Tariffs take their toll on the dietary supplement industry

January 27, 2020

How the U.S.-China trade war continues to change the playing field for players international and domestic.

Collateral damage is inevitable in war. That’s as true of an active shooting conflict as it is of the more metaphorical variety-like, for example, a trade war.

And by all accounts, a trade war is precisely what we’ve found ourselves in since the Trump administration began levying tariffs of as much as 50% and more on imports from friend and foe alike.

And that’s where the collateral damage comes in. For whether intended or not, one consequence of the White House’s trade policy has been upheaval in the pricing, supply chain, hiring, and investment decisions of businesses only tangentially involved in the disputes that sparked the tariff standoff in the first place-including those in the dietary supplement industry.

But you don’t have to explain this to James C. Griffiths, PhD, senior vice president, international and scientific affairs, Council for Responsible Nutrition (CRN; Washington, DC). He witnesses every day examples of how this “highly politicized staring contest” is rattling dietary supplement brands, and their consumers.

 

Caught in the China Net

“Everything is happening so fast that I’ve turned to my members watching specific tariff codes and ingredients to see if anything’s changing,” Griffiths says.

And while he concedes that he’s not privy to the tariffs’ full political backstory, and understands that concerns around technology transfer and intellectual property demand action, “I do think the situation has significantly affected our industry,” he says. “And I’m sure that every affected industry can find reasons why it doesn’t deserve to be caught up in this large net.”

How large a net is it? To take just one section-albeit one that could catch a whale-the Trump administration in July 2018 began imposing tariffs of 25% on $250 billion worth of imports from China, a critical source of raw materials for industries spanning electronics to pet care to, yes, nutrition.1

And because importers-not the offending countries-pay these taxes, that raised costs for dietary supplement manufacturers whose formulations rely on Chinese inputs; but perhaps as vexing, China retaliated by laying tariffs of its own on $110 billion of U.S. exports1-exports that most surely included American dietary supplements.

 

Double Whammy

This is the perfect example of a trade-war double whammy, Griffiths believes. “China is important,” he points out. “So many of the raw materials and botanicals we’ve come to rely on come from China,” which has developed a sophisticated supply chain, with vetted farmers, processors, and vendors, over the years.

Indeed, in comments it filed with the Office of the United States Trade Representative in June 2019, the American Herbal Products Association (AHPA; Silver Spring, MD) noted that among the Chinese commodities subject to the tariff are many frequent fliers in dietary supplement and herbal products: pepper, fennel, ginger, black and green tea, kola nuts, chicory root, ginseng, and more.2

CRN, in comments to the U.S. Chamber of Commerce, adds that tariffs on Chinese Ginkgo biloba alone-which grows native in the country-would raise the price that one of its member manufacturers pays for the ingredient by $1 million.1

 

Tit-for-Tat

Perhaps even more than these immediate costs, “It’s the retaliatory tariffs that scare me the most,” Griffiths says. After all, Chinese consumers have been demonstrating an increased appetite for American nutritional products-and an increased willingness to seek them out and pay for their high quality and reputation.

“So if these products are now getting a tit-for-tat retaliatory tariff,” Griffiths fears, “not only does it cost our producers more to import Chinese ingredients, but the finished products that go to China are now getting hit with a tariff that may make them more expensive than domestic products, and maybe even more than European or Australian ones. We’ll pay more dearly for raw materials, and we may lose more of those exports to China that we’ve come to depend on.”

 

Everyone Pays

In other words, everyone loses.

Wilson Lau, vice president of Nuherbs (San Leandro, CA), which supplies high-quality herbs sourced sustainably in China, can vouch personally that tariffs “impact our business and resources, both financially and in personnel commitments, as well as our customers’,” he says.

“It’s impacting everyone’s cost of goods, whether you’re buying ingredients or finished products,” he continues. And don’t expect size to insulate you. “These tariffs and this trade war impact everyone from big companies to small-just differently.”

Because smaller companies may not import tariffed items directly, the fallout doesn’t hit their cash flow as much as it does direct importers. “Yet they have less ability to absorb the tariff-related premium on things they buy,” Lau notes. Meanwhile, though big importers are likely better able to absorb the tariffs or a portion of them, he continues, “they pay the toll on customs clearance, which can ding cash flow and finances.”

Ultimately, everyone will feel the trade war’s impact because we operate on a global economic stage. “Some sectors that don’t even import or export directly feel it,” Lau adds, “because our system is integrated in such a way that there are indirect effects on related businesses.”

And on consumers. As in China, “Higher ingredient costs mean that finished products cost more,” Lau points out. “For some consumers, that’s not a big deal; for others, it may mean they can no longer afford the products.”

Evolving Fast

As for next steps, companies in Griffiths’ orbit “are evaluating their options on a case-by-case basis,” he says.

Many business leaders he’s spoken with plan to eat the added costs, should they be small enough to digest-“perhaps a percentage of a penny per tablet or bottle,” he says. But with some ingredients assuming an across-the-board 25% ad valorem tariff, the price increase may be too much to swallow-forcing other brands “to pass the cost along,” Griffiths says. “We already know that’s happening.”

While some manufacturers will reformulate products to circumvent tariffs, particularly if subject ingredients are easy to replace, others are petitioning the government to grant individual ingredients exclusion from the imposts. Yet after putting in petitions for six different ingredients, one company Griffiths is familiar with reported denial of all six requests. Upon looking into similar requests lodged by other supplement companies, Griffiths says, “To date I’ve found zero that have been granted an exclusion.”

