WASHINGTON (CN) — For the past 15 years, Mike Brey has owned and operated a small business called Wing Tote that caters to hobbyists who need a more specialized means of storing their remote-control cars and other toys. Now he is considering closing up shop.
The bags, which are made in China, appear next to golf bags and ski gloves, CD cases, and clothes made of reptile leather on the nearly 200-page list of goods hit by a tariff announced in May.
Historically, such products were subject to a 17.6% tariff for sewn-finished goods. With this year’s addition of a 25% tariff, however, Brey said he faces a 42.6% charge on the total cost of each shipment of tote bags entering the country.
Brey said he, like many business owners, “flat misunderstood” how new tariffs would impact his company — anticipating the tariff would increase to 25% total.
At the time Brey was cautiously optimistic. “I thought even if I had to weather that storm for a few shipments, or a year or two, I could easily do it,” Brey said.
The true scale of the tariff, however, has brought Wing Tote to its breaking point.
“I think it is a potential miscalculation that many small business owners have made or could easily have made,” Brey said. “If you are a much bigger company, there is an accounting person [whose] job is only to read the tariff code and map out what the impact is going to be.”
Jennifer Kelly, deputy press secretary for the Small Business Administration, said the office is committed to providing as much help as possible to merchandisers.
When asked what steps the agency is taking today, Kelly mentioned a hotline by which callers can request information on government assistance to resolve or pursue international trade opportunities.
In addition to this hotline, which predates the burgeoning U.S.-China trade war, the Office of U.S. Trade Representative operates a similar hotline with information on how to apply for exclusion from tariffs.
Brey called this option inadequate.
“You’re talking about a relatively sudden 25% in additional costs — another $10,000 on $35,000 in product,” Brey said. “There is no hotline in the world that is going to be able to tell me how to absorb those costs.”
As for the possibility of an exclusion, Brey said his importer informed him Wing Tote would likely be ineligible.
Amie Ahanchian — a managing director at the global accounting firm KPMG — said over email that a USTR exclusion can buy companies some time to seek an alternative manufacturer outside of China.
KPMG associate Sean Miner noted that companies must demonstrate they are undergoing significant financial strain, though the exact rate for granted exclusion applications is “difficult to pinpoint” given the number under review.
When Courthouse News called the USTR hotline, a staff member said that his phone was just installed within the last hour. The office’s media affairs did not respond to requests for more information on when the hotline began operating and how many employees staff the phones.
While Brey has doubts about how successful the tariff hike will be in bringing China to yield, his longtime mentor praised President Donald Trump for taking action on the harmful trade policies that past administrations ignored.
“He can see the long term,” said Bill Molyneaux, a hobby wholesaler who spent two weeks in July touring Chinese factories with Brey. “It’s not getting any better so it’s time to do something about it now. … We gotta share the pain.”
Trump was abroad around the same time. Upon his Aug. 1 return from Shanghai, the president announced plans over Twitter to put a “small additional” tariff on the remaining $300 billion in finished goods coming from China.
He later indicated that he may raise the new 10% tariff to 25%, hitting toys in Molyneaux’s warehouse, soon to land on Brey’s store shelves.
A member of the industry since 1974, Molyneaux is banking on the president not raising tariffs again as negotiations continue. Like Brey, however, his only course of action is to pass the burden on to consumers in part, raising prices by half the cost of the tariff.
Brey and Molyneaux agree that Chinese trade practices hurt American hobby store owners — both men rank intellectual-property theft high on their list of concerns — but Brey finds fault with the current administration’s tactics.
“I think it’s rare that you achieve long-term success through hostile actions at any time, whether it’s the hostile takeover of a business, or a negotiation like this,” Brey said.
From a Chinese cultural perspective, Brey added, Trump’s tactics make even less sense.
“The people who think that bullying the Chinese is going to work don’t understand the most basic things about the Chinese and the Asian culture,” Brey said.
In his experience, Brey has found the Chinese slow to say no in negotiations. “If you don’t give them an out, you are not going to win,” Brey said. “They will just go down.”
Molyneaux, who voted for Trump, said the tariffs are applying appropriate pressure on China. He plans to cast his vote again for the president in 2020, even if trade negotiations drag on.
Brey, on the other hand, said he has become infuriated watching the usually “tax-averse” Republican Party “sitting idly by” while Trump orders a veiled tax increase with the tariffs, hurting hobby retailers in the process.
Over the last three decades, the number of U.S. hobby stores has plummeted from more than 10,000 stores to approximately 3,800.
Rob Gherman, executive director of National Retail Hobby Stores Association, warns a 25% tariff on hobby-toys would devastate stores holding out in a dying industry.
“The problem is the attention span of the youth in America is very limited,” Gherman said. “You can look at Toys R Us. People are not buying something you can actually hold in your hand.”
One point the two hobby-dealers agree on is Trump’s decision to pull out of the 144-year-old U.S.-China postal agreement next year.
The pact allows Chinese businesses to mail small packages to the U.S. at a discounted postal rate, costing the U.S. Postal Service around $170 million annually.
Brey and Molyneaux are in agreement that the loophole puts American businesses at a disadvantage — costing sometimes 10 times the postal rate to ship domestically as a Chinese manufacturer selling on Amazon.com direct to consumers.
“China has virtually no freight charges,” Brey said. “I can’t compete with that. So on some level you actually get penalized for following the rules which I think is what bothers the American businessman about China.”
Still it remains unclear whether the U.S. is moving closer to a trade deal that would end the tariffs.
A data strategist with the Washington, D.C., business consultancy Brunswick Group, Robert Moran said most observers expected a deal at various points during the last 18 months of negotiations, predicting Trump would prioritize a strong economy headed into the 2020 election.
“But, we may be locked in a standoff scenario,” Moran said over email.
Brey said Trump’s plans for an additional 25% tariff would hit the planes, trains and cars on his shelves, dooming his second business just like the first. That fate has Brey considering abandoning the hobby wholesale and retail industry entirely.
“You have to wonder eventually what the impact on the economy is going to be long term,” Brey said. “Retail jobs are a great entry point for people looking to get into the workforce. When those go away, what’s going to replace them? We can’t all go work in an Amazon warehouse.”