E257: What does the latest tariff increase mean for your ecommerce business?
Dave’s back on the podcast with me to talk about one of our favorite topics (insert sarcasm) – tariffs. Specifically, the latest tariff increase. As anyone caught in this plight will know, the US and Chinese governments have reached another impasse in the ongoing trade talks. This resulted in the Trump administration raising tariffs from 10% to 25% on $200 billion worth of goods imported from China effective this month.
Here are some key points from our hour-long discussion.
How are things looking?
Both sides of the fence are playing it tough in this trade war for distinctly different reasons. Trump believes he’s a great negotiator and is convinced that he will sway the Chinese and bring back manufacturing jobs to America. The Chinese, on the other hand, has learned not to kowtow to any country that perceives itself as a ‘superpower’. It stands firm on its position and will retaliate if necessary to push their trade agenda forward.
What are the possible implications?
On June 17, 2019, the implementation of 25% tariffs on the remaining $300 billion worth of goods (List 4 | the final tranche) will be reviewed. If a trade deal isn’t reached, it could take effect late in the year.
If Chinese imports are tariffed to the hilt, there would be inflationary consequences.
How does an ecommerce company like yours prepare for this?
- Monitor growth
- Focus on profit instead of top-line growth
- Make sure cash is being used as effectively as possible
- Take a closer look at your debt and identify ways of clearing it with a lesser impact on your bottom line
How can you ease the impact of these tariffs increases on your business?
If your products have a low-profit-margin, increasing prices is inevitable. It’s also good to monitor invoices from your Chinese manufacturer and determine how you can cut back on those.
And if this mess with tariffs has taught us anything, it’s to diversify, diversify, diversify. Source from different countries. China might be a manufacturing powerhouse but other countries have their strengths too. Vietnam, for instance, produces great textile products.
The situation is downright frustrating. But I hope that the insights shared in this episode can still be helpful to all ecommerce sellers out there impacted by the enforced tariffs increases. If you have questions or comments, I’d love to know. Please leave them in the comment section below.
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E182: When the Little Guys Get Caught in the Tariff War
Full Audio Transcript
Intro: This is Mike and welcome to the 257th edition of the EcomCrew Podcast. So glad to have you guys along with us today. Today is one of these episodes that aren't really enjoyable to record because we're talking about tariffs today and the effect that this new 25% tariff is having on importing from China, and e-commerce businesses and how to deal with them. And quite frankly, we don't really have a lot of great answers for you because it's been pretty unpredictable. But it's a pretty candid, open, honest conversation between Dave and I.
I always love having Dave on the podcast. I feel like every episode that we do together is better and better. We have an awesome dynamic, just like we do with our relationship with EcomCrew. So I hope you guys at least can get some entertainment out of the episode today. Even though it's not the best of topics, it is reality. Unfortunately, we can't control what the government does and these outside factors. So this is just us being the bearer of bad news, I guess or the communicator. Don't be mad at us. We didn't put these things in place. So anyway, enough for being funny about that. I hope you guys do enjoy the episode today. So without further ado, let's jump into the 257th episode of the EcomCrew Podcast.
Mike: Dave Bryant, back on the EcomCrew Podcast, what's going on man?
Dave: Not much.
Mike: It's been a while. We were like — I was like, we got to get Dave back. People are going to be like Dave doesn't even exist in EcomCrew anymore, which is not true. You've been writing epic content. Our SEO results are actually incredible. It's really, really neat to see our rankings going up and all the effort that you're putting in there coming to fruition. And one of the things that we have that's doing really well right now is this article on tariffs. And I forgot the exact title of it. But it's basically about the 25% tariff and what to do about tariffs.
And the reality is we haven't talked about this in a while. I mean, I think we talked about before the 10% tariffs went in. So I thought it would be good to get you back on and let's chat about this not so fun subject.
Dave: Yeah. And I think the last time we talked about it was October 2018. And you made this incredibly stupid prediction that the tariffs were going to be gone by the election in November and they would all be gone by now. And of course, I won that bet.
Mike: Most people don't realize the sarcasm in this because it was literally the other way around. I was like, this is not going to go away. And you said this was going to be short lived. And I was just like, no way in hell was this going to be short lived.
Dave: You probably have me on that one.
Mike: I just, I didn't see it. I mean tariffs – and this is the problem with tariff wars especially with– I would say countries or personalities or whatever the right word is here that are stubborn. So you have Trump who's obviously stubborn, and you have China who by culture is stubborn. And I think it's hard for them to lose face to their people by backing down. And the reality is that until it gets super, super painful for one side to the point where they have no other choice, it's almost like in a war, like our natural war, except this is an economic war, then it just keeps on escalating. And I'm actually worried that we haven't even seen close to the end of it yet. So I don't know. I mean, I don't know what to say from here.
