Tariffs in the teapot destroy cozy trade relations

By Perry Luckett, TeaManToo

On September 1 (2019) U.S. consumers started paying a 15% tariff on Chinese tea—the first tariff on tea since the country’s founding. The U.S. Trade Representative (USTR) was to begin increasing this rate to 30%, effective October 1, following a notice and comment period. That increase received a reprieve as of October 11, however, because the U.S. and China reached a “Phase 1” oral agreement. Under this deal, China will reportedly buy $40-50 billion in U.S. agricultural products annually, strengthen protections for intellectual property, and issue new guidelines on how it manages its currency.  

But this deal hasn’t been written yet and may take weeks to finalize. As Dominic Rush says in a recent article at The Guardian.com, “breakthroughs on trade talks have come and gone before. Since the China trade war began last year, moments of comity and cheer have more than once been shattered, giving way to jolting deteriorations in relations between the two sides.” (Ref: DR)

Meanwhile, a further 15% tariff on almost all remaining Chinese imports—including laptops, smartphone, footwear and clothing--is still set to be imposed on December 15 unless the U.S. can reach agreement with Beijing. Given the volatility of President Trump’s deal-making and our up-and-down relationship with China, I thought it might be timely to talk a bit more about how tariffs on Chinese tea can affect our cozy habit.

What’s a tariff and how does it affect tea drinkers in the U.S.?

As Austin Hodge points out, tariffs on tea result in higher costs to U.S. importers and, likely, us tea drinkers across the country. (Ref: AH)  A tariff is a tax that an importer must pay on a product being imported. Tariffs usually try to protect a native industry. For example, if another country is making steel cheaper than the U.S. steel industry can make it, a tariff on steel would equalize the cost and make our native steel industry competitive here.

But only a small amount of tea grows in the United States, so there’s no tea production industry to protect. In other words, China doesn’t pay the tariffs on tea. Importers pay the tax and typically pass it along to wholesalers, who pass it to retailers, and then to customers. Worse still for us tea drinkers, by the time these prices fall on us, other distribution, packaging, and retail costs mean we’re usually paying more than the tariff.

What does the tea tariff cover in the American market?

Import fees for processed tea packaged for retail and the packaging itself (tins and ornate storage containers) fall under the tariff, as does bulk tea grown in China. In fact, the rules apply to all Chinese tea except for black tea in packaging weighing more than about 6.6 pounds.

Earlier this year, tea-industry representatives sought to exempt Chinese tea but were unsuccessful in removing it from the U.S. Trade Commission’s List 4. The U.S. Administration delayed until December 15, 10% tariffs on cell phones, computers and laptops, clothing and shoes. But the tea tariff on September. 1 remained intact. Further, the tariff on packaging from China is already at 25%, so it drives up the cost even more.  (Ref: DB1)

How has the tea industry responded?

Several major tea importers have lamented the Administration’s action, including Harney & Sons Fine tea. “We are sad that it is happening,” writes Michael Harney, Vice President. “Over the 20 plus years I have been going China, one could see a problem coming. China growing and feeling its oats. Tea was an original item of trade. Now it is insignificant. Since we are insignificant, we have little impact. So, we can only dodge the elephants as they fight,” he says. 

Harney & Sons is already paying the 25% tariff on packaging items from China (see examples below). Although they’ve gotten ahead of the new tariff by bringing in extra tea ahead of the effective date, they expect costs to go up over time. Distributors in other industries often pass these costs on to consumers, but the tea market is so competitive, importers are limited in their ability to raise prices.

Jason Walker is marketing director at First Tea, the New Jersey division of Zhejiang Tea Group—the world’s largest exporter of green tea. Walker says they’re meeting the tariff challenge by adding supplies of high-priority teas in their U.S. warehouses, with container ships on the water before September 1. They’re also offering options to customers in some cases, such as contract purchases with locked-in pricing and reserved quantities.  (Ref: DB1)

Austin Hodge, founder of Seven Cups Fine Chinese Tea, notes that the United States imports a lot of tea, but most of his company’s tea comes from South America, Africa, and more recently, Vietnam. As he points out, the United States loves cheap tea and has focused on flavoring and blending to make it acceptable. As a result, for Seven Cups, Chinese tea plays a minor role in the American market, and most of it is very cheap to begin with. He believes cheap tea “will be easily replaced from other sources, and if not, it won’t be missed.” (Ref: AH)

Other importers say the tax is disruptive but not debilitating. Still, industry leaders such as Mighty Leaf, The G.S. Haly Company, and Bigelow Tea will experience some losses. For example, CEO Cindi Bigelow explained to a reporter from the Hartford Currant that tariffs will cause “a $2 million impact on our company — right out of our bottom line.”  (Ref: CK)  She adds: “Nothing can be done because the current administration is using tariffs as a weapon, and we’re in the pathway. We can only hope Washington will wake up and see what they are doing to companies around the United States.” (Ref: DB2)

Why not switch tea suppliers by cozying up to other countries?

The problem is quality. For example, Cindi Bigelow of family-owned Bigelow Tea says: “The only place for us to get the smooth-tasting, quality green tea is from China. You can’t just go to another country.”  (Ref: CK) Harney & Sons says India has had a bad year, and Sri Lanka teas have been sliding. So, China is their most important source and not replaceable. 

Taiwan would appear to be a potential source. Thomas Shu, owner of ABC Teas since 1978, is Taiwan’s Tea Ambassador. He says that, although Taiwan can’t approach China’s annual production of 11 billion pounds, tea from Taiwan meets or exceeds standards of quality for flavor. It also meets or exceeds U.S. Dept of Agriculture, European, and Japanese rules for organic production. But Tea Association of the USA President Peter Goggi points out the US Trade Representative (USTR) doesn’t classify tea from Taiwan as Chinese origin.

