All the tea from China will be taxed at least 10% if the Trump Administration carries through on its threat to 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 and devalued 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 the first time since the recession. With only three weeks to negotiate a truce, the 10% tariff seems likely and may quickly rise to 25%, according to President Donald Trump.
On Monday, Trump told reporters, “We have rebuilt China. If they don’t want to trade with us anymore that would be fine with me. It would save lot of money.”
The impact of the escalation 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 767 points, a decline of 2.9% not seen since a dramatic sell-off last December. The S&P 500 fell 3% and the Nasdaq Composite declined 3.5%. On Tuesday shares recovered somewhat but globally investors now expect increased volatility and a long, drawn out economic realignment into competing trade blocs where cooperation was once the rule.
Weakening the Yuan makes products from the U.S. considerably more expensive, a move that will discourage sales of U.S. goods to China. Goods made in China, however, will be more affordable. The decision follows U.S. reductions in the prime interest rate, a policy decision that likely influenced China’s monetary policy. In the past decade 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 tampered with rates to gain advantage.
The fourth round of U.S. imposed tariffs is a severe test of China’s resolve as it includes virtually every product traded by the two countries — costing consumers on both sides of the Pacific.
Impact of Trade Tensions on the Global Tea Industry
In combat at this level tea exports 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 apparent consumption of Chinese tea is 5.9% of China’s exports and only 0.825% of their production. This quantity is not a meaningful amount of tea considering their huge production, writes Peter Goggi, president of the Tea Association of the USA.
No matter what the outcome, socio-economic and political crises in the world’s leading tea consumers have led to a significant decline in global tea prices, according to the East African Tea Trade Association (EATTA), an industry lobby.
The global price for tea is currently $2.73 a kilogram, compared with $3.31 at the same time last year, said Edward Mudibo, EATTA managing director.
He cited unrest in Sudan, the unpredictability of the U.K. discussions with the European Union and U.S. sanctions against Iran. “While prices have been on the decline or flat, the tea sector is grappling with increased costs of production such as labour, fertiliser, electricity and fuel. With the prevailing low average price of tea, most tea producers are not able to sustain the costs of production,” he said.
The U.S.-China trade war has already forced American soybean and wheat growers to develop new trading partners. Rising tariffs will lead Chinese tea exporters to do the same. Price increases due to tariffs on steel and aluminum imposed last year are significant but were less visible to consumers, but this final round of tariffs conceivably could cost Americans $135 billion. Raising the price of a $6 box of 100 teabags to $7.50 will not go unnoticed.
To retain market share manufacturers of big-ticket goods, including Apple, assured customers the company will absorb the added costs of importing Chinese’s components, but tea retailers 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, and imports fell. The Canadian government collected $1.27 billion in tariffs, money used to ease damage to domestic industries consuming large amounts of steel and aluminum.
If tariffs rise to 25% expect virtually all that increase to be passed along.
The Tea Association of the USA testified that “Imposing punitive tariffs on tea would not be effective in changing [China’s trade practices] because tea exports are a very small part of China’s overall tea sector. Most tea that China produces is consumed domestically. Further, punitive tariffs would have a disproportionate economic impact on small and medium-sized enterprises because most of the U.S. importers (those that pay the tariffs) are small businesses.”
In testimony before the U.S. Trade Representative in June Goggi sought to remove tea from the list of Chinese imports “due to the disproportionate economic 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 if tea is included. I have contacted the office of the Trade Representative for information but have not received any response ― as yet.”
The U.S. is the world’s third largest tea importer, but its suppliers span a broad range of countries. China is by far the biggest supplier of green tea, but Argentina, a black tea provider, ships far more tonnage annually to the U.S. Taiwan, Malaysia, India, Sri Lanka, and Kenya all contribute significant shares of the U.S. tea imports. Tea imports from Vietnam and Indonesia may ultimately benefit from increased demand.
Austin Hodge, founder of Seven Cups Fine Chinese Tea in Tucson, Ariz., notes that consumers of more expensive, and one-of-a-kind Chinese teas, such as Puer, are going to remain loyal to their personal preference. “This is certainly not going to put us out of business,” he said, “the cost of raw tea is only part of retail pricing that includes shipping, packaging, marketing, and delivery expense.”
Commodity tea drinkers, which represent the largest share of the U.S. tea market, demonstrate brand preference but also keep a close eye on grocery prices which have been heavily discounted 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,” says Hodge, adding that the devaluation of Chinese currency largely offsets the additional expense of import duties.
Will the U.S. or China back down?
In opinion polls 49% of Americans say new tariffs “make things worse” with 26% responding that tariffs “make things better” while 25% say tariffs “do not have much impact” as a tactic.
The poll, conducted by YouGov | CBS News in May, found that more than six in ten Americans (62%) favor trying to get China to change its trade policies toward the U.S. This view includes large majorities of Republicans (84%) and independents (67%) and a substantial number of Democrats (46%) too.
It seems unlikely that the Communist Party will back down, despite the fact China’s economy is slowing. The Chinese anticipated a downturn in exports and are focused on developing stronger domestic demand and well as expansion of the service economy. The trade war makes it convenient to blame the U.S. for a decline in exports. China is the world’s largest, shipping $2.2 trillion of its production. The country has many desirable partners that are lowering barriers to trade in Europe, Canada, Mexico and throughout Asia. Chinese are willing to spread their wealth, recently purchasing more than $1 million in tea from India in response to growing enthusiasm for black tea blends.
Goggi pointed out that it was the U.S. that blinked in July when Trump and Chinese President Xi Jinping agreed to resume trade talks. Perhaps it will do so again. The alternative is ominous.
Morgan Stanley predicted Monday that “If the U.S. were to implement 25% tariffs on all imports from China for 4-6 months and China were to respond with countermeasures, we believe we would see the global economy entering recession in three quarters,” reads the company’s note to investors. Morgan Stanley estimated that global growth would fall to a 7-year low by the end of 2019.
If that comes to pass the tea industry will face far greater headwinds than tariffs.
Source: Tea Association of the USA, The East African