Dave: Yeah, I mean, the problem is that Trump, he thinks he's a great negotiator and whether that's true or not, we will leave up for debate. And in China, like you mentioned, there is a cultural thing there that the Chinese don't want to feel like they're being taken advantage of, which is still hugely in the Chinese psyche from 100 years ago when basically, the Europeans and mostly the Europeans took over China for a good period of time, burned down the Summer Palace, all these nasty things. So that's still in their psyche a lot. So the Chinese don't want to give an inch.
And the Chinese also probably look at things for a little bit longer time perspective, they're thinking in 10 year cycles, where in America, typically things are thought of in two or four year cycles and reflecting the election cycle. So you combine those two things, probably nothing is going to happen in the short run. And there's no election looming over anybody, at least for I guess two years, until next year when the presidential elections are up again. So yeah, you mentioned I don't think there's probably an end in sight unfortunately.
Mike: Yeah. I mean, it's disheartening and the thing that's tough for me is it's unpredictable and we're in a situation right now that just makes me so mad. I mean it's just this happens and seems like every business that I've ever been involved in and it's kind of funny because I felt like I learned my lesson. I don't know if we've ever talked about this before, but in a previous business I was involved in, the government got their hands involved in some way shape or form. Online poker was definitely the biggest of that but I also owned onlinedegree.com, and they were getting involved in that as well.
And so I was like you know what, I want to get into something that is just so agnostic that no one is ever going to want put their hands in, gel packs, gel pens, I guess gel, gel, right? But things that they're never going to get regulated, that the government is never going to basically screw my business up, and never thought about tariffs. Did not think about that angle, that that could be a thing that that would kind of derail the business. But at the 10% level, I thought of it as nothing but a tax on me because we didn't really — we weren't in a position to be able to raise our prices.
So it just basically became this — there was a tax cut that happened last year, with one hand and y’know God giveth and he taketh away kind of thing, and it was just — but at 25%, it's not just the tax anymore, it's like either we raise our prices, which could have some pretty adverse consequences because of some stuff we'll kind of talk about here in a little bit. But it takes a long time for this stuff to really percolate through the system, especially on a platform like Amazon. So we're just really caught in a rock and a hard place. And the unpredictable part is we placed a really large order, not because thinking of tariffs at all, but we placed a large order for some new products and for some stuff that we want to get back in stock several months ago.
And those products are going to arrive on June 20, which is 10 days after the cutoff for the tariff, and I had no idea that the tariff was going to be a part of that order. And quite frankly, had I known that, we just wouldn't have ordered it. It would have been something we wouldn't have gotten. So yeah, I mean, it's tough. I mean, it's making things very difficult from a planning perspective.
Dave: Yeah, I mean, for me, actually I found the fact that they've gone from 10% to 25% liberating in some sense. That kind of goes back to what you talked about. When it was a 10% tariff, it's like oh crap, okay, well, this is kind of attacks and it hurts the bottom line a little bit, but we'll suck it up and will absorb it and hope things kind of play out. Now at 25%, there's absolutely no choice you have as a retailer except to raise prices. There's no other way to go about it. If you're not raising prices at 25%, it makes me unprofitable pretty tricky, especially in e-commerce where margins are as low as they are.
And so I know me personally, my hand is basically being played for me, we have to raise prices. And I think that goes for most other retailers. So what's going to happen is 10%, you couldn't really raise your prices even if you wanted to do because other people on Amazon or wherever, are not going to raise their prices. At 25%, people have pretty much no choice right now but to raise prices. So we're going to raise our prices, let's say it's a $10 cost of goods sold widget. So we're going to have an extra 2.50 in cost of goods sold now, so we're going to raise our prices 2.50. And that's going to be the same for other retailers hopefully.
Now some people are going to be stubborn and hold out and not raise prices. But overall I think that this tariff increase is so significant that everyone has to raise prices, if not today, at least in the next couple of months. So in that sense for me it's been liberating.
Mike: Here's the problem with all of this, and I agree with you, I'm not disagreeing with you. I mean at some point you got to raise the prices. But the problem is like okay so let's boil this down to just the entire retail sector. I mean a company like Walmart just to use them as an example, their supply chain is super tight, so the lag between when stuff is hitting the dock to being on the shelves to being sold is pretty small. They were basically running on just in time inventory. So the lagtime from when the tariff goes into effect and when it's going to have to be raised on the shelves at Walmart is pretty small.
And they're operating on — everything is just so dialed in, and they're going to operate on x percentage profit margin. And so they're not going to absorb any of that ever period. That isn't even a consideration that a company like them is going to use. So they're going to raise prices right away. Now boiling down to Amazon, this is a pool of way less sophisticated sellers. And I would put myself in that group as well. I don't claim to be as put together as Walmart when it comes to supply chain. But I do think because we've been doing this for a while, we have some decent business acumen and history that we're better than the average person on Amazon and we realize the economics of everything.
I think that there's people on Amazon that literally don't even understand if they're making money or not. They're selling stuff, it seems like they're making a bunch of money because they’re selling a widget for $10 that they're buying for $4 and they think oh well, I'm making $6 per unit and go months or even over a year without actually realizing the economics. You see this all the time, at least I see this all the time in our niches that are more competitive, because people just don't understand accounting supply chain, all the costs that are involved.