 

Shifting Lines

So if the tariffs’ aim was to support stateside suppliers, they’ve missed their mark, Lau believes. For neither domestic nor Chinese industry wins here; rather, the spoils go to suppliers in, say, Mexico or Vietnam, where production may head. “It may also shift production and sourcing to countries not yet part of the current trade wars,” Lau adds.

Griffiths agrees. “I think everybody is looking to new suppliers, whether they’re in Southeast Asia, India, or other regions that can step up and provide the same quality and quantity of product-or they’re domestic suppliers hoping to reap some of the benefit.”

But are such domestic suppliers even out there? “I’d like to think so,” Griffiths says. “Otherwise, why are we doing this?”

If a vitamin manufacturer in the heartland has a solid game but has never been able to compete on price, he continues, “I’d like to think such a company has never had a better chance than right now to come out with a made-in-America ingredient that users can turn to. I just don’t know if enough of those manufacturers can jump into this space quickly, of if their ingredient won’t still be out of price range even with a 25% tariff on competitors’ ingredients.”

 

Diversify, Diversify, Diversify

“I don’t think tariffs or trade wars are beneficial if you believe in a global economy and free trade,” Lau declares. “However, if you want regionalization or even isolation, then they may help push us toward those goals.” And by reallocating trade away from China to somewhere cheaper, the battle “may diversify the supply chain, but it doesn’t bring jobs back to the U.S.,” he says.

Which might be a tarnished silver lining in itself. As Griffiths sees it, “Our industry, for better or worse, has come to rely heavily on China, and now that we’re in this situation, everybody is realizing suddenly that that was probably a big mistake 20-plus years ago as those chains were developing.”

So yes, we should have diversified our supply chain then. “But now isn’t too late,” he continues. “You can begin to identify and qualify alternate suppliers, and provide sufficient business to keep those suppliers interested.” Not doing so, he believes, means “you’ve lost the opportunity of this ‘reset’ that everyone’s now forced to think about.”

 

Uncertain Times

The fact that supplement companies are having to plot sourcing shifts signals that industry leaders “don’t think this situation will end anytime soon,” Lau says. “It will change where investment occurs, the size of those investments, and a lot of planning because now we may have to produce in several countries to factor in multiple tariffs and market needs.”

And that’s why Lau is humbled not only by the trade war’s direct costs, but by “the damage that uncertainty causes.” Without predictability in where, how, or whom tariffs will strike next, “it’s hard to plan expansion, growth, and investing for the future,” he says. “How do you forecast when there are so many moving parts? It will take longer to come to these decisions, and once you decide, the assumptions you relied on may no longer be valid.”

Take the case of a hypothetical American vitamin maker poised to capitalize on the price advantage that tariffs on Chinese goods bring. With every proposed truce or tariff reduction, that manufacturer will think twice about expanding to fill a gap that may soon disappear. “It can all change, literally, with a tweet overnight,” Griffiths says. “And if I’ve just started expansion or hiring, that can be catastrophic.”

 

Phasing Out

As it happens, the U.S. and China on January 15 signed a partial “Phase One” trade agreement dropping some ad valorem tariffs on Chinese ingredients from 15% to 7.5% beginning February 14. But the agreement still leaves other commodities under tariff-at least for now.3

So more work remains. If Lau had a seat at the negotiation table, he’d ask for “predictability and stability. Give industry a roadmap for what’s happening next and how we can plan. If you tell us there are going to be tariffs on Chinese goods indefinitely or for the next two years, we can use that information to make decisions. What we’re getting instead is uncertainty. Every day, it seems we get contradictory information from the previous day or week. Unpredictability hurts business.”

For his part, Griffiths wishes the tariffs were “more targeted to the sectors where trade really was out of fair balance”-information technology, say; not nutrition.

But until the tariffs are better targeted, supplement makers can’t hide under the covers. “If you want to stay in business, you’ve got to do something,” Griffiths advises. “Use that crystal ball, talk to your congressperson, and get some sense of where this is going in the near-, mid-, and long-term. And have a plan that addresses these disruptions. Prepare, diversify, and evolve.”

References:

  1. Ridel K. “Tariffs on Chinese Imports to Drive Up Costs of Health, Wellness Supplements.” U.S. Chamber of Commerce website. Published September 4, 2019. Accessed at: https://www.uschamber.com/series/above-the-fold/tariffs-chinese-imports-drive-costs-of-health-wellness-supplements
  2. American Herbal Products Association comments to the Office of the United States Trade Representative on the “Proposed Modification of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation.” Docket No. USTR-2019-0004. Comments submitted on June 17, 2019. Accessed at: http://www.ahpa.org/Portals/0/PDFs/Advocacy/19_0617_AHPA_Comments_USTR_China_Tariffs.pdf
  3. American Herbal Products Association website new page. “‘Phase One’ Agreement with China Provides Some Relief to Supplement Importers.” Published January 21, 2020. Accessed at: http://www.ahpa.org/News/LatestNews/TabId/96/ArtMID/1179/ArticleID/1273/%E2%80%9CPhase-One%E2%80%9D-agreement-with-China-provides-some-relief-to-supplement-importers.aspx
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