Transcript 0:04 Hi, everyone. Welcome to What Just Happened. Today, we welcome Rich Taylor, a China-based, a China-based international trade specialist for a discussion on tariffs. Welcome, Rich. 0:21 I'm Christine [clears throat] I'm Christine Russo, and that is what just happened. I'm Christine Russo, and that's what just happened. I'm Christine Russo, and that is what just happened. Hi, everyone. 0:37 Welcome to What Just Happened. Today, we have Rich Taylor. Rich is a China-based international trade executive and specialist. Okay. 0:45 Let's do it because there's so much to cover, and it's really exciting to have you here, so welcome, Rich. Thanks. I'm glad to be here. Yeah, and I really just wanna get right into it. I wanna talk about first sale. 0:57 I wanna talk about where we are today on tariffs- Mm... where everything is changing. We're still waiting for kind of the shoe to fall, I think. 1:05 Obviously, the biggest thing that i- importers are trying to do is mitigate any kind of tariff costs. 1:12 So first, first sale valuation or the first sale rule is, is just one of the mechanisms that they can use if they qualify and if they can do it. 1:23 Most companies that are doing imports from China, and that's specifically where I'm at. 1:29 Obviously, I do interface with India as well, but primarily because I live and, and work in China, so there's a lot of confusion about tariffs in general and how it's impacting business, and then ultimately how it's gonna impact the consumers. 1:45 A lot of people are saying right now that, you know, th- that we're not seeing heavy inflation from any kind of tariff activity, but really it's not been long enough. 1:55 Because most of the companies that do import, uh, normally keep three to four months of inventory on-hand, and from what I... 2:07 M- my, my discussions with those importers has been that most of them have held and actually built up stock in anticipation of tariffs going up. 2:18 So there, m- many of them are just burning through the inventory that they have in the United States right now. 2:26 But I think it's, again, until July 8th, until the big expiration of this pause, which has not really been a big pause, I still consider the tariffs to be highly impacting on, on business. 2:40 I'm not following the buildup of the inventory conversation. 2:43 So I heard that back when this first was brought up because we're in such a seasonal, cyclical place, so I'm- I try to think the only category maybe is, like, towels and sheets because summer furniture is summer furniture, and holiday is holiday, and that's the window for selling there. 3:02 And apparel is, and apparel is apparel. You have a window for selling there. What is... I've heard that s- the news covered people are stocking up. What are they stocking up on? 3:14 After 4th of July, all summer inventory here goes on sale. Sure. So the s- We, you- Just the stock-up narrative never worked for me because that's reckless. Who's doing that? 3:25 Very large, uh, billion-dollar importers that rely on China manufacturing had actually put a pause on all their shipments during the April/May timeframe. 3:37 Building up the inventory, y- you're normally gonna see an increase in shipments anyway in anticipation of fourth quarter sales. 3:45 But with the tariff question, uh, added to the equation, many of the smart importers were already building up their inventory. And that does give you a fake sense, I think, that tariffs work. 3:59 "Oh, we've got billions of dollars in tariff of money coming in, and there's no impact to the economy." But that's re- it's really just a delay. We're in a delay right now. 4:11 And I think that tariffs will eventually have an impact on availability of products, on costs of products. I think you'll see cost increases go up. 4:23 My business here in China is I work with Chinese factories, and I also work with Western importers, and I try to optimize the Western importer as far as their savings on their logistics, on their costs, on the quality of the product, so I do product development. 4:41 But I also do business development here in China, and so I'm working with a lot of the Chinese factories for them to understand this environment of an unknown, where they're just good at making things. 4:55 They wanna just produce products at, at X dollars, and they're, they have a difficult time understanding this environment. I think we're seeing demand delay and demand destruction. I think both are happening. 5:10 Retail sales- Actually, you would see it before I would. You're in the United States. You're a consumer. You're gonna feel it, and I won't. 5:17 A lot of the importers were refusing to ship product that they had already manufactured here in China, and they were als- some of them were also refusing to pay their bill that they owed to the Chinese factories because of this unknown tariff. 5:35 They... Let's say you produce 50,000, $100,000 worth of products, and now you've come to find out that you're gonna pay, at one time, 145% of, of that cost. 5:47 On top of that, American businesses are saying, "No, we don't wanna ship. We don't wanna pay." And so a lot of the factories here, they're people, and most of them are living off a very small margin. 6:00 You know, there's not big margins on most Chinese, uh, produced goods.So they're having to a- ad- adapt to that and try to understand why would their customers not pay, why would their customers say, "Don't ship." 6:13 Actually, you raise an interesting point that it has nothing to do with tariffs, which is the manufa- the relationship that importers and brands have here with manufacturers around the world, let's say focused on China, is it's all done in good faith. 6:28 There's not a lot of- Right... money being exchanged upfront. Yeah, it does depend upon what kind of relationship you have with your factory. 6:36 If you've got a long-term relationship with your supplier, open terms is common. Net 30, net 60, net 90 even from a Chinese factory is possible if the relationship is strong and it's... And there's trust. 