They're looking at it just purely on the transactional level and not bringing in overhead cost or storage cost or some marketing costs, returns, other things like this, that they don't understand all the way. And so they're slow to change their pricing. The other thing that happens that's really scary is you get people that make bad decisions, they order a bunch of stuff, thinking, oh, I'm going to compete in this really crowded space and realize that they can't. And now they have a bunch of inventory stuck at Amazon and the only way to get rid of it is just to like dump it, dump it at or below cost.
So you end up with that dynamic that's happening more and more on Amazon because I see it happening all the time. We even do a case study about it, it happens to be one of our best selling products. And as open as we've been about stuff, it's still a little bit nerve wracking, showing all this data. But there's a niche that we're in that I see this happening continuously already. So it's just like how do I raise my pricing into this headwind? They're lowering price and they're dealing with all these other things, their supply chains not as tight as ours, all these different things. What's the timing of when I can raise my price and not just continue to take it on the chin?
Dave: Yes, but everything you discuss there is kind of separate from tariffs, because I totally agree with you that there's a huge number of sellers, especially on Amazon, who are selling either to break even, or even a small loss or maybe even a big loss. That's totally separate from the tariffs because that's always going to be there. There's always going to be somebody selling a tow rope that’s selling at a loss or breakeven, just because they don't understand the mathematics behind it, or maybe they have lower needs for a salary. Whatever reason they're going to be selling it, they can afford to take a lower margin than I can. So that's always going to be there without the tariff.
So I think trying to say that because of this, we can't raise their prices because of the tariffs, well, I don't think that argument really holds true just for the fact that if that's the case, and you're never going to raise prices, then it's going to be hard to compete overall, tariffs or otherwise. So that's where in my mind, you have to just kind of disregard all these people who are always going to sell things out of breakeven or loss. You can't compete against those people, you're just never going to win that battle. If people are going to be a loss leader, knowingly or unknowingly, you cannot compete against them. It's just, it's impossible.
So that's where I think you just have to look at your things in your own vacuum. Okay, our prices are going up 25%, we have to raise our prices 25%. And hopefully, most consumers are going to realize, okay, this is a better quality product, it has more support behind it, the warranties actually mean something. Hopefully that trickles through. And yes, you're going to lose some revenue, of course, because your prices are going to go up. But overall, the impact I think will be marginal.
Mike: Yeah. I think we have to make another bet here because I think the impact is going to be not marginal. I don't know, I think that this happens in every tariff wars and I agree with you first of all that it's a separate conversation but the tariffs compound the problem. It's like throwing a magnifying glass on top of an already existing problem. And I don't know, not everyone is going to react to just the tariff issue at the same speed because of either maybe they have more inventory and maybe they just didn't plan as well and they have a ton of inventory or maybe they were really smart and knew this was coming and they bought a bunch of inventory at a cheaper price or whatever it might be. It takes a while for the supply chain to shake its way all the way out.
And again, I'm really prideful of the fact that we run our inventory levels really thin, as thin as we possibly can. We want to leverage our cash flow to the best of our ability. We want as few widgets lying in the warehouse as possible to keep our storage costs down, and again, leverage our cash flow as good as we can. And so because of that, I mean, this is going to impact us probably before the average person because we're going to be selling inventory that we paid 25% tariffs on relatively quickly.
And I am really concerned about this, because I’ve thought about this, like if I just raised my prices 25% or compensate for the tariff, whatever that means in increase, what will that do to my short term sales while I'm now pricing my products? I mean, we just did this case study ourselves, we lowered — we had our product, one of our products, our bestselling product at 12.99. We raised it to 13.09 just trying to incht a little bit higher to see if we can get just some more profitability. Our goal was to raise it even more and just raising it 10 cents had a massive negative impact on this particular product.
I mean, other products we've had, we haven't seen something like this happen. So what's going to happen there? I mean, if I go and raise it 25%, which is way more than 10 cents, what's going to happen to my short term sales? And then everything on Amazon is a halo and flywheel effect, so what does that do long term? And if I just let that ride long term and bury my head in the sand and say everyone is eventually going to come to this level, but then do I ever recover? So this is what happens in entrepreneurial headspace. I mean my head is spinning all over the place in what to do there.
Dave: Yeah, I mean, I think the thing is, so the big thing to keep in mind too is that tariffs are going up 25%. That does not mean that your prices are going up 25% because the cost of goods sold is a fraction of your sales price. So I'm looking at a product that we have right now. It's a 99.99 product so $100 product, cost of goods sold is $35. So at a 25% tariff increase, that roughly equates to around eight or nine bucks. So our prices are going to have to go up. It's going to go from a $99 product probably to roughly $109 product.
Mike: So it’s 10%.
Dave: Yeah. It's going to be a 10% increase. How much traffic are we going to lose going from $99 to $109? Probably something, I don't think it's — I would guess it's probably going to be in the 10 to 30% revenue hit that we’ll take, which sucks in the short term. But what's probably going to happen in the long term over the next year or so, tariffs are going to go away, we know they're going to go away at some point. They're not here forever. That's a definite.
