In mid-February the United States import tax on approximately $75 million in Chinese tea will be lowered to 7.5%, a reduction by half since duties were first imposed in September 2019.
Specific details have yet to be disclosed in guidance from the US Trade Representative (USTR), but officials confirm that tariffs on $112 billion in Chinese goods, including coffee and tea, will be lowered as part of the Phase 1 agreement signed Jan. 15. The lower rates are effective Feb. 14.
A U.S. import tax of 25% remains on $370 billion in Chinese goods pending further Phase 2 negotiations. China kept in place tariffs imposed on goods imported from the U.S. These include tariffs on coffee and tea. Tariffs now cover almost two-thirds of U.S. imports from China, with an average tax of almost 20%, compared with 3% before. China’s retaliatory tariffs hit almost 60% of U.S. exports, with an average rate of 20.5%, up from 8% before the current administration, according to the Wall Street Journal. Talks are expected to continue through 2020.
The trade war truce drew limited praise from U.S. firms marketing teas following the unprecedented tax. Peter Goggi, president of the Tea Association of the USA, said that while the lowered tax is good news “our position has not changed since the imposition of these “taxes” by the Trump Administration.”
“The imposition of tariffs on Chinese tea will not impact the Chinese producer, exporter or government. However, it will negatively impact the U.S. consumer,” said Goggi. “We welcome the reduction, but we will not be satisfied until we return to free and unencumbered trade of tea from all producing nations.”
Price Pass Along
The immediate impact of the Sept. 1 tax was to increase prices for consumers. To avoid duties, blenders and wholesalers initially sought alternatives to Chinese teas resulting in a spike in imports from several countries. Green tea imports from Asian growers including Taiwan, Argentina, Japan, and Malaysia increased and some black tea contracts previously supplied by Chinese importers went to growers in Africa (Kenya and Malawi), India, and Sri Lanka.
“One of the biggest losers was [Chinese] black tea packed in teabags. Imports brought in under this code dropped from $11.5 million in 2018 to $3.6 million in 2019 (Jan-Oct of both years),” according to Jason Walker, marketing director at Firsd Tea, a U.S. based subsidiary of the largest tea exporting company in China.
Goggi points out, “Like wine, tea varies dramatically due to local terroir (geography, climate and local manufacturing techniques). China has many unique teas that are unavailable elsewhere, due to their unique cultivars, terroirs and processing methods. In the area of specialty tea, many Chinese produced teas are unable to be sourced anywhere else in the world.”
Sellers who specialize in importing Chinese tea had little choice but to pay duties and pass along the 15% expense to retailers, most of whom increased prices. Retailers of the more expensive, premium Chinese teas, including Austin Hodge, founder of Tucson-based Seven Cups Fine Chinese Tea, did not see sales declines because “our value proportion continues to be high and our prices are low, giving us a buffer when it comes to unexpected changes in cost.”
But loose leaf in total represents less than 1% of the U.S. tea market. Of the 1,607 U.S. special tea retailers identified by Sinensis Research, only 7.3% predominately offer Chinese tea. It remains unclear but likely that higher prices will reduce sales volume in 2020 which peaked around $100 million in 2016. China has no incentive to lower prices given the global demand and scarcity of its best teas.
Retailers with overseas clients in Canada, South America, and Europe simply arranged to pack, blend and ship directly from China, avoiding U.S. duties since the tea was never landed.
Tariffs impact more than raw tea. Import duties on packaging materials cost Bigelow Tea $1 million last year. Harney & Sons and other big suppliers of foodservice tea in thin metallic film overwraps were not able to find alternative packaging options outside China. In some instances, the cost of importing packaging materials made it less expensive to hire U.S. firms to pack teas with packaging materials imported from countries not subject to tariffs.
Declining Tea Imports
Tea imports overall are down. The Foreign Agricultural Services (FAS) GATS database shows tea imports from China were valued at $67.8 million through November, down 17% compared to the same period in 2018. This despite a rush to import as much green tea as practical during the first six months of the year. Green tea imports declined 6% by volume to 7,142 metric tons. Volume overall declined 4% during this period suggesting China’s more valuable teas were shipped elsewhere.
In contrast, tea imports from Sri Lanka spiked 15% with year-over-year green tea exports to the U.S. increasing by 87% through November. In testimony before the USTR last June, industry representatives made clear that tea tariffs pose no threat to the $17.9 billion Chinese tea industry. “The tea trade does not suffer from unfair technology transfers, theft of intellectual property or stifled innovation. There is no commercial tea grown that needs to be protected by tariffs, nor are there any farm-based jobs that would be protected,” Goggi testified.
“Most tea that China produces is consumed domestically. 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 China’s huge production,” he said. China is the world’s largest green tea exporter in every grade.
Tariffs may have an outsized impact on green tea growth as a percentage of total consumption just as Americans are learning to like Chinese teas.
There were no green tea imports to the US from China during the 1950s through the 1970s. Japan supplied small quantities of green tea, but sales amounted to only $3 million in 2000. Green tea imports remained flat through the 1990s, averaging about $25 million per year until 2004-05 when values quickly increased to more than $135 million per year, according to Organization for Economic Co-operation and Development (OECD) statistics.
“The market is already seeing more growth in foodservice and RTD green iced teas. Iced green teas offer a great palette for adding popular flavors while maintaining the healthy benefits associated with green tea,” writes Walker. Consumers favor green tea over herbals by almost two to one, according to market research Statista. A 2017 study showed green tea to be consumed by 54% of respondents based on a survey of 810 tea US drinkers.
In the U.S. tea accounts for 15% of restaurant beverage menu items, according to Mintel market research. About 40% of restaurant-goers drink iced tea, twice the number of hot tea drinkers.
Green tea currently accounts for 15% of total U.S. volume across all segments, reflecting strong growth in the past decade, much of it in the ready-to-drink segment. Health benefits continue to drive sales, but green tea growth has slowed. The surge from 5% to 15% market share was due in part to availability at foodservice chains like 6,711-store Wendy’s, the No. 3 burger chain in the US, which began serving organic green tea in 2015. McDonald’s offers green tea lemonade. Restaurants, including fast casual chains, are experimenting with fresh brewed tea including iced green tea blends. In 2020, when confronting an additional 7.5% increase, price-sensitive chains are more likely to promote black tea.
Trade Tensions Remain
Tea and coffee were fortunate. Under terms of the phase one agreement, rates were reduced on relatively few of the thousands of agricultural goods, machinery, and industrial goods listed in four tranches by USTR. Significant (25%) tariffs on $370 billion of Chinese goods remain as leverage prior to resumption of talks, but no further tariffs are anticipated until after the November U.S. presidential election.
To resolve the trade dispute the U.S. insisted on forcing China during the next two years to purchase an additional $200 billion in U.S. goods and services (compared to 2017). Observers express hope that China can normalize the trade balance with the U.S. despite a domestic economy that has slowed to its lowest growth rate since 1990. Skeptics point out the requirements amount to an 81% increase over 2017 orders followed by a 125% increase in 2021.
One billion in export revenue for the entire tea segment is a rounding error in a $12 trillion economy with $2.3 trillion in exports so the only way tariffs will disappear is with Chinese concessions with respect to intellectual property and an agreement on Beijing’s side to end the forced transfer of technology by U.S. companies in return for access to the Chinese market. Only then will the Trump Administration consider abolishing the tax on tea.
The tea industry seeks only a level playing field and a return to a non-tariff normal — the key to frictionless trade.
Source: USTR, USDA FAS Global Agricultural Trade System