6:51 But a lot of trust was lost when the tariffs started to be applied because c- the true face of business, uh, happens, rears its ugly head. Yeah. 7:01 And, and if a cu- company in the United States is lean on their financial stability then they're gonna be the first ones to say, "We're not gonna be able to pay you. We're gonna..." 7:13 They're living off of the loan that the Chinese factories have given them. If it's a relatively new factory, uh, 95, 100% of them almost always have you put down, let's say 30% and 70% when you... 7:26 A product's done and a bill of lading is issued. There, there is money involved normally upfront. Uh- Great point. I think trust was broken actually during COVID. Yep. 7:38 A lot of cancellations, and they're just barely re-establishing those relationships. And the ones who paid and figured out a way- Yeah... 7:49 an ecosystem and a support relationship with their manufacturer came out stronger, and now this is basically the same thing. 7:57 Yeah, except in, in the, during the pandemic, you had both government supporting the economy's downturn by financial incentives, where they were giving out loans in the United States to companies. 8:11 Si- similarly, the same thing happened here in China. There was... 8:16 The government was supporting the downturn because of the pandemic, and all the people understood that, where it's a health risk to go into a factory and have all the workers there and spreading COVID. 8:29 But tariffs is so- is a, is a difficult thing for factories to, to grasp because they're at the mercy of the, the US government, let's say. 8:40 Now, the ones that were relying on the US market are out trying to drum up business in Europe and South America and Africa. 8:49 They're spending their marketing time and their marketing dollars going to trade shows in Europe or visiting customers in South America. 8:57 They're taking their, the money that they would normally invest and try to market to the United States customers, they're doing it to try to drum up business in other markets that offer them more stability. You know? 9:09 The, um, America is not a stable business environment right now. It just isn't. 9:15 And so a lot of the, a lot of these co- companies that are re- they have, yeah, a thousand factory workers that, that are going to work every day. What do you do? You have to keep them busy. 9:27 And they're repositioning all their marketing, they're repositioning all their salespeople to start approaching other markets. But again, direct export from China to the United States is about 14%. 9:40 You know, that doesn't... 9:41 I think that's a misconception of how much power China has on the export side because Chinese components, Chinese-produced goods are used, shipped into Europe and put into product that's then shipped to the United States or all around the world. 9:58 I wanna go back to this stocking because everything we've just talked about doesn't support the stocking of inventory. Yeah. We just said that people aren't paying their bills and et cetera. So who's... 10:10 Where is this mysterious stocking? What category are you- So, um-... stocking? Okay, I think that- Everyone's talking about it, but it's not true. It's just factually not true. 10:18 They say over 70% of the goods that are sold on Amazon come out of China, and 60%, let's say, are sellers directly in China that are on the Amazon platform selling. So a lot... 10:32 And l- they're selling to the U- US consumers, uh, FBA. You never wanna be out of stock when you're selling online because that puts you, obviously it cripples your business. 10:43 The smart sellers that are, that are on Amazon selling, they built that inventory up in a- anticipation of something bad happening. 10:53 So y- you really had a mass, you, you really had a massive buildup of product prior to the heavy tariff being applied, and everybody was rushing to get product to the containers to put them in the port and get it shipped out prior to these heavy tariffs. 11:09 The larger stable businesses in the United States that have really strong logistics, strong purchasing, they all were building up prior to the tariffs, and you see a container increase during those times. 11:23 And then you'll see a flattening and then a downcrease when the tariffs were implemented. 11:29 Maybe what some of these, you know, enormous amount of Chinese sellers decided to do was to find that sweet spot where it hit the water when there was no tariff, but there was tariffs immediately and it only went up, and then now it came down. 11:45 So it's, it still doesn't, like, make sense other than maybe they decided to do 120 days' worth. The tariff went into effect in November. 11:53 And a lot of them have let the fuel, a lot of them have just let the fuel run out as well. A lot of... 11:59 I talked to many of the sellers that are online here in China, and many have said they just have allowed their inventory to, to run out. Um, and then, you know- That makes the most sense financially because- Yeah... 12:11 it's a wait and seeYeah. If you did nothing, you got hit with some costs because your stuff was already flowing. But it's a wait and see. It's still a wait and see. 12:22 And for us also here on the consumer side, it's very much a wait and see because everything has already landed, and it didn't get subject to the tariffs. We're in the... There's a delay effect, right? 12:34 There's this delay effect. Right. So it's delay and destruction because April and May here from a consumer, like, shopping data standpoint, May was down. It was unexpectedly down, and that was psychological. Right. 12:47 It wasn't because prices went up. It was because, like, we're talking about prices going up. And then from there, now fast-forward, you'll have actual prices going up, and then you'll have destruction. 