And as you talked about, you so profoundly said in one of our premium webinars, what normally happens is when prices go up, they never come back down. So eventually, we're going to be at $109. And everyone else is kind of going to settle around $109, prices are never going to go back down. And we're going to go; we're going to be making up for all that money we lost on these tariffs. Well our prices in a year or so or whenever these tariffs go away, our prices are going to be the same and we're going to end up pocketing an extra eight or $9 per unit. So in the short term, yeah, there's going to be some type of hit, long term, it's probably not a bad thing. Prices are going to go up and our margins hopefully are going to go up relatively speaking.
Mike: Which causes inflation, which is another potential byproduct of this. And it's also, the thing that I'm worried about is what happens to the economy, which can also have a long term effect on our retail sales because we're both really fortunate. I talk about this as much as we can on the podcast and I think about this literally every day. I don't let a day go by where I don't realize like how fortunate I am. I go buy whatever I want whenever I want. I mean, obviously we're minimalist, so it's all within reason. It's not like I'm out buying a bunch of crazy crap. But if prices go up 10% across the board, it won't affect my shopping habits in any way.
But the reality is that the average person out there and probably a lot of people listening to the podcast, you have a $500 a month budget to buy your groceries, to buy your clothes, to buy whatever other things you're going to buy. And you can't raise that to 550 because you only have $500. So the reality is you end up buying 10% less things. And what's the ripple effect to that to the economy and ultimately to our e-commerce businesses? And so I’ve thought a lot about this in terms of the businesses that we have and how we can position ourselves.
I think that there are certain things that we sell like the ice pack stuff that it probably won't affect much because if you have that problem, you're most likely going to go buy the product no matter what. But I think that for things like our baby brand, our tactical brand and your offroading brand, it certainly can be one of these things where people just have less buying power and sales can potentially start to slip, and what who knows what that has as far as a ripple effect in the economy and what that could do with the recession.
So between like a potential inflation and potential economics, I think that it probably behooves all of us to at least be thinking about that, and how you can protect yourself and your business for that. I know I have, I put a lot of thought into that because I do think that there will be some adverse consequences that the old unintended consequences that happen with things like this. And I think that some of those things are coming and it's easier to predict some unintended consequences when you have history as a guide. And every time that there's been tariff wars like this between the United States and other countries or in other parts of the world, these are usually the repercussions that happen.
Dave: Yeah, so I totally agree. I mean, there is going to be an inflationary consequence at some point, it looks like it hasn't caught up yet. But at 25% I can't see inflation doing anything but basically running away in the next year or so. And like you talked about, economics 101, inflation goes up, interest rates go up, interest rates go up, investments go down. And some point, yeah, the economy is going to take a hit. Should we play what would happen if now all of a sudden, America goes from having this great boom to all of a sudden being in recession? What should an e-commerce company do? What can we do to plan? Let's pretend, let's say it’s a definite 2021 there's a recession happening, GDP growth is going down to negative 2% per year. What should an e-commerce company do?
Mike: Yeah, I mean, for me, it's not role playing, because this is how — I mean, you and I have talked offline. I mean, I think this is coming. So for me, it's way beyond roleplaying to what we've actually done step by step in our lives and in our business to plan for this. So one of those things was to sell one of our businesses to just take some chips off the table. I think that if you've been working for several years in this boom economy, and all you've done is continue to put everything back into your business like we had, and there's a potential for you to at the end of the road have nothing but there was a great business that you had on paper. At some point, I didn't actually put the money in the bank. I think that that's a little bit dangerous.
So for us, at least for us, and again everyone is different, that was one of the things — that was the one of the first steps that we took. The other thing is instead of focusing on growth right now, we've changed our mindset to really focus on profit. I think that you can only do one of those two things in business, it's either you're focusing on top line growth, and you're trying to scale the biggest company you can as quickly as you can, or you're really focused on getting every penny out of your businesses that you possibly can. And so that's the focus we're taking right now.
I mean, for us it's let's enjoy it while it's still lasting, put the money in the bank, save it for a rainy day. Not take the longer term that we were taking previously with developing a lot of new products and investing into things that might pay off in in one to three years. Where normally I'm really excited to do those types of things, I just think that it's a time to just position yourself to run a little bit leaner. And so we've been doing that in every aspect of our business, not just from that. But like I said, we've been really working on making sure our cash is being used as effectively as possible and things of those nature and just keeping our expenses as low as possible everywhere that we can.
And we've been changing the way that our logistics are running; we're going to be getting rid of our warehouse so we have working everything out of a 3PL. And just everything that we're looking at, we're considering how can we do it cheaper and not let quality and stuff fade. But I think that those are really prudent things that you can do with your business because I've been through these cycles before. It sucks, I’m getting older. But that's one advantage of being older is that you've seen this stuff happen. So I think that those are some first steps you can take.
