Tariffs Could Force Some Retailers Into Bankruptcy

Jun 3, 2019 | Bankruptcy, Chapter 11 Bankruptcy

Are you one of those people who look to see where the stuff you just bought was made? It’s fun to flip over that deck of cards, or your new Himalayan Salt mill and just to look for the country that’s brave enough to take credit for manufacturing that hunk of junk.

There was a time when it might say “Made in the U.S.A” on it. Even these days if you could flip over your Chrysler, at least some parts of it might still say “U.S.A.” But manufacturing in the United States ain’t what it used to be. Many of us still look to see if it’s an American made product. It’s usually a sign that it’s a high-quality product, and we presume buying it will help our local economy.

At least since World War II, there’s been a country that’s synonymous with cheap, and often poorly made products. After the war, many cheap products were made in Japan. Japan meant cheap ( and not so good), but at least cheap.

The guy who drove his Toyota to work this morning just had his jaw hit the floor after reading that last paragraph. These days we think of Japanese products as being very high quality. And in most cases, you wouldn’t be wrong.

However this is now, but that was then…? Japan worked hard over the years to create quality products and to change it’s reputation. It also means the cheap aspect of their products went away. If they could have stuck with cheap and nice, that would have been something. But usually cheap is just cheap junk. Or is it? We will revisit this in a bit.

As Japan’s manufacturing quality improved along with their reputation, other countries stepped in to fill the void. “Hecho en México” would often sneak in as the cheapest option, especially in certain areas. Products made in India seemed on par with those from Mexico but appeared in our stores later. Stuff made in Taiwan (and often Taiwan R.O.C.) seemed to go the way of goods from Japan – transforming from the “cheap junk” category to the well-made, higher-technology category.

But the biggest country in the world (by population, not by size – which is key to manufacturing) has eclipsed them all. Made in China is the ubiquitous name applied to virtually all the products out there. After Chairman Mao’s stunningly ineffective (understatement alert) control of the economy and its stifling effect on economic growth in China, we have seen an explosion in China’s ability to create goods for the world market.

At one time those goods fell squarely into the “cheap junk” category, and China is still making that stuff as well. Just go to the dollar store before Saint Patrick’s Day and you’ll see what we mean. But this is also the China that has it’s very own space station! Nevermind the fact that it burned up in our atmosphere and it’s is now gone. Skylab did the same thing in the 1970’s. And it’s not like they built the thing on Earth and paid Russia to launch it into space either. They launched it with their own rockets, using their own engineers and scientists.

It’s safe to say as of this point that China is a technological force to be reckoned with. One thing that China has been able to do that none of the other countries we mentioned are capable of, is creating a cheap product that is still a good product. When Japanese goods increased in quality, so did their price. They can now only compete price wise in higher-tech industries where China has yet to make inroads, such as the auto industry.

When is the last time you bought a chainsaw and had any options that weren’t made either in China or the United States? And if you bought the cheapest one you could find, (undoubtedly made in China), we bet it was pretty well made in spite of being cheap, wasn’t it?

Sure if you want to pay an arm and a leg, you can go buy a state-of-the-art product made in a place like Germany or Switzerland that is known for producing high-quality products. But have you seen the price of a Mercedes or a Rolex lately? China makes a pretty good timepiece these days, and at a fraction for the price of those Europeans.

Tariffs’ Tarror

All this leads us to the issue of tariffs (I’ll bet you thought we’d never get there!). Clearly Chinese goods are in demand all over the world. Even if you’ve been living in a cave for the last half-century, we’ve made that abundantly obvious in the last two pages. Any effect on China’s ability to export its goods to another country will have tremendous consequences on business. It goes without saying, although we said it anyway.

The white house has been threatening tariffs against Chinese good for a while now. We won’t get into the politics here, but objectively the argument goes something like this. China has unfair tariffs/ fees or what have you on American imports into their country In order to level the playing field we are placing tariffs on their goods coming into our country. No leader in recent time has addressed this problem head-on, so our current Commander in Chief has decided to do something about it.

The key issue we are addressing here is the effect tariffs on Chinese goods will have on American businesses, and whether it may cause any businesses to seek the protection of chapter 11 bankruptcy.

What’s a Tariff Anyway?

They didn’t even try to teach us this in school. Of course, that school was in a poor town with a voting base made up primarily of retired people who couldn’t give a whoot about education. “Don’t be raisin’ my taxes for somebody else’s grandkids no how!” But…

We’ve heard from other kids who learned American History at their school in third grade that tariffs are basically a fee placed on imported goods. Tariffs can be great for manufacturers in your country. Here’s why…

P.S. It’s all about hammers.

Let’s say you are a farmer. You go to buy hammers at the store. Presumably your barn needs some fixin’ and your old hammer done gone and broke. So you get yourself to the general store and there’s two hammers available. One is from jolly ol’ England and the other is made right here in the good ol’ U.S. of A. They are roughly the same quality, (and besides, you are desperate for a new hammer so who cares really?) but the English hammer comes in at 4 bucks and the American hammer is 5 bucks.