12:58 People will just walk away from it. And, and we'll see, and maybe it'll go back to whatever it was before because it is very volatile. So don't think we're gonna see anything on the 9th. 13:09 I think we're gonna see further delay to get more things. Like, the more you wait, the more you, like, have your foot on their neck, and that's really- Right... the style of na- uh, leadership we have now. 13:22 Yeah, and the other issue is the layering of tariffs is a big issue. The... We had, in 2018, we had the Section 301s, which was basically 25%, and then they started to do some exemptions and such. 13:37 But still, those tariffs are still in place, right? So then you have... You, you already have those tariffs in place, and now you've got... Now, I could... 13:46 You could go through the all, the whole list of layered tariffs that are impacting China goods, that it's causing... 13:53 Th- there's an, uh, such a huge unknown as far as what your ultimate landed cost would be because the layering effect of the tariffs that have been put onto these Chinese goods, it's very difficult for... 14:07 Actually, you could talk to any customs broker and, and they will not be able to normally give you exactly how much your tariff duty would be when your product's landed because they don't know the... 14:19 And that's where first sale valuation or first sale rule in, in customs comes in. That's something I've used, I've helped other companies use here in China as far as mitigating the high tariff costs. 14:35 It's a legal way to reduce your tariffs that's been on the books and legal for over 30 years, and it primarily came from the garment industry. 14:45 The garment importers in the United States were being hit with some heavy tariffs, and it was given... It was a way of relieving the high tariffs that they were having to pay. They came up with the rule. 14:58 I'm particularly interested in the apparel industry for that. Are they setting up their own trading companies? Are they using third party? I'd love as much insight as you possibly can. Okay. 15:09 Most often, most of the importers either rely on an agent, a middleman, a trading company to consolidate that, those orders, to work with those factories. And you've got... 15:20 And I'm gonna call him a middleman, but you've got a middleman or a trading company that's managing the purchases of the importer, okay? And that could be with, let's say, 20 factories, right? 15:32 20 fact- 20 different factories could pr- be producing all of their goods, all the goods for this importer, and it's going through the trading company. 15:41 When the product's manufactured at the factory, it's obviously the trading company doesn't... I- is purchasing those products on the importer's behalf at the factory. 15:52 And then when the goods are ready to be shipped and the duty has to be assessed, there's a commercial invoice issued, and that's normally issued by the trading company to the end u- to the end importer, to the importer. 16:06 So you've got really three, three parties involved in the import. You've got the factory that's manufacturing the goods. 16:14 You've got the middleman or trading company that is getting the products from the factory, and then you have the importer. 16:21 And normally, again, in most cases, the importer is paying any duty tariffs on what the trading company is issuing to them u- under a commercial invoice, okay? 16:35 It doesn't take into account that the trading company might be making 10 to 20% from the factory, right? And so that's where first, this first, first sale valuation or first sale rule comes into play. 16:48 So it's a mechanism that allows you, if you're dealing with a situation like I described, have a factory, a middleman, and you're the importer, is to use the actual cost that the factory gave to your trading company or your middleman as the basis for your, your, your duty and your tariff to be paid. 17:10 Now, the difficult part of this process is it's all relational. It really is. It's about relationships. You would never wanna do this with a small trading partner, factory, middleman. 17:24 You would wanna do this process with someone that you're doing a sizable amount of importing from because it requires a level of trust, okay? But the good thing is the... 17:37 And to instill that confidence in this program to a Chinese factory and a Chinese middleman is to explain to them that the cost that you might be giving me from the factory that's gonna be used in this first sale valuation process is hidden from the importer, okay? 17:59 Now, could the importer reverse engineer those costs and figure out what the original purchase cost was at the factory? Yes. 18:09 But y- again, you're doing this in a way to mitigate these high tariffs to keep the importer competitive in the market, to reduce his costs, and to help him do business. 18:21 The largest importers in the United States all use first sale valuation. We're in the final stretch before the 9th, and we'll just... It's a wait and see. Everything has been a wait and see. 18:33 We'll just have to do that ourselves. [laughs] The consumers should be concerned. I think that the fourth quarter might be a big surprise to people. 18:43 I also think that we, the United States will see price increases probably during the fourth quarter. I don't think you're gonna see as much on sale. Normally, you have a lot of sales during the fourth quarter. 18:55 I don't think you're gonna see the sales that you normally have. Your experience, your background, your point of view, it's spot on. I've really enjoyed it, and I know it's almost sunrise for you. 19:05 We'll let you get some Zs before, [laughs] before you start your full work day. Thank you. [laughs] No, that's okay. I enjoyed talking with you. Hopefully, anybody who hears this, you know, has gained some information. 19:16 That's the key. 19:18 I think educating people, especially people in, in the business of import and export of products, be it China or United States or anywhere else, should, again, know of all the tools that are available to them as a business person to maintain their competitiveness, to reduce their costs, while not sacrificing quality or anything else. 19:39 We learned a lot from you. I wanna thank you, Rich. Thank you for having me. Of course. And that is what just happened. I'm Christine Russo.