Dave: Yeah, and I think a big one, I guess if there's an actionable thing that people can do to too and this is what I would do if I was in the case of having a lot of debt is take a look at your debt, how much do you have? What are you paying to service that debt at probably four to 5% interest rate that you're paying now? What would happen if those interest rates went up two or 3%? And it doesn't seem like much on paper, but when you actually do the calculations what that would actually cost your bottom line, it can be really significant.
And kind of like you Mike, three or four years ago, I was kind of in the doom and gloom category and I sold off my previous company and basically I reduced my debt to basically nothing just for the fact I was afraid of being over leveraged. And fortunately, we don't really have a lot of let now — a lot of let — a lot of debt aside from a small line of credit. But I know a lot of other e-commerce companies who have literally seven figures in debt. And all of a sudden when those interest rates go from five to 8%, that can mean pretty dire consequences especially if you're a small margin company, and that's what I would particularly look at.
The other thing like you talked about too with overhead, again, a lot of people are running so nimbly, and they're running at two or 3% margins because they have huge volume. And if all of a sudden your sales slip 15 or 20% and you're running on those two or 3% margins, things quickly slip from two or 3% positive margins to negative two or 3%.
Mike: But your fixed expenses don't change. So, if you've built a lifestyle for your business or overhead for your business, those typically overhead expenses are not scalable, or up and down, they're pretty fixed. So you start establishing overhead expenses like a warehouse or office space, or employees or things of this nature, and those things are going to be the same month after month.
Dave: Yeah, absolutely. And I don't know, I think overhead destroys a lot of companies. Just something you mentioned it's hard to get away from.
Mike: Yeah. There's one other thing that you mentioned that I want to just take a second to talk about, which is that four years ago, when you sold your other company, you were all doom and gloom and worried about a recession or something like that happening. So one thing I want to make clear here is that first of all, it's basically impossible to time this unless you hit the lottery one time and you get it right one time as far as timing. So I don't have a crystal ball. There's no guarantee that there's going to be a recession or something bad is going to happen. I'm certainly not rooting for that.
For my own best interest, I think that it'll be bad for our business. I also know that it would be really hard on the average person. I would hate to see that happen. So it's not a matter of I have any inside information or that something has really changed to make me think that it's absolutely going to happen now. But there definitely are a lot of signals that scare me. And again, we’re speaking specifically about tariffs right now, so I definitely am worried about what that can mean. But one thing, again, I'll definitely make clear here is that I do think that we're operating in– just an unprecedented time in terms of how the economy works.
There's never been a time where this much cheap money has been available for this long period of time. The Fed did just try to raise rates, it caused a huge negative ripple effect. And they're talking about actually lowering them again right now and doing more quantitative easing. So, the reality is that without question, we're going to pay for all this at some point, we being the country and just the economy. Definitely, there's no question that at some point, that's going to come back to haunt us. But the reality is, it might be another five years or something or another — who cares about the record of the longest boom economy which we're already in? That doesn't matter.
I mean, there's the whole gamblers fallacy of because the roulette wheel came up red 10 times in a row that the chances of becoming a black next time are higher, it's still a 50/50. Each time you spin the wheel, it doesn't matter what the past results have been whatsoever. So who knows what's going to happen moving forward in this economy and 50, 100 years from now when history has been written, maybe this was a period of time where it broke all the rules.
So, it doesn't necessarily mean that just because it's been good for so long that things are going to change or that these economic factors that have played out with the tariffs are going to be the thing that brings everything down because there's definitely unprecedented other things that are happening as well. And it's very complicated. We don't have time to get into all that. But I do want to mention that I don't want to come off as this guy that's doom and gloom. It's really funny. There's lots of people have been talking for a very long time about this. And while I am personally convinced that the meter is kind of running out, it doesn't necessarily mean that I'm right. And you were really in this frame of mind four years ago and still haven't been right. So it's interesting how that works out.
Dave: So you mentioned roulette. Here's a question for you. You just had a cash event with the sale of ColorIt. Where did you park your money? Is it in bonds, stocks or just sitting in a cash bank account right now?
Mike: It's in the cash bank account. I'm still debating what to do. I actually bought a couple of domain names because I'm always on the prowl for domain names. So that wasn't necessarily based on the sale event. It was just a couple of things I have been talking about for a while to people finally came to fruition. But I talked to my mastermind about this. I think that the prudent thing to do here is to just wait a little bit. This has nothing to really do with economy or other things but people tend to make bad decisions when they have money and do things that they wouldn't have done if they didn't have the money or throw good money after bad.
There's still a lot of things going on in our business that I want to improve upon. And we still have a pretty darn large business that's throwing off quite a bit of money in cash flow, which I'm really happy about. So just taking a few months to just let my head clear, and make sure that I'm making the right decision, these are going to be like life event decisions moving forward, and just kind of letting the money sit there for a little bit. All of us tend to get antsy in these situations, like I got to do something with my money. I got to put it to work. I got to do something. And the times that I've been like that have been the times that I've made the worst decisions of my life. So I'm just trying to learn from mistakes and past experiences and just give it some time and see what happens.
