How will USAChina trade war impact direct sales niche?

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This post is my opinion .. not a political statement or indepth analysis!

The recent announcments by the US administration indicates that trade tarriffs will be applied to a long list of consumer goods imported from China. Up until now the tarriffs have been applied to the industrial sectors with little direct impact on the individual.

What is a tariff?

A tariff is a tax that is applied to the value of goods purchased from a designated country and is paid by the importer at the time the goods arrive int the country who have designated the tariff.

Why have tariffs?

The tariff is intended to push up the price of foreign goods, to make locally manufactured products more attractive

Who ultimately pays the tariff?

In the end, the only one who pays for taxes or tariffs is the consumer. All taxes applied at the manufacturing or wholesale level end up in the determination of the end price of the goods sold to the consumer of those goods or services.

These tariffs are not good for the direct selling industry. The current round of tariffs impact products sold to end consumers. This can only result in one thing ... higher prices for the consumer across the board. With higher prices comes inflation and the cycle of economic meltdown is escalated.

How will this impact Direct Sales?

Many of the largest online direct sales companies will see an increase in costs, a reduction in profits, and an increase in prices for their goods, as the consumer-level tariffs take effect on goods producted in China.

Many of the Direct Sales products are manufactured in China and imported for sale in the US and other countries.

This will increase the cost to acquire these products because the company must use more expensive domestic parts or pay more for the finished products.

The current China tariffs combined with the industrial and manufacturing level tariffs, previously announced, will impact the bottom line of most Direct Sales companies.

What will be the impact on prices?

Many direct sales companies use a cost to price ratio of between 4 to 6 times (or more).

Simplified example ...

If a product costs $10 it will be sold for between $40 to $60.

This markup covers the costs of importing, warehousing and distribution, and of course the commissions to their sales representatives, which can often be over 50% of the selling price, depending on the compensation plan.

If the cost of the goods is increased by 25% (from $10 to $12.50) the selling price would have to increase to a value of $50 ($12.5 * 4) to $75 ($12.5 * 6) ... making the products less attractive, compared to locally produced products, or those available from other sources, such as the European Common Market.

If the gross profit margins are to be maintained by the Direct Selling company, they will be required to increase the selling prices to cover the 25% tax levy.

Where does the money go?

Import duties flow directly to the Government who sets them ... so the US for example, will take in the 25% levy directly from the importer ... the cost is passed on through the supply chain and the consumer pays the increased price of the goods.

Impact on the Economy?

As the prices go up the total revenue from direct sales will increase as well, provide demand for the products stays the same. Some goods are essential and therefore consumers will have not alternative but to pay the higher costs.

Those products on the "nice to have" or "extravagent" list will suffer ... demand will go down as the amount of dlscretionary funds is reduced.

The Government will benefit as these taxes flow directly into the treasury and reduce the overall financial deficit and help to prop up the resources available for Government programs or services.

Inflation will be impacted, although the actual effect can not be accurately predicted. Prices will rise and the cost of living will go up. Disposable income will decline ..





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Recent Comments

20

Magnificent writeup Thanks for sharing this post it was very good reading

Thanks for the feedback ... have some serious concerns as many do ...

Hi Allan, thanks for clarifying all this for me. I see the headlines continually both from the US papers and Canadian papers, as trade wars are looming here. I never totally understood tariffs other then for the little guy it means it costs more. Interesting fact is where the tax money goes, first time I heard that it heads to the government's coffers. All this makes so much more sense now.
Mary

Yes, that is seldom mentioned for obvious reasons ... :)

Higher product prices mean higher affiliate commissions. Hopefully, consumer demand remains the same.

That is the hope, exactly ... for some products it will. For the luxury products there will likely be decline, but in the longer term of course, everything evens out ... the consumer becomes a little poorer, is the end result! :)

This trade war that has the U.S. and China going back and forth will have indirect effect on all business that venture across the water to some unknown degree sooner or later. Time will be the telling factor in the coming months.

Let us not forget who rules africa now, taking all its natural ressources and keeping,dictators into,place...

All our smartphones build wIth their blood and tears

Hey Allan,
This is an interesting article on how the economy works!

Tried and True

Elaine

A very over simplified example, but hope it stimulates thought around the impact on Direct Sales / Internet Marketing businesspeople.

I think China will focus on other markets, like Russia and Europe. The USA prices itself from the market with all its consequences.

There is definitely going to be major shifts in the source and destination of products as a result of these changes.
It is good to be aware of and to anticipate how this is going to impact our Direct Sales industry ...
For example, drop shipping of goods from China, may now be subject to duties when the consumer receives the goods ... that will have a serious impact on this segment of the market!

Yes, I never buy from Chinees companies, delivery is very random, sometimes it's free, sometimes we have to pay double the price of excise duty.

Thank you for that simplified lesson in economics. The consumer - even though not much people realises it - ultimately has the say. Change of taste away from that "over priced" product can see the price fall or it's supply disappear and a substitute appear on the market.

You are welcome ... my background is Accounting but I am not an economist by any means. I think sometimes changes take place that we don't pay attention to until it is too late ... good to keep an eye on the marketplace and the influences that will impact our success! :)

I am in full agreement on that one.

Taxes are a way to restore social justice

This being said, i think political issues and religion are nono stuff also

This is neither a political or religious statement! Simply a comment on how these changes are going to impact Direct Sales ... people need to be informed of these changes!

I believe it is indeed an important subject that affects us all.

In europe we have social taxes, hence my ansWer
We pay twice: for products we did not produce and for people who lost their job

I agree, in Australia we are flooded with cheap and nasty products from China, much of which ends up at the rubbish tip. While local companies making quality products go broke because they can't compete at the low prices.

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