Indonesia produces 50 varieties of tea, mainly green, but their focus is on bulk production. They’re the world’s seventh-largest producer at nearly 309 million pounds per year--the highest figure in the last four years. But specialty teas make up only about 10% of their total. Japan is also a major green tea producer, but the Japanese drink virtually all their top-quality tea (except for matcha).

Munnar, the valley of teas, Indian state of Kerala. Tata Tea Limited, one of the world's leading tea producers, has headquarters here.

India seems to be a good source because of their overall production figures. Indeed, they qualify as the world’s second-largest producer of tea (behind China). They registered their highest-ever tea production and exports in the 2017-2018 fiscal year by producing 2.92 billion pounds and exporting 565 million pounds of tea. But China’s export of 660 million pounds per year dwarfs India’s output and accounts for about 21% of world export value—largely because of their specialty teas’ higher quality.

Sri Lanka bulk tea processing. Dan Lundberg, Wikimedia Commons: CC BY-SA 2.0, January 27, 2016

Sri Lanka often is mentioned as a possible substitute source for Chinese tea because the country is the world’s second-highest exporter of tea behind Kenya. Most of their Ceylon black tea goes out in bulk packaging, however, and their green teas don’t match the color and flavor of China’s fine green. Also, as mentioned above, recently the quality of Sri Lankan teas has been sliding as production quantities have ramped up.

Austin Hodge suggests illegal sources could affect availability, as well. Tea pirates and smugglers are smuggling out of China to get around the country’s strict laws for exporting. They have websites hosted outside China but using fulfillment from within China. The servers can block the Chinese government from seeing their sites, so they operate under the radar. Often, they’re near wholesale tea markets so they can carry little inventory. They buy the tea when ordered and then ship it through the Chinese post. After the tariffs become effective, the U.S. post office will collect duty on these shipments, with tea importers paying like any other importer. These ingenious methods will increase supply, but they’re unlikely to replace imports lost to China’s other markets. (Ref: AH)

So alternative sources for China’s high-quality specialty teas remain limited. Eliot Jordan, tea master at Mighty Leaf tea writes that “to keep tea alive, everyone in the chain will have to absorb some pain: the producer, the exporter, the importer, the blender, the packer, the brand, the grocer, etc.  For specialty China teas, he says, “I don’t know where people will turn – there are just too many unique types from this origin. I hope customers will understand tariffs are a tax paid by American companies that bring tea to the USA market. . . . most parties will grit their teeth and hold fast at first — but if the tax looks permanent it’s going to have to be worked into the final price to the consumer.” (Ref: DB1)

Will tea drinkers have to cover these costs to importers?

Most experts in the tea industry think it can weather the tariffs without costs falling to tea drinkers, though some retailers may take advantage of the situation to raise prices.

The bottom line is that teas from China will carry a notably higher price for importers (and perhaps distributors) when imported under these new tariffs. Aaron Vick, senior tea buyer at The G.S. Haly Company, says his company has been working to reduce the trade dispute’s effects on their customers since it began in June 2018 with the first list of tariffs. But their costs across the system will become increasingly hard to bear as tariffs rise. As a result, Vick expects these tariffs to affect price, as well as supply and demand.

As an importer, Vick hopes the tariffs will cause his distributors to consider other tea origins now that pricing will be more competitive. He says other countries “have so much to offer and are so often overlooked in a knee-jerk response to choose the cheapest option, which has historically been China teas.” (Ref: DB1) As pointed out above, however, many Chinese specialty teas don’t have ready alternative sources, so these “non-cheap” teas are likely to increase in price if tariffs continue.

First Tea, which imports the equivalent of 25 to 50 shipping containers of tea into the U.S. every year, has accelerated shipments to its warehouses on the East and West coasts of the U.S. in hopes of beating the tariffs. The company should have enough supply in place to avoid raising prices for six months. Like other importers, they’re doing all they can to outwait the tariffs, but if the tax goes on longer than six months, they’ll have to pass on costs, which could eventually trickle down to consumers at the cup.

So those of us who enjoy fine teas from special regions of China—such as Long Jing Green (Dragon Well), Tieguanyin (Iron Goddess Oolong), Junshan Yinzhen (Master Mountain Silver Needle), or Pu-erh Aged Black—may have to pay a bit more. Still, the soothing peace of mind will be worth it, especially if the world around us continues on its wobbly course.

References (by date):

Note: Initials in parentheses used for references in the post above.

Chad Bray, “Storm in a teacup? Trump goes after all the tea from China with latest tariff push as trade war threatens to boil over.” June 21, 2019. https://bit.ly/34eL32L (CB)

Austin Hodge, “Industry News, Seven Cups News.” August 5, 2019.  http://bit.ly/36iaYYUHodge (AH)

Dan Bolton, “American Consumers Pay Tea Tariff on Sept. 1.” August 16, 2019.  http://bit.ly/32WJXZfBolton1 (DB1)

Christopher Keating, “Trade war with China is hitting Connecticut, and tea drinkers are paying more.” September 1, 2019. In the Hartford Courant, http://bit.ly/31Yah3CKeating  (CK)

Dan Bolton, “US Tariffs Begin on Chinese Tea and Coffee.” September 1, 2019.  http://bit.ly/2ppRUaBBolton2 (DB2)

Dominic Rush, “US delays China tariff increase as Trump claims 'substantial' deal.” October 11, 2019. http://bit.ly/2peyw0qRush (DR)