No fun and games for toy companies despite tariffs delay
WASHINGTON — Toymakers breathed a little easier this week when President Donald Trump announced plans to delay tariffs on many goods from China — but their relief may not last long.
The delay pushes a new 10 percent tariff on some Chinese imports to December from September, and allows companies and retailers to avoid paying an additional tax on the goods they’re bringing into the United States for the all-important holiday shopping season. Yet toymakers are already looking ahead to next year’s holiday season, and fretting about the crippling uncertainty that the president’s on-again, off-again trade policy has created for them.
“Everybody is just on this roller coaster, trying to stay one step ahead or keep up with this inconsistent, irrational trade policy that is coming out of the White House,” said Jay Foreman, chief executive of Basic Fun, which manufactures toys like Lite-Brite, K’NEX building sets and Lincoln Logs, the vast majority of which are made in China. “It’s just a nightmare.”
Trump and his advisers have urged business leaders to stay focused on the larger picture: that the administration is trying to secure a historic trade deal with China. They say that China has gamed economic rules for decades, leading to the loss of millions of American manufacturing jobs, and that the United States must do what it can to change the behavior now.
After months of negotiations, however, the United States and China appear no closer to a deal. Meanwhile, the pain of the tariffs is being felt by American consumers and businesses, and forcing companies, where they can, to reconfigure their global supply chains.
Some companies are moving factories out of China to countries like Vietnam and India to avoid being hit by the tariffs. But that strategy also introduces risks for an industry focused on children that depends on carefully controlled facilities and strict health and safety standards.
Trump’s latest round of tariffs would have affected nearly $300 billion of Chinese products as of Sept. 1, on top of a 25 percent tariff that is already in place on roughly $250 billion of goods.
Instead, tariffs on about $160 billion of consumer products, including toys, shoes, apparel, laptops and mobile phones, will be delayed until Dec. 15, while tariffs on a few items will be canceled altogether.
The move does not appear to be a response to any concessions by China in the trade negotiations. “We’re doing this for the Christmas season,” Trump told reporters Tuesday.
“Obviously, toys are a sympathetic product,” said Matt McAlvanah, a spokesman for the U.S. trade representative in the Obama administration who is now a policy analyst for Farmers for Free Trade, an anti-tariff advocacy group. “I think it’s an admission that it would be politically unpopular to see price increases during the holiday season.”
Toymakers both large and small say they don’t have the ability to absorb cost increases, and would have to almost immediately raise prices. The typical toy in the United States retails for only $10 and profit margins for some of them may be just pennies on the dollar, according to the Toy Association, an industry group.
Foreman, who sources 92 percent of his products from China, said that if tariffs had gone into effect as planned, they would have eaten up two-thirds or more of his profit for the year.
But the company must now decide whether to try to speed up product shipments to beat the new tariff date in December. That could save money, but will tie up capital and will crowd distribution warehouses with products. For many companies, the large outlays and disappearing profit margins risk throwing lending covenants with banks out of whack.
“It just causes chaos from the top to the bottom of the whole business model,” Foreman said.
Moving operations out of China to lower-cost countries without tariffs may not eliminate the issue either. Trump has threatened tariffs on Mexico, for example, to try to get the country to do more to restrain migrants. The administration has also weighed tariffs on Vietnam because of that country’s rising exports to the United States.
Hasbro, which is based in Rhode Island and makes Nerf, Transformers, Play-Doh and Disney Princess merchandise, said last month that it would aim to produce just half of the goods it sells in the U.S. market in China by the end of 2020. It currently makes about two-thirds there. Much of that production will go to India and Vietnam.
Hasbro has said that it must make this shift slowly. At a hearing on the tariffs in Washington in June, John Frascotti, Hasbro’s chief operating officer, said that suppliers in China had been trained to meet strict U.S. product safety standards, and that there was no readily available alternate supply chain outside the country.
Although the administration’s aim is to bring manufacturing back to the United States, toymakers say that isn’t realistic for many low-margin products.
Jim Barber, who owns Luke’s Toy Factory in Danbury, Connecticut, which makes eco-friendly trucks for toddlers, said he would like to sell to more lower-income people in the United States, but he realizes that his market is the consumers who can afford to spend money to get what they want, not the majority of people for whom price is the paramount issue.
“You can go to any consumer survey you want and they say, ‘Yes, I’d be willing to pay more for an American-made toy,’” Barber said. “It’s a complete lie. You talk to any retailer and they’ll tell you that’s not true.
“Price is what sells toys,” he added. “Price and Batman.”