Tariff Increase and QRG Pricing

To Our Client Partners,

After weeks of progress and growing optimism around an end to the U.S.-China trade dispute, there was a sudden reversal late last week. On several key issues, the U.S. interpreted China’s position as retreating on prior agreements–initiating a response by President Trump to move forward with an increase to the current tariff rates and a potential expansion of tariffs to cover all Chinese imports. China’s leadership responded by levying additional tariffs on $60 billion of U.S. exports to China. Unfortunately, as the situation appears today, both sides have staked out positions that make a near-term agreement unlikely. Worst case, we are facing a protracted trade war that could have significant implications for our industry and the global economy.

The situation has been unfolding very rapidly, but here is what we know today:

• Tariffs on the existing $200 billion of Chinese imports will increase from 10% to 25% effective June 1st.
• The 25% tariff impacts the product categories originally included in the 10% tariff regulations that were enacted last September. The major categories relevant to our industry include Bags and Stationery products, and portions of Drinkware, Technology and other Accessory categories.
• The U.S. Trade Representative announced Monday that the U.S. has begun the formal process to expand the 25% tariff to all other imports from China (i.e. those currently not subject to tariffs).
• This represents an additional $300+ billion of imports from China and would cover a large majority of product categories sold in our industry. The public hearing and comment period end on June 24th.  The expanded range of tariff categories would not be imposed until after that date.

It is difficult to assess the potential implications to our market and the broader economy beyond stating the obvious. It is equally challenging to predict how this will play out over the coming weeks. Nevertheless, we are moving forward with scenario planning to cover the various potential outcomes. Our current thinking around the 25% tariff is as follows.

• If the 25% tariff goes into effect as planned on June 1st, we will move ahead with price change effective at that time.
• Our approach and philosophy will remain consistent with our pricing strategy for the 10% tariffs to start the year.
• We will continue to manage price increases commensurate with the timing and phasing of the 25% tariff impact – with the goal of minimizing the impact on you.
• Should the 25% tariffs remain in place for an extended period (and/or should the range of tariff categories be expanded), we would look to make a further adjustment in our prices as required.

We are working aggressively to offset the impact of the tariffs through a number of initiatives. We have successfully increased the amount of production allocated domestically and to other countries outside of China. Ongoing efforts continue to re-negotiate our buying costs with our vendors as well as to reduce our internal servicing and decorating costs.

We understand and appreciate the challenge the tariffs and related price increases pose to your business. You have our commitment to work through this together – and to do so equitably and with as much transparency as possible. We will provide further updates as additional news and information warrants.

As always, thank you for your ongoing support of QRG.
 
Sincerely,

Todd Pottebaum

QRG President