Dave: So, on that note, is there anything actionable that we can tell people in regards to the tariffs aside from kind of watching your expenses, watching growth over the next year or so, seeing how things play out? Is there anything kind of concrete that you're doing with regards to tariffs? Are you doing any of the hokey pokey play with having stuff go through Vietnam or of course you wouldn't say it on the podcast, or anything else that you're kind of doing to tackle the tariffs head on right now?
Mike: I think I'm pretty much an open book as everybody knows and even on the podcast I probably would just be a little bit more vague and not just simply say that I'm not doing any of the hokey pokey, which I'm not. So I can definitely say that wholeheartedly we have not done. The two tactics that seem to be pretty popular right now, number one is just to reduce your invoices. I mean, a Chinese manufacturer will give you an invoice for anything you want. They have no qualms whatsoever to do that. Or you can route it through another country and basically have the country of record be Malaysia or Cambodia or whatever the heck you want it to be. And as long as people aren't poking their nose around too much, you'll get away with that just fine.
My feeling on this is and I'm not — this is just a personal Mike Jackness thing. So I'm not again trying to tell anybody that wants to do any of these things how to live their life by any stretch of imagination. But I'm not a big fan of taxes. No one's a fan of taxes. But I've always been — my feeling is that like I have to pay what I'm entitled to pay or have to pay or obligated to pay is probably the better way to put it. And so, there's been lots of things I've done in my life to try to pay less taxes. I mean, we moved out of the country for four years for crying out loud as a way to pay less taxes, but we didn't pay zero taxes. We didn't hide our money. We didn't do anything that wasn't legal, basically is what it comes down to.
And you're changing invoices and doing things, I mean, it's a slippery slope. I don't think that it's, for me, it feels like a little bit over the edge, and like I'm trying to evade taxes or not pay what I'm obligated to pay. And I feel like — I think what's happening here with the tariffs, I'm very against it. I think that this is the really wrong thing to do. I think that it's a massive mistake that's going to have dire consequences over the long haul. But it's like your parents paid to get home by midnight, and you don't want to listen so what are you going to do kind of thing. I mean, this is the rule, this is the wall, this is where it stands. And I don't want to be in a situation where I try to have two wrongs make a right kind of thing. So I just haven't done it.
And I also feel like I don't want that cloud hanging over my head. I mean, you can get away with it in the short term, but the customs and border protection duty organization, whatever the organization that does this is…
Mike: What is that, sorry?
Mike: CBP, thank you, Customs Border Protection. I mean, they can go back and audit you years later. And again, I don't want that hanging over my head. If they come back and audit me for anything, we're squeaky clean. There will be no problems for anything. We haven't changed the DHS codes. We haven't lowered invoices. We haven't shipped things through another jurisdiction. I'm looking at things that are more aboveboard to kind of plan our future and that's going to be looking at other countries. And who knows, I mean, I thought Mexico was safe or NAFTA was safe, Guatemala is a place we bring stuff in from. I mean, who knows where things are going.
So this is a dangerous thing as well. I mean, we might be like, oh, we're going to start bringing stuff in from Vietnam, because it's not China, things are just very unpredictable right now. But nonetheless, we are looking at other opportunities. We're going to be going to Vietnam in January, and looking for things in other parts of the world. And I think that it's interesting how things work out in life. A lot of these things that you didn't even plan for happen. You can look back and connect the dots. And we might find a manufacturer in Vietnam or find products in Vietnam or we're talking about potentially going to India early this year as well or next year, maybe this forces something else to happen that you weren't planning for that becomes the next big thing in your life. And so I try to keep a positive outlook on those types of things.
And the last thing, I'll just mention Dave, on that as well, I mean, we're all kind of been trained if you will, to import from China, because China is so good at manufacturing, and in terms of — and they're cheap, and all those types of things as well. But the reality is that slowly but surely, things are actually getting more expensive to buy in China. So tariffs or not, you can probably source your products cheaper from Cambodia, or Vietnam or some of these other countries. So again, I mean, it's interesting how things work out, but by doing those things, I think it's a better way to go. And so those are things that we're thinking about.
Dave: Yeah, yeah. I mean, I think one note of caution for everyone looking to source outside of China, I do think it's important to diversify your sourcing countries, because it's never great to have your eggs all in one country’s basket, which is what's happened to a lot of us with China. The one thing to keep in mind with manufactured goods in China is that they're not necessarily just — China's competitive advantage isn't necessarily just that they're cheap; it’s that they're good too. It’s kind of like me saying, let's go find, you know what Germany is really expensive. Let's go find a luxury high performance car to import from Russia. Well, this doesn't exist. Only the Germans are good at making those.
And the same thing kind of falls in line with China except it's not luxury high performance vehicles. It's things like bed, mattresses and tables. But a lot of countries still are struggling to get up to that same quality that China has, which sounds ironic, because you don't normally associate quality with China. But in terms of a developing country, it's definitely true.
