The question of whether (or not) trade wars are easy to win is a political one. As is the question of whether short-term pain outweighs long-term gain. Therefore, a consensus about equity of the current and future tariffs imposed by the Trump Administration is, like everything else in our current climate, elusive.
What isn’t is that tariffs are here and have mightily affected – or will mightily affect soon – the cycling industry. From bikes to components to the raw materials that make them, the additional tariffs will make much of what U.S. consumers buy in stores or online – much, but not all – more expensive.
But first … what is a tariff? And why impose them?
Quite simply, a tariff is an import tax on anything made abroad, theoretically to raise prices and give domestic manufacturers a competitive edge, even where there is little or no domestic manufacturing.
Like in the bike industry.
Although there is scattered bike building in the U.S., essentially all the bikes sold here are made elsewhere. Of that, fully two-thirds are made in China, including virtually every children’s bike.
Those bikes are already subject to tariffs (5.5% for road bikes, 11% for mountain and children’s bikes) but received an additional 10% tariff when further restrictions went into effect on Sept. 24. Unless China and the U.S. come to an agreement, which is unlikely, that will jump to an additional 25% percent on Jan. 1, meaning as much as a 36% hike on most bikes.
The math is simple, as is the result. For those companies affected, the increase in prices at the port will be passed on to consumers.
“Prices are definitely going to go up for 2019 products,” said Patrick Cunnane, CEO of Advanced Sports Enterprises, the parent company of Performance Bicycle and the Fuji, Breezer, Kestrel and SE brands it sells. But, he added, “nobody’s quite sure what effect it will have on consumer behavior. Will they not buy a bike because it’s more expensive than it used to be? Or will they buy a less-expensive bike and get less value? That’s the question that we don’t know the answer to.”
Geography plays a part in the pricing structure, a further confusion point. For example, a bike that retails for $1,000 and is assembled in Taiwan has no additional tariff. A similar bike made in China could see its price jump to $1,250. And many manufacturers import bikes from China and elsewhere (mostly Taiwan, but also Europe), setting up a potential pricing nightmare for bikes with similar features but different origins.
“It remains a business with a lot of moving pieces,” said Steve Frothingham, the editor of Bicycle Retailer and Industry News, a bike business publication. “It’s not as easy as just saying, ‘OK, everything gets marked up X dollars.’”
It’s also not simple to just move manufacturing away from China, either. Although some companies like Advanced Sports and industry leader Giant build in both Taiwan and China, the capacity of the factories in Taiwan can’t make up all the difference. Other countries in the Pacific rim don’t necessarily have the factory tooling or robust supply chains.
“The other sort of offsetting factor is cost. Even if production moves, the cost of producing something in Taiwan is more expensive than China; the cost of producing something in Vietnam or Cambodia is more expensive than China, because a lot of the supply chain is still from China or Taiwan,” Cunnane said.
Electric bikes, subject to a 25% tariff by the administration earlier this year, are particularly problematic. With a higher price tag to begin with, those electric bikes that come from China will see prices soar. Although most of its electric bikes were made in Taiwan, Cunnane said Advanced will move some production to an existing plant Mexico.
What you likely won’t see unless there is some permanence to the tariffs is companies building new plants.
“The goal [of the tariffs] is to hurt China. The collateral effect is to encourage suppliers to look outside of China,” Frothingham said. “But the situation is so fluid … no one is going to trust making a multimillion dollar investment that would take a year or two years to get rolling when you don’t know what’s going to happen tomorrow.”
One American manufacturer, Kent International, has a factory in South Carolina that opened in 2014 to build bikes for the U.S. retailers like Walmart and was on track to make 400,000 this year. Because it imports parts from China to build its bikes, parts that will soon be 25% more expensive, company president Arnold Kamler put expansion on hold.
A fortunate beneficiary in the business is California-based Marin, whose bikes are sold by Performance and to independent retailers. It moved its production from Taiwan and China to Indonesia nearly five years ago and that factory is suddenly the most popular person at the dance.
“We’re having an interesting time of it right now,” said Sean Walters, Marin’s vice president for business development. “Manufacturers who have been [hesitant] for the last five years are suddenly interested. But because of Marin USA sales and worldwide sales, and our Performance sales, and the other manufacturers that we work with, we are getting close to capacity. However, as a brand we are really well positioned to weather this storm out.”
Chinese companies do have a way to end-run the system, though, and it involves something known as the “de minimis” shipment exemption. It states that imported goods to consumers with a value of $800 or less face no duties or taxes. Through eBay, Alibaba and Amazon, Chinese firms that sell direct to consumers can therefore move their items at a fraction of what it costs U.S. firms to sell something similar.
“It gives Chinese retailers an advantage – they don’t have to pay the existing 10% duty the additional 10% tariff, and potentially the additional 25% tariff,” Cunnane said. “We said, ‘OK, we’re going to punish China, but we’re going to reward Chinese exporters that export directly to consumers?’”
Cunnane proposed a reduction to $50 in testimony last month to the trade officials in Washington D.C.; thus far, no action.
“One of the arguments I made is that it doesn’t make any sense,” he said. “As a retailer, that’s what’s hurting us more than anything else in the bicycle industry.”
If you think any or all of this issue is partisan, you’re wrong.
The current tariffs may be a deep Trump red, but the de minimis exemption was increased from $200 to $800 in 2016, under the Obama administration. (Because, Cunnane said, the government felt collecting the money for small purchases was “too complicated.”) And when Chinese began dumping low-priced bikes on the American market in 1996 and U.S. manufacturers hollered for anti-dumping taxation, it was the Clinton administration that said no, effectively killing the domestic industry overnight.
Now the trade war is on, and the outcome is far from clear. Only, in the short term, are the casualties.
“Who’s really hit is the bread-and-butter consumer,” Marin’s Walters said. “High-end bikes are made in Taiwan, and even if there were tariffs on those the guy who’s going to drop $3,500 on a bike could probably afford the increase.
“But what about the people who can least afford it? What about the person who needs to buy a bike to get to work, or to school, for transportation? Someone who wants to spend $350 on a bike might not be able to up to $500 to cover this. That’s the guy who’s getting screwed.”