Could Donald Trump's taste for tariffs trap Captain America, Spider-Man toys, Barbie dolls and Transformers in the trade war?
Toys are one of the largest exports to the US from China annually
Captain America may soon face his toughest enemy yet: United States trade officials.
Toymakers, major job creators in Hong Kong, China and the US, are on edge as the Trump Administration has placed tariffs of up to 25 per cent on about half of all goods shipped from China.
Spider-Man action figures, Barbie dolls and Transformers have escaped the clutches of the new levies, but could be affected if US President Donald Trump goes through with his threat of adding tariffs to all Chinese-made goods, which accounted for more than US$505 billion in exports to the US last year.
The trade war has already enveloped children’s dress-up clothing, board games and arts and craft items, with the US imposing 10 per cent tariffs from September 24. These levies could rise up to 25 per cent on January 1 if no resolution is reached.
And if the US were to move forward with a 25 per cent tax on all imported toys, it would cut US$10.8 billion out of the US economy and led to the loss of 68,000 jobs in America, said Rebecca Mond, vice-president for federal government affairs at the Toy Association, a US-based trade group.
The tax could have an even greater impact in China. About 85 per cent of all toys sold in the US annually are produced in China, she said.
“[China is] an established manufacturing base. The infrastructure is there. It’s not a base that’s easily moved,” said Mond. “Even with the increased duty rate, it’s still more expensive to bring manufacturing here into the United States than it would be to stay in China.”
Many companies are taking a wait-and-see approach for the moment, given the difficulty in shifting supply chain, she said.
“Are these tariffs going to last?,” said Mond. “If they’re not, it certainly doesn’t make sense to change manufacturing for a short-term issue.”
Finished toys were the fourth largest product category imported into the US from China last year based on customs value, accounting for US$12.2 billion in products, according to the US International Trade Commission. The largest category of imports from China to the US last year was mobile telephones, valued at more than US$44 billion.
Toys and games accounted for US$24.3 million in sales in 2017, a growth of 15 per cent over the past five years, according to Euromonitor International, an independent market research firm.
The threat of tariffs comes at a difficult time for the sector, as the industry has been hit hard by the bankruptcy of Toys “R” Us in the US, which has removed a major retail avenue for toy sales. (The owners of the Toys “R” Us bankruptcy estate said this week they are looking to relaunch the brand on a much smaller scale in the US.)
“The imposition of tariffs would come at a historically inopportune time for our industry considering the recent bankruptcy” of Toys “R” Us, Corinne Murat, director of government affairs at Mattel, said in a letter to the US Trade Representative in August, arguing against proposed tariffs on several children’s items. The liquidation of Toys “R” Us in the US “is already having a devastating impact on the juvenile products and toy industries. Levying what is tantamount to an additional tax on the US industry at this time could have significant negative ramifications”.
Mattel, the maker of Barbie dolls and action figures based on DC Comics characters such as Batman and Wonder Woman, noted that because of how entrenched the US juvenile product industry is in China, it would be difficult to switch sourcing and tariffs “would result in higher consumer prices and reduced consumer choice”.
The California-based company manufactures its products at multiple facilities in several countries, including Indonesia, Malaysia and Thailand, to help avoid disruptions in product supply due to “political instability, civil unrest, economic instability, changes in government policies or regulations and other risks”.
In a letter to the Office of the United States Trade Representative last month, the Toy Association said Chinese producers have adapted to the “seasonal nature” of the industry, in which they spend six months of the year producing toys and six months manufacturing other goods.
“Of even greater importance to US consumers, the US toy industry has invested in ensuring that Chinese suppliers produce toys that comply with the strict US safety standards that protect America’s children and families while at play,” the Toy Association said in its letter. “Establishing a new manufacturing base elsewhere could thus force companies to move hastily (and at significant cost) to identify and educate new manufacturers of these requirements and develop relationships with them to ensure that the toys are, in fact, compliant.”
Hasbro, the Rhode Island-based maker of Marvel and Star Wars action figures and the largest toy seller in the US, produces about 65 per cent of its products designed for the American market in China.
The company has been moving more of its production out of China in recent years, with about 30 per cent of its total manufacturing outside China, Brian D. Goldner, the Hasbro chairman and chief executive, said on an analyst call in July. Hasbro expects to increase that to 40 per cent of its overall production in the next few years, he said.
“We’re moving more production outside China. We found some great new partners and territories that provide very high quality products that can meet with our specifications,” he said. “In terms of the tariffs, we’ve been working with and talking to the administration and our congressional delegations to ensure we're communicating just how terrible an impact the ongoing tariff or trade war would have.”
Hasbro announced plans last year to begin manufacturing Play-Doh in the US to supplement its existing manufacturing overseas, rather than as a reaction to Trump’s trade policies.
The fourth quarter is typically the largest selling season for the industry, but the introduction of a tariff on finished toys this year is unlikely to greatly affect companies, as most of the toys destined for holiday sales have already been shipped to the US or will arrive by next month, said Mond of the Toy Association.
Toy companies often ship most of their holiday products between August and October, and some companies have stocked up early in anticipation of potential tariffs, said Mond. However, that is a temporary solution for one season and will not help toymakers if tariffs are in place by early next year.
“They negotiate these prices with retailers well in advance,” said Mond. “If you have a price already negotiated with a retailer for Valentine’s Day products or Easter products, now US companies are scratching their heads trying to figure out how they can make that price when their costs are increasing.”
For Lego, manufacturing in China is a relatively new frontier. The Danish toymaker opened its first factory making construction bricks in Jiaxing, China, two years ago, with these products destined for the Asian market, rather than the US.
Roar Rude Trangbaek, a Lego spokesman, said the company’s strategy is to have its manufacturing bases close to its customers, meaning America is served by its factory in Mexico, while Europe is served by factories in Denmark, Hungary and the Czech Republic.
“The reason for our manufacturing set-up being like this, is to ensure we can quickly supply the products needed and adapt to the demand we see in the local market,” said Trangbaek. “Our newest factory in China enables us to reach children across China as well as the rest of Asia much quicker. Whereas before, this region of the world was served out of Europe.”
The tariffs, while aimed at China, could have an especially harmful impact on smaller US companies making toys and other children’s products.
Horizon Group, a New Jersey-based manufacturer of arts and crafts items for children, said in a letter to the US Trade Representative last month that a 25 per cent tariff on arts and crafts items would have “a catastrophic effect” because of the difficulty of sourcing various components in the volume and quality it needs outside China.
The company, which has a showroom in Hong Kong and a production office in Shanghai, employs 300 people in the US.
The tariff “would not only destroy Horizon's 100-plus year old business, but decimate an industry that caters specifically to children, with arts and crafts items designed to be valuable learning and teaching tools for American children,” a Horizon representative said in the letter.