All the tea from Chinawill be taxed at least 10% if the Trump Administration carries through on its threatto impose a $300 billion round of tariffs effective Sept. 1.
On Monday, in retaliation,China halted the purchase of U.S. agricultural imports by state-owned farms anddevalued its currency to an 11-year low. The U.S. then declared China a“currency manipulator.” Chinese economists noted the U.S. Federal Reserve“manipulated” its currency on Wednesday when it lowered interest rates for thefirst time since the recession. With only three weeks to negotiate a truce, the10% tariff seems likely and may quickly rise to 25%, according to PresidentDonald Trump.
On Monday, Trump toldreporters, “We have rebuilt China. If they don’t want to trade with us anymorethat would be fine with me. It would save lot of money.”
The impact of theescalation was immediate. In what became the worst trading day of the year,U.S. stocks in every index declined. The Dow Jones Industrial Index fell 767points, a decline of 2.9% not seen since a dramatic sell-off last December. TheS&P 500 fell 3% and the Nasdaq Composite declined 3.5%. On Tuesday sharesrecovered somewhat but globally investors now expect increased volatility and along, drawn out economic realignment into competing trade blocs wherecooperation was once the rule.
Weakening the Yuan makesproducts from the U.S. considerably more expensive, a move that will discouragesales of U.S. goods to China. Goods made in China, however, will be moreaffordable. The decision follows U.S. reductions in the prime interest rate, apolicy decision that likely influenced China’s monetary policy. In the pastdecade China has maintained the value of its currency at 7:1 (yuan to dollars).This followed a period during the 1990s when the central bank often tamperedwith rates to gain advantage.
The fourth round of U.S.imposed tariffs is a severe test of China’s resolve as it includes virtuallyevery product traded by the two countries — costing consumers on bothsides of the Pacific.
Impact of TradeTensions on the Global Tea Industry
In combat at this level teaexports are miniscule compared to the billions in farm transactions. The U.S.imported 19.4 million metric tons of Chinese tea last year. The U.S.’s apparentconsumption of Chinese tea is 5.9% of China’s exports and only 0.825% of theirproduction. This quantity is not a meaningful amount of tea considering theirhuge production, writes Peter Goggi, president of the Tea Association of theUSA.
Nomatter what the outcome, socio-economic and political crises in the world’sleading tea consumers have led to a significant decline in global tea prices,according to the EastAfrican Tea Trade Association (EATTA), an industry lobby.
Theglobal price for tea is currently $2.73 a kilogram, compared with $3.31 at thesame time last year, said Edward Mudibo, EATTA managing director.
Hecited unrest in Sudan, the unpredictability of the U.K. discussions with theEuropean Union and U.S. sanctions against Iran. “While prices have been on thedecline or flat, the tea sector is grappling with increased costs of productionsuch as labour, fertiliser, electricity and fuel. With the prevailing lowaverage price of tea, most tea producers are not able to sustain the costs ofproduction,” he said.
The U.S.-China trade war hasalready forced American soybean and wheat growers to develop new tradingpartners. Rising tariffs will lead Chinese tea exporters to do the same. Priceincreases due to tariffs on steel and aluminum imposed last year aresignificant but were less visible to consumers, but this final round of tariffsconceivablycould cost Americans $135 billion. Raising the price of a $6 box of 100 teabagsto $7.50 will not go unnoticed.
To retain market sharemanufacturers of big-ticket goods, including Apple, assured customers thecompany will absorb the added costs of importing Chinese’s components, but tearetailers have little cushion and are likely to pass along even a 10% increase.Last year, when Canada imposed a tariff on American coffee, prices rose, andimports fell. The Canadian government collected $1.27 billion in tariffs, moneyused to ease damage to domestic industries consuming large amounts of steel andaluminum.
If tariffs rise to 25% expectvirtually all that increase to be passed along.
The Tea Association of the USA testified that “Imposingpunitive tariffs on tea would not be effective in changing [China’s tradepractices] because tea exports are a very small part of China’s overall teasector. Most tea that China produces is consumed domestically. Further,punitive tariffs would have a disproportionate economic impact on small andmedium-sized enterprises because most of the U.S. importers (those that pay thetariffs) are small businesses.”
In testimony before the U.S. Trade Representative in JuneGoggi sought to remove tea from the list of Chinese imports “due to the disproportionateeconomic harm these tariffs would have on U.S. tea industry and U.S.consumers.” On Monday he wrote “until the Section 301 Committee of the U.S.Trade Representative makes a decision (or makes it public) we will not know iftea is included. I have contacted the office of the Trade Representativefor information but have not received any response ― as yet.”
The U.S. is the world’s third largest tea importer, but itssuppliers span a broad range of countries. China is by far the biggest supplierof green tea, but Argentina, a black tea provider, ships far more tonnageannually to the U.S. Taiwan, Malaysia, India, Sri Lanka, and Kenya allcontribute significant shares of the U.S. tea imports. Tea imports from Vietnamand Indonesia may ultimately benefit from increased demand.
Austin Hodge, founder ofSeven Cups Fine Chinese Tea in Tucson, Ariz., notes that consumers of moreexpensive, and one-of-a-kind Chinese teas, such as Puer, are going to remainloyal to their personal preference. “This is certainly not going to put us outof business,” he said, “the cost of raw tea is only part of retail pricing thatincludes shipping, packaging, marketing, and delivery expense.”
Commodity tea drinkers,which represent the largest share of the U.S. tea market, demonstrate brandpreference but also keep a close eye on grocery prices which have been heavilydiscounted since the recession. Fine tea drinkers are value-conscious as well,but when it comes to China there are simply no alternatives, Hodge explains.“The people I see getting jammed up are the pirates and the smugglers,” saysHodge, adding that the devaluation of Chinese currency largely offsets theadditional expense of import duties.
Will the U.S. orChina back down?
In opinion polls 49% ofAmericans say new tariffs “make things worse” with 26% responding that tariffs“make things better” while 25% say tariffs “do not have much impact” as atactic.
The poll, conducted by YouGov| CBS News in May, found that more than six in ten Americans (62%) favortrying to get China to change its trade policies toward the U.S. This viewincludes large majorities of Republicans (84%) and independents (67%) and asubstantial number of Democrats (46%) too.
It seems unlikely that theCommunist Party will back down, despite the fact China’s economy is slowing. TheChinese anticipated a downturn in exports and are focused on developingstronger domestic demand and well as expansion of the service economy. The tradewar makes it convenient to blame the U.S. for a decline in exports. Chinais the world's largest, shipping $2.2 trillion of its production. The country has many desirable partners that arelowering barriers to trade in Europe, Canada, Mexico and throughout Asia.Chinese are willing to spread their wealth, recently purchasing more than $1million in tea from India in response to growing enthusiasm for black teablends.
Goggi pointed out that itwas the U.S. that blinked in July when Trump and Chinese President Xi Jinpingagreed to resume trade talks. Perhaps it will do so again. The alternative isominous.
Morgan Stanley predicted Monday that "Ifthe U.S. were to implement 25% tariffs on all imports from China for 4-6 monthsand China were to respond with countermeasures, we believe we would see theglobal economy entering recession in three quarters," readsthe company’s note to investors. Morgan Stanley estimated that global growthwould fall to a 7-year low by the end of 2019.
If that comes to pass the tea industry will face far greaterheadwinds than tariffs.
Source: Tea Association ofthe USA, TheEast African