Examined

American Support of Trump’s Tariff Policy
Trump administration cut corporate taxes to lessen the burden of companies running business in America and pushed for “reshoring” of American companies by providing benefits to domestic invest-ments. This move had many foreign companies to invest in America as well. Trump administration also blocked the increase in interest rate recommended by the Federal Reserve Board of Governors. In the end, his moves were largely successful. After a big achievement in economic policy, Trump moved on to start a trade war against China. Through the trade war, the US government is subsidizing American agriculture industry with a revenue created by the tariffs, which would keep Trump’s popularity among American farmers.

China’s Initial Posture to Accept U.S. Demands
In the beginning, the negotiations between governments seemed fruitful. Trump expressed his optimism on negotiations via Twitter. In coordination to Trump’s prospect, Xi Jinping spoke in the Second Belt and Road Forum on April 26, 2019 as if he would accept the terms of the US government. He emphasized that the protection of intellectual property, cutting government subsidies, encouragement of international investment, a stable Yuan exchange rate, and institution of resolution dispute or-ganization for the US-China trade are all necessary for China’s own advancement China. The speech was interpreted as China would ac-cept all critical terms of the U.S. government. In fact, Li Keqiang who is the current Premier of the State Council of the People’s Republic of China made a report public in March 2019, a month ahead of Xi Jinping’s speech, where he identified China as “a developing country” and expressed concerns of “hardship among Chinese businesses caused by the trade war.” In this report, he did not mention the Made in China 2025, China’s strategic plan to em-phasize technological advancement. Such move was interpreted that China needed to accept US terms in order to change the character-istics of Chinese economy. As those were words spoken by the top officials of China, Trump re-sponded with tweets overcasting American optimism over US-China

trade negotiations.

Power Struggle within China Bringing about High Tariff
One day, everything was changed. Only a week after the Second Belt and Road Forum, China delivered a draft agreement, virtually re-written from scratch. Including protections of intellectual property rights and American business activities in China, almost all main is-sues already agreed upon had evaporated. What happened? Within Chinese Communist Party while discussing US terms, a disgruntled voice of hardliners shook the path. As to the US-China dispute resolution institutions, especially, they voiced an opposition to accepting unfair terms reminding them of the treaty made between Qing dynasty and the U.S. The opposition was led by Shanghai gang of Jiang Zemin who served as General Secretary of the Communist Party of China and the Communist Youth League of China headed by Hu Jintao, also a former leader of China. They considered the trade negotiations between the U.S. and China as a great opportunity to oppose Xi Jinping’s ruling.

The Likelihood of Changing the Path Again?
As of today, the likelihood is very low. Despite Xi Jinping’s absolute power in China, he probably has concerns over backfire if he ac-cepts all US terms on the economic reform of China. The drastic shift in Chinese stance toward US economic pushes lies on the internal power struggle within Chinese Communist Party. The tough stance is based on the consensus within the Party, so a sudden change in near future is unlikely. After declaring People’s War against the U.S. and prompting articles in the state-run new media Xinhua written by many columnists to provoke anti-US sentiment, double backing becomes an unfavorable course of ac-tion. An American think-tank R Street Institute’s Clark Packard forecasted that “after a cooling-off period, they’ll come back to the table.”

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BNB Magazine 2019, July ©