There has been significant speculation surrounding President-elect Trump’s bold platform that pushes for key initiatives and changes regarding: international trade, border security, immigration, taxes, regulatory policy, US manufacturing job growth, military upgrades and readiness, school choice (vouchers), healthcare (Obamacare overhaul), space exploration, and national infrastructure spend for transport. Yet, the likely impact points of these dramatic changes have not been sufficiently discussed. Specifically, what are the anticipated impacts of these changes on the national and international e-commerce scene?

We are launching a series that will focus on each element of Trump’s platform in order to connect the dots to our own e-commerce businesses and how this will affect our prospects for top-line and bottom-line growth.

We begin with International Trade Reforms and the impact on U.S. Importers, Wholesalers, Distributors and E-Commerce Sellers.

International Trade Deal Reforms

Among the points that Trump has been most consistent with throughout his campaign is the need to balance international trade and the renegotiation on major trade pacts, like the North American Free Trade Agreement (NAFTA). While the key changes of this cornerstone initiative have not been detailed, we know from his campaign message that President Trump would pursue trade deals that would maximize the greatest potential for U.S. jobs at home while offsetting import/export ratio imbalances through levied tariffs.

These tariffs will likely impact production from China and Mexico to the greatest extent, as Trump views these countries as the chief culprits for production-related job losses in the United States in the past two decades. If a tariff (let’s assume 10-15%) is imposed on Chinese and Mexican imports, the net effect to U.S. importers of these foreign-manufactured products should be neutral to positive.

China would likely take the brunt of this import tax levy since it has little to offer the U.S. on a geographical basis. Mexico, though, may be able to offset such impact as a current NAFTA partner. President Trump has vowed to “build a wall” in order to gain control over the flow of illegal immigrants across the Mexican border. He has also promised to have Mexico pay for that wall; in this way, it is possible that this Mexican expenditure could be swapped for economic trading value to Mexico in the future, which could include declaring Mexico as a “continental” trade partner.

Promoting Mexico as a preferred partner would redirect the current imports from China to Mexico through credits and other enticements and benefits. It is clear that the U.S. will not be a competitive producer with the lowest paying wages, and Mexico is the more strategic target to pick up the slack. This approach will serve to scale the Mexican economy and improve the job opportunities in Mexico; this will reverse the need for honest, hardworking Mexicans to risk or uproot their lives to journey over to the U.S. illegally.

It is also important to note that Mexico’s governing principles are closely aligned with U.S. democratic principles, further supporting Trump's motivation to keep Mexico strong. Chinese governing principles, on the other hand, are still viewed as “dressed up” Communism and therefore adverse to U.S. culture and interests.

Trump and The China Card

The Chinese currency (Yuan/RMB), which has already lost significant ground against the strengthening dollar, will be further weakened by the stress of a tariff on imported products. Its value will also decrease with the impending tightening of borrowing rates by the U.S. Federal Reserve, which will further inflate the value of the American dollar.

→ 1:1 effect - From the U.S. consumer perspective, 1% of the tariff should equate to and offset 1% of Chinese currency devaluation, as both of these costs and savings would be incorporated into the final product landing cost. (Note: This ratio works provided that the levies are not implemented on the U.S. company sales side transactions.)

Chinese factories are already feeling the pinch due to the following dynamics:

1. price pressure from the weakening Chinese currency
2. shorter product life-cycles due to U.S. consumer desire for new and differentiated products
3. Chinese factory (over)-production of OEM aftermarket components without U.S. end-use market trend visibility, which accelerates margin compression and generates short- to mid- term market saturation
4. expansion of U.S. marketplace outlets for similar products

This last reason—the expansion of U.S. production— has both positive and negative effects on both countries’ economies. It positively reduces U.S. consumer pricing as an overall deflationary effect for hard goods. However, it is negative for the U.S. individual sellers who could be stuck with excess inventory after buying from China directly and forced into unsubstantiated, factory-driven minimum order quantities (MOQ).

U.S. sellers are over-purchasing imported product due to a lack of widespread inventory management and immediate sell-through data and forecasting tools. This generates an increased effect of temporary-to-permanent product saturation in e-marketplaces, invariably resulting in a hard stop at the Chinese factory source. This will certainly slow the Chinese output, and the Chinese government will move to prop up these factories with additional loans in order to (artificially) sustain jobs.

It is uncertain how long the Chinese government could backstop such a factory overflow recession without liquidating their balance sheet. It is likely that the “real” money effect would push China to sell off major assets. With the Chinese selling their U.S. assets – which are currently held in the form of U.S. Treasuries and big U.S. metro area real estate – the impact to the American macroeconomy could be dramatic. (This scenario will be addressed in a future article).

Conclusion: Short to Mid-Term E-Trump Effect on China and the U.S. E-Commerce Seller

A 10-15% tariff would certainly reflect the cost of the product to sellers. However, due to the continued Chinese currency devaluation, there should be an equal or greater offset in the overall savings to companies that purchase products from China.

= POSITIVE

Nevertheless, the impact of a 10-15% tariff would be detrimental for a U.S. buyer of imported Chinese goods that does not have the access or leverage with foreign factories to accept payment in Chinese currency. In that scenario, the full impact of the tariff would likely fall on the US buyer, thereby making it difficult to compete and stay in business.

= POSITIVE - FOR SELLERS WHO DO NOT BUY CHINA FACTORY DIRECT

= NEGATIVE - FOR SELLERS WHO BUY CHINA FACTORY DIRECT MOQ WITHOUT REGARD TO MARKET SELL-THROUGH

If the U.S. Importer/Wholesaler/Distributor supply chain cannot negotiate a better price for buying in US dollars or reduce links towards more cost-efficient supply, then they would experience a double negative effect. They would have to pay both the currency offset (15-25%) and the tariff (15%), which could be a devastating- if not fatal- blow to margins. This would cause:

• Inflation for the U.S. consumer market price
• Erosion of margins for U.S. sellers that are buying higher
• The launch of a period of e-commerce seller rollups and consolidation that favors the largest and most efficient sellers
• The collapse of inefficient heavy supply-chain-dependent importers, wholesalers, and distributors
• The renewal of U.S. isolationist style-manufacturing (though not necessarily through new manual labor operations as we will discuss in a future article)
• A pick up of the supply role by North American continental economies (Mexico and Canada), making these countries the key supply hubs for the U.S.
• A more advantageous supply/trade deal for Mexico and Canada over China

We cannot discount the possibility that the Chinese government, which currently owns and tightly controls its banking policy and banks, will respond with the opening moves (or at least the strong threat) of a “trade war.” It could limit or freeze the issuance of Chinese currency for conversion requests by U.S. banks and therefore require payments to be made in U.S. dollars. In this scenario, the Chinese government would use the USD to offset the tariff, either by paying the tariff on behalf of the factories or by guarantying the funds back to the factories to pay directly.

In terms of rapid worldwide economic change, the next 12 months may prove to be the most interesting shifts yet. How this will affect the online selling marketplace is still to be seen.