Americans may feel a pinch on the hip pocket nerve this Christmas as some toymakers pass higher import tariffs to shoppers

This year’s Thanksgiving or Christmas shopping season may be a more expensive one for Americans, as toymakers who are struggling to move their manufacturing bases out of China may have to pass some of the costs from higher US tariffs on to customers.

Toymakers from Hong Kong to Rhode Island are already reconsidering their manufacturing base in mainland China and asking their Chinese partners to share the higher costs to cope with US President Donald Trump administration’s threat to slap more tariffs on nearly all goods made in China.

It is a dramatic re-evaluation of a relationship that has spanned decades and spawned a highly specialised industry that accounted for about US$27 billion in US sales last year. It also is a relationship that is proving to be hard to sever.

“[Toymakers] are upset, confused and scared all at once,” said Stephen Pasierb, president and chief executive of The Toy Association, a US trade group. “They’re trying to figure out, if the tariff does happen, how much [of the cost do] they have to eat, how much will the retailer be willing to eat and how much gets passed to the consumer by the retailer.”

Trump has threatened to place 25 per cent tariffs on US$300 billion of Chinese-made products, including toys, later this year unless Beijing agrees to change years of trade and industrial policies that he claims are unfair.

The additional tariffs – barring the industry convincing the administration to exclude toys – could come into place this summer when the bulk of the toys sold during the Christmas season are on cargo ships bound for America.

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About 3 billion toys are sold in the US each year at an average price of US$10 per item, with about 85 per cent of those products made in China, according to The Toy Association. Toys, puzzles and models were one of the biggest categories of goods imported from China into the United States last year, accounting for more than US$11.9 billion, according to the US International Trade Commission.

Only mobile phones, computers, telecommunications equipment and printed circuits had a higher value in 2018, according to the government agency.

The Toys Manufacturers’ Association of Hong Kong said that a 25 per cent tariff may accelerate the exodus of Hong Kong toy manufacturers from the mainland, especially among those who have already been exploring other markets because of rising labour costs in China.

“They will have to make their own business structure changes or alternatives to meet this impact,” the group said.

Hong Kong toymakers are exploring opportunities outside the US, including Europe, other parts of Asia and the domestic China market, according to the trade group. The US remains the Hong Kong toy industry’s largest market.

US companies have also been shifting production out of China this year, but have been limited in how much they can move and are still relying on the mainland for products. At the same time, US companies find it hard to shift the higher costs to their Chinese partners as those manufacturers are unlikely to bear the brunt of the tariffs, according to the Toys Manufacturers’ Association.

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“The overall toy industry will be adversely affected if 25 per cent tariffs are applied to all China imports, including toys, since it raises prices on a broad variety of consumer products, thereby reducing consumer discretionary spending, including toys,” Fitch Ratings agency said.

Brian D Goldner, the chief executive of Rhode Island-based Hasbro, said the toymaker has been reducing its footprint for some time in China, the origin of about two-thirds of its products shipped to the US.

The maker of Monopoly, Mr. Potato Head and Star Wars action figures could reduce its percentage of Chinese manufacturing for the US market to less than one-third within the next five years, Goldner said.

“We’ll still use China manufacturing in a significant manner for the rest of the world because again, it’s a good supply chain, high-quality product, at a price and very safe,” Goldner said at the Sanford C Bernstein Strategic Decisions Conference in New York last week. “But we’re also finding new partners around the world to partner with in India and Vietnam and other places.”

Mattel, the California toymaker, manufactures about 65 per cent of its products in China, but produces most of its Barbie and Hot Wheels toys outside the country,

The company expects the higher costs from tariffs will be absorbed not only by the company, but also by its vendors, retailers and consumers, said Mattel’s chairman and CEO Ynon Kreiz.

In the “mid- to long term, we expect to be able to more mobile and resilient in the way we’re organised as a company and source product in other regions that are not susceptible to tariffs,” he said at the D A Davidson Consumer Growth Conference in Chicago last week.

Changing the manufacturing relationship with China has not been an easy one. Some manufacturers moved production to Mexico for the North American market, only to see Trump threaten to put a 5 per cent tariff on all goods made in Mexico on June 10.

Others have found difficulty in matching the manufacturing scale or supply chain ecosystem that has been created in China.

“We’ve built that relationship with Chinese manufacturing partners over five decades. The skills that they have, and the vertically integrated economy that China has, are why it works for us,” said The Toy Association’s Pasierb. “You just can’t pick that up and plop it down in an injection mould in another country and get them to understand or deliver on the demands of the toy industry.”