Tariffs are taxes or import duties imposed on items imported from one country to another. Sometimes tariffs are nominal – around five per cent of the producing country’s sales price – and in other cases, the tariffs are much higher, in the range of 15 or even 25 per cent.
This happens when one country is trying to discourage another country from underselling domestic manufacturers – the goal may be to change another country’s behaviour. This appears to be what is happening right now between the U.S. and China. The big question for many in the professional cleaning industry is how much these tariffs might impact the cleaning industry in Canada.
While good can come from tariffs, they can also cause harm. This can happen for one or more of the following reasons:
- The tariffs raise the costs of goods and services.
- They expand to more and more products or product components.
- They last too long.
- They negatively impact related industries not the original target of the tariffs.
This last point is critical, as it is the most likely outcome for the Canadian professional cleaning industry. Currently, there are no specific tariffs on cleaning-related products by either the U.S. or Canada. However, there are tariffs on some of the components, ingredients, and finished products imported from the U.S., and distributed in Canada, and these should be of concern to Canadians working in the professional cleaning industry.
In a press release ISSA, the worldwide cleaning industry association, opposed the recently proposed tariffs, that would affect, among other things, intermediate component parts or ingredients used by U.S.-based manufacturers in the production of finished goods such as mops, buckets, brushes, janitorial carts, and cleaning product formulations.
Tariffs at Work
Here is how tariffs can impact the Canadian cleaning industry. Let’s say a U.S. jansan manufacturer of carpet extractors has its equipment made in China. This is referred to as “contract manufacturing” or “contract branding.”
Consider a 25 per cent tariff is imposed on those extractors. If the machine had previously retailed for $5,000, tacking on the tariff charge will bring that amount up to $6,250. That is a significant price differential.
To handle the problem, the U.S. jansan manufacturer and the Canadian distributors have several options:
- The U.S. manufacturer and Canadian distributors could pass on the added costs directly to the end customer.
- The Chinese contract manufacturer could absorb the costs, reducing its profit margin.
- The U.S. manufacturer could absorb the costs, reducing its profit margin.
- The Canadian distributor could absorb the costs, reducing its profit margin.
- A “share the pain” scenario could be created. The U.S. manufacturer and the Canadian distributor absorb some of the extra costs, while some costs are passed on to the end customer.
- The U.S. manufacturer could look for ways around the tariff. For instance, exporting the extractors to a third country instead of directly to the U.S. could circumvent the tariff. This approach works if there are no tariffs on extractors coming from the third-party nation.
- The U.S. manufacturer could look for a new contract manufacturer in a country in which there are no tariffs.
- The U.S. manufacturer could move manufacturing of the equipment to the U.S. or to Canada.
Because the costs of building and operating a new manufacturing plant can be considerable, companies may determine it makes more economic sense to pay the tariff. As a result, one of the other scenarios just discussed will likely play out.
Addressing Future Tariffs
When a tariff situation happens quickly, it catches manufacturers, distributors, and end customers off guard. They will likely have no choice but to follow one or more of the scenarios mentioned earlier. But, over the long term, what can Canadian distributors and end customers do?
Canadian distributors, unfortunately, may be in a very challenging situation. Smaller distributors often purchase equipment from larger distributors. If the larger distributor passes on additional costs to the smaller distributor, the smaller distributors may not be able to absorb the costs. So, they pass them on to the end customer. By doing so, however, they may be “priced out” of the market. The end customer will look elsewhere for brands that are less costly or not impacted directly or indirectly by tariffs.
This situation can also cascade throughout the Canadian jansan distribution industry, impacting both large and small distributors.
One source of relief is for small, medium, and even large distributors to join membership groups or become part of a distribution, sales, and marketing organization. Representing many members, such organizations often can negotiate from a position of strength far more effectively than individual distributors. Luckily for distributors, membership organizations do exist and they can help alleviate the stress of these tariffs, which can benefit the entire cleaning industry.
Michael Wilson is vice president of marketing for AFFLINK, a global leader in supply chain optimization. He can be reached through his company website at www.AFFLINK.com