Which one are you going to buy? The English hammer of course. Now everybody is happy except for the American company who makes the hammer.

But that scenario is the one without the tariffs. Next up… the tariff version.

A year passes, and somewhere in that time Uncle Sam decided to place tariffs on English imports into the United States. Your good-for-nothin’ son-in-law dropped that hammer into the mud, and it’s done disappeared. So at the general store you see the same, two hammers. The American hammer is still 5 bucks, but the English hammer is now 6 bucks. Why so much for the English hammer?

The difference is that now there’s a tariff on goods imported from England. Of course the English manufacturer is not going to absorb the cost of the tariff. Instead, he’s going to pass along the cost to the consumer. So now that hammer is 6 dollars instead of 4 dollars.

Which one are you going to buy? The American hammer of course.

Now nobody is happy except for the American company who makes the hammer. The English company is obviously losing business because of the tariff. The farmer now has to pay 5 dollars if he wants the cheapest hammer instead of 4 dollars. The owner of the general store might even be worse off because he may sell fewer hammers due to the overall increase in prices of hammers. Our farmer may be more apt to go digging through the mud that his good-for-nothing son-in-law dropped the hammer into to try and recover the old one now that they are 25% more expensive than they used to be.

Ever heard of a free market?

So what does this simplistic, old-timey example have to do with today’s market?


Tariff’s and Bankruptcy

So here we are in our modern world talking about tariffs. We’ve already bypassed the politics, so we aren’t going to talk about fair, international trade and how China may or may not have put itself into an unfair trade situation with the United States by placing its own tariffs/fees on our goods. We aren’t going to talk about if it’s sensible to retaliate with our own tariffs and whether or not that levels the playing field in an intelligent or foolish way. What we will do is look at what tarifs mean for American companies who may face bankruptcy as a result of them. The specific sector that faces one of the highest risks is the modern-day version of the general store. These days we call them retailers.

These days retailers rely heavily on the sale of good manufactured in China. Just like with our old-timey hammer example, they aren’t going to absorb the cost of a tariff themselves, especially if it’s a retailer that is already struggling for other reasons.

Nope – they are going to pass that cost right on down to their consumer.

This obviously is going to hurt the consumer, but what stores will be hit the hardest?

Any retailer who is already on hard times is going to be hurt the most, especially if their goods primarily come from China. So a retailer like Walmart or Amazon should be able to absorb some of the cost of the tariffs. They are economically strong and don’t necessarily need to pass all the cost of the tariffs on to their customers. They can eat some of the expense and still stay competitive within their market.

Additionally, places like Amazon and Walmart source their inventory from a wide variety of countries. They are dealing with imports from across the globe. Chinese specific tariffs won’t affect their products if they come from another country.

These retailers also do business in many countries. The business they do outside of the United States is somewhat immune from tariff issues – at least those of the American variety. Walmart has locations in Canada, Mexico, South America, and Asia. Amazon stretches even farther across the globe.

But what about other American retailers? Many are still huge corporations, but not on the scale of Walmart or Amazon. Their business operations are primarily American, and much of their merchandise is manufactured in China. For example, JCPenney is one such company.

JCPenney has also struggled financially as of late, and has not filed for bankruptcy protection like Sears or KMart. Since it’s already experiencing financial hard times, it will be less able to absorb any of the costs associated with Chinese tariffs. This means the bulk of this cost will be added to the price of the goods it sells, making it that much more difficult for JCPenney to compete against other retailers who it is already losing customers to. Since it has yet to file for bankruptcy, it is very likely to do so as tariffs take their toll on its bottom line.

How Will Bankruptcy Affect Struggling Retailers?

If tariff’s do end up causing American retailers to file for bankruptcy, what will become of these businesses?

Large businesses file for chapter 11 bankruptcy. When they do, it doesn’t mean automatic death. It’s more of an opportunity for a company to reorganize and trim the fat. The court will temporarily take over and begin to do things like closing underperforming stores, and settling with creditors for pennies on the dollar.

This sounds like a bad deal for the creditors, doesn’t it?

Unfortunately, most creditors will take a loss when a business files chapter 11. However, the alternative is that a struggling business closes without filing for bankruptcy, and creditors are left with nothing. So to creditors, chapter 11 isn’t all bad. Something is better than nothing.

Chapter 11 is not a slam-dunk either. A business can jump through all of the hoops required by the court and still end up going out of business, but bankruptcy at least gives it a fighting chance.

In conclusion, we’ve learned that tariffs lead to more expensive hammers and more expensive goods at JCPenny. We’ve also learned tariffs are a huge political issue which we’ve chosen to ignore, but they can have wide-reaching positive or negative consequences that should be seriously considered by our political leaders when deciding whether or not to enact them.

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