Mike: I agree. I mean, it is so ironic because China does have this negative connotation. And it is there for a reason, because their default mode is to make that cheap Chinese crap. And that gets sold to the eastern world I mean, like people in India and within China themselves. And so I mean, a quarter of the world is buying that stuff, or maybe it's a third. But they're also really good at producing western goods, the things that you want to at a higher quality level, and you have to stay on top of that, etc. But they're actually capable of doing it versus in other countries, like you said; it may or may not exist. There are some things that Vietnam and Cambodia do well, mostly textiles, but a lot of other things no.
And one other thing to bring up here as well is a lot of people have said, well, I think the whole point of this is supposedly to bring manufacturing back to the United States. But the delta is still so big. We're not even close, 25% tariff doesn't even scratch the surface of what would have to be instituted for a lot of the products that we bring into have it makes sense to make in the United States? I think that it's about 3X. So until there's a 300% tariff on gel pens or clay hot and cold packs, we couldn't even think about manufacturing in the United States. So, I don't know exactly again, where things are going to go from here because the reality is it's not going to bring those types of jobs back.
And I'm of the opinion that those are the types of jobs that we don't really want here anyway. I mean, I think that we should be targeting higher tech and type jobs, things that require a higher education or better machinery to produce, something like wind turbines or airplanes and things that require like a high skill level for manufacturing. And so I don't know, again, it doesn't seem like we're actually solving the problem here.
Dave: To the right context so a little bit I do think there's pretty bipartisan support for getting tough on the Chinese. And it's actually for that reason, it's about bringing manufacturing back to America but it's not like you talked about making bed mattresses or even high tech things. It's one of America's greatest exports is its technology. And China does have kind of a history of IP theft and extortion from these technology companies looking to get investment from Chinese investors. And so that's one of the things that has kind of brought up this big trade wars, America trying to clamp down on the Chinese basically not respecting the IP kind of going against their WTO commitments that they made almost, what is it now, 20 years ago?
So I do think that's kind of the bigger picture here. And I do think whether you're a Trump supporter or a Trump not supporter, there is pretty bipartisan support here. And again, so probably some of these concerns that America has are probably well founded, and hopefully I don't know in the long run…
Mike: For sure because there's been for both Democratic and Republican administrations, I try to be pragmatic and keep the politics out of this. And either way I'm realistic. I don't ever think my political affiliation and the people that are in those seats are hundred percent right all the time. But there's without a doubt, I mean, there's been a multi decade issue of the United States telling China like stop stealing our IP and China basically laughs at us. So I mean, it definitely is a problem without a doubt. And I'd love to see that solved.
I just don't know if the way that we're going about it is going to actually solve the problem because some things like one thing doesn't have to do with the other. And I mean, this is a slippery slope that we're going down trying to solve one problem that could create a much more profound problem. And I don't know, I mean, I'm not an economist by education and I read as much as I can about this stuff, because I find it to be fascinating, but the more I read about it, the more I realize how delicate this ecosystem is of the economy just as delicate as the ecosystem in nature.
You can't just pull out the amoeba from the food chain, because all kinds of things break. And you can study it all you want, you don't know exactly how it's going to play out until after centuries of that being out of the food supply or whatever. And so who knows exactly how much of an adverse effect this is going to have. But it does seem like there's not a whole lot of good that can come out of it. But by the way, it's going — but it's a tough problem to solve. I don't know how if I was president, what would I do? How would I stop China from the IP theft stuff because basically the reality is you tell them and they say no, you don't you tell them they say no, you tell them and they say no, at what point do you put your foot down and how do you do it? And it seems like that's the juncture that we're at.
Dave: It's kind of funny. We’re speaking about all these cultural differences between the West and China and we're recording it. I guess one day after the Tiananmen Square Massacre. So isn't that ironic.
Dave: Anniversary. But I was talking to my wife yesterday about it and she's from Beijing and I asked her what do you remember from that day? And she's like, well, I remember my dad telling me that we're driving through the streets. And I’d seen a bunch of cars burning and I was so excited to see all these cars burning. My wife was about four at the time. So that's her strongest memory from that date.
Mike: Is it 30 year anniversary now?
Dave: 89 I guess, yeah 30 years.
Mike: Yeah, crazy. No it's 40 years — 30 years, 30 years.
Dave: Math are hard.
Mike: Yeah, so yeah, don't ever do math on the podcast. Oh my god, that was bad.
Dave: I did a YouTube video, we have one on YouTube about me basically trying to multiply 30,000 by 10% or something and I got the number wrong on the YouTube video and the whole YouTube videos full of people like just criticizing me, how could you not do that math?
Mike: It's interesting when you're on mic or whatever on camera, how you have to think differently. And that part of your brain just doesn't meld well with the other part of your brain which is having to think during these types of things.
Dave: Yes, that's where we should have every video and podcast scripted.
Mike: Well, I'm just sitting here trying not to say um or uh or you know so that's part of what's going on in my brain power is to keep those words from being split out. I think I did a pretty good job today.
