In a major hit to the global trade economy, President Donald Trump has officially imposed 20% tariffs on all imports from China. Meanwhile, the proposed 25% tariffs on US imports from Canada and Mexico are set to land in the coming months, with ongoing changes daily.
The tariffs will bring American import duties to their highest average level since 1943, with the changes set to have a ripple effect throughout e-commerce, supply chains, and manufacturing. According to a report by Swap Commerce, the move could drive up customer spending by billions, with apparel facing a $10 billion cost increase, as more than 80% of clothing items sold in the US are imported.
This is a crucial moment for Australian fashion e-commerce brands and retailers, especially those who rely on cross-border trade into the US and brands that predominantly manufacture products in China. Costs are set to increase, margins will be at risk, and customer demand will become unsteady. Brands and retailers need to act now to remain agile and adapt to the upcoming disruptions to everyday trade.
What does this mean for Australian brands with US customers?
If your products are manufactured in China and shipped from your Australian warehouse to US customers, they will now be subject to import duties upon entry into the United States, regardless of order value.
The removal of the de minimis exemption is the most significant change, eliminating the previous duty-free threshold for shipments under $800. This means that every order—no matter how small—now incurs taxes and duties, increasing costs for your US customers and potentially impacting conversion rates.
This shift has major implications for cross-border strategy, and Australian brands need to act fast to assess pricing, margins, and supply chain options to mitigate the impact.
5 ways Australian brands can reduce US tariff impacts
Pass the costs to the customers
Brands have the option to ship DDP (delivery duty paid) where the seller is responsible for any import duties and taxes, but can ultimately charge the customer at checkout to streamline the delivery process. Or, shipping DAP (delivered at place) keeps all import duties and taxes at the responsibility of the customer to pay once the package has reached its destination. Transparency is the key here as the new presence of duties may impact conversion.
Absorb the costs into your margins
For brands who want to resist customer friction, taking on the costs internally will require strategic assortment planning and the lowering