The American toy industry is headed for turmoil as the Trump administration has placed tariffs of up to 25% on about half of all goods shipped from China.
Barbie dolls, Spider-Man action figures, and Transformers have so far escaped the wrath of President Trump's new tariffs but could be affected if a full-blown trade war erupts next year between the world's two largest economies.
According to the South China Morning Post, the latest round of trade tariffs has already affected children's dress-up clothing, board games, and art item, with the US imposing a 10% tariff on those items last month. There are indications that these tariffs could rise to 25% on January 01.
If a full-blown trade war breaks out, it would cut nearly $10.8 billion out of the US economy and lead to a devastating loss of 68,000 American jobs, said Rebecca Mond, vice-president for federal government affairs at the Toy Association, a US-based trade organization.
She said tariffs would have a much more significant impact on China.
"About 85% of all toys sold in the US annually are produced in China."
"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 in the United States than it would be to stay in China."
Mond said many toy companies are taking a wait-and-see approach for the remaining months in 2018. She added that shifting supply chains is not an easy task.
She added: "Are these tariffs going to last?" If they're not, it certainly doesn't make sense to change manufacturing for a short-term issue."
Toys are one of the largest exports to the US from China, on a per annum basis.
Finished toys were the fourth largest product category imported into the US from China last year, accounting for $12.2 billion in products, according to the International Trade Commission.
Toys accounted for $24.3 billion in US sales in 2017, according to Euromonitor International.
The threat of a full-blown trade war could bring severe stress to toy producers at a time when the American toy industry is still recovering from the collapse of Toys "R" Us.
"The imposition of tariffs would come at a historically inopportune time for our industry considering the recent bankruptcy" of Toys "R" Us, Corinne Muray, director of government affairs at Mattel said in an open letter to the US Trade Representative in August, indicating that tariffs on children toys would be disastrous for the industry.
The Perfect Storm: The liquidation of Toys "R" Us "is already having a devastating impact on 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," Muray added.
Mattel, the manufacturer of Barbie dolls and DC Comics characters, noted the company would have a tricky time rerouting its supply chains, and tariffs would ultimately punish the consumer by higher prices and reduced choice.
Last month, the Toy Association sent a letter to the Office of the US trade Representative indicating that Chinese producers have adapted to the "seasonal nature" of the industry, in which they make toys for six months of the year and produce other goods in the other half.
"Of even greater importance to US consumers, the US toy industry has invested in ensuring that Chinese suppliers produce toys that comply with 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 manufactures of these requirements and develop relationships with them to ensure that toys are, in fact, compliant."
Hasbro CEO Brian Goldner spoke to analysts about shifting production away from China, but he made it clear that the shift would be to other low-wage countries -- not back to the US. He said it would take many years to shift a small fraction of its supply chain in China elsewhere.
"There is absolutely no way that Hasbro can shift from China to another low-cost country overnight," said Lutz Mueller, CEO of Klosters Trading, an expert on the industry. "They do not have infrastructure or supply chain in place."
Lutz said small to medium-sized toy companies do not have the financial mobility to rework supply chains out of China; they could quickly go out of business if a full-blown trade war develops.
As for the mega toy companies, Mattel was already struggling before the Toys "R" Us implosion. Its stock is down -5.59% YTD with short-interest growing to about 16.40%.
Lutz also said Mattel would not file for bankruptcy, but a full-blown trade war would revive talks about it being acquired by its rival, Hasbro.
"Mattel is already teetering on edge," he said.
"Hasbro has been trying to buy it for a while. Whether it can survive as an independent company with tariffs is a question mark."
Here is how the story could play out: Multinationals reworking supply chains from China would likely disrupt trade flows. Already, global growth momentum is slowing from trade uncertainty and will continue into 2019. What comes next you ask? Well, a global growth scare sometime next year, and it could be just enough to reprice US risk assets.
As for the toy industry, if a full-blown trade war breaks out in 2019, like JPM, thinks, then it could spell disaster for yet another industry that is struggling to survive in President Trump's trade war. To note, America's farmers just received a bailout. Storm clouds are gathering.