Dave: I think you did, we’ll have to review the transcript to see how many times you said um or yeah, and we'll give you a score at the end of the podcast.
Mike: Perfect. So the thing that I'm frustrated about with this episode, and I knew this going into it is there isn't really a whole lot of actionable advice here. I mean, there isn't, obviously there's some gray hat or black hat things we talked about. There's just the kind of how to position your business type stuff, but I think that the reason we wanted to record this podcast is that we're frustrated. There's only so much we can do. And it's probably the same situation for everyone listening and sometimes it just helps to hear other people be in the same headspace as you and going through the same thing. So we thought this would be a valuable podcast from that perspective.
And hopefully, you guys found this helpful from that regard. I mean, the reality is, unfortunately, I mean, the one thing that does frustrate me about the whole thing that I am against Trump won I guess is I'm not going to criticize anything here is the unpredictability and the quickness that things are happening. These are very delicate supply chain things that I was reading this amazing case study the other day, because I again, I've been trying to read a lot about this about Mexico because now they're talking about putting a 5% tariff on Mexico, and how many things actually go back and forth and back and forth across the border just at free will.
So something will get manufactured in Mexico, it comes to the United States for another part to be added to and assembled then it goes back to Mexico for something else to be added to it, then it comes back to the US to have something else happen and it goes back into Mexico to be added to a car and then shipped, and the car gets shipped over here. And these types of things get really complicated. There was another case study I was reading about pants getting made and how these large clothing manufacturers put so much detail into every little component, the button, the zipper, whether it's going to be a snap or a button and all these little tiny things that go into manufacturing clothing.
And manufacturing loves certainty and the uncertainty that this is creating is the part that frustrates me. If there was more — at the end of this year, the 25% tariff is coming into play, get prepared for it, I would stomach it a lot better, because it would allow us in our business as well even though it's a much smaller scale and we're not as sophisticated as the clothing manufacturer to be prepared for it. Again, I don't like the situation that we're in right now where we placed the large order for something planning on paying a 10% tariff. and now we have a five figure higher bill due and luckily, we're in a position to just handle that right now.
But I feel like we made a bad business decision now to buy that product because I legitimately wouldn't have bought it before. So these are the things that I'm dealing with and I'm sure obviously Dave voiced his concerns. And I think the important thing here was to let you know that you're not alone, that these are all things that we're going through together. And eventually, who knows how long from now this will all be behind us and just be something that we laugh about over a beer when I start drinking again, a couple of years from now. So those are kind of my thoughts on it.
Dave: Should we end the podcast with a prediction for when the tariffs are eliminated and see if I can double or nothing bet here from last year’s?
Mike: Getting them all wrong. I mean, I'm curious to hear your thoughts. I literally have nothing to say about this. I have no idea. I don't even know what to predict. I have no clue. But I'm curious to hear what your predictions are.
Dave: Okay, do you want the over or under on the end of this year?
Mike: I want the under but I will take the over.
Dave: All right and I'll take the under.
Mike: I really hope that this is done before the end of this year. It's crazy to think that six more months of this nonsense and worth — I mean the problem is if it's not done by the end of the year, the talk will be a bigger number than 25% because it can't stay here. And this is again the problem with tariffs because it's always a tit for tat. And I do hope that by the end of this year this is resolved, but I don't have any reason or have any confidence that it will be. There's nothing that's been said or done to make me think that that's where things are going.
Dave: All right, we have it in — not in writing but in a recording.
Mike: In a recording that Dave will only remind me of if he's right.
All right guys, so hopefully if you’re on this at least entertaining. All right guys, that's going to wrap it up for the 257th episode of the EcomCrew Podcast. Thanks again for hanging out with us today. If you haven't had a chance to do so already, please head over to iTunes from your desktop computer, as I understand that is difficult to do from mobile device and leave us a review. It does mean a lot to us. It's greatly appreciated. The reviews help us rank in iTunes and keep us motivated to do these podcasts. So please do that.
I know you're probably sick of me talking about it. But judging by the number of people that we have listening to the number of reviews that we get, very few of you leave reviews, and I know it's a pain in the butt. However, we do appreciate it. So if you get a chance to do that, thank you so much in advance for doing so. All right guys, that's going to wrap it up for the 257th edition of the EcomCrew Podcast. Until the next one, happy selling and we'll talk to you soon.
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I recently listened to this podcast from 2019. At the end, Dave and you made a playful bet on if the additional tariffs would change or be removed by the end of 2019. It has now been over 2-years since this episode went live and the 25% additional tariffs are still in place. Therefore, I am curious of how you guys are managing this situation. Are you still absorbing this additional cost or did you find a better way to manage it?
P.S. Good episode :) Still helpful 2-years later
I’m managing losing the bet by heavy drinking and denial. From a business perspective, basically we’re absorbing the duties. Close to half of our items are either 15% duties or exempt so this helps somewhat. Our items are fairly price insensitive, so we’ve been fortunate and been able to increase prices to accomodate the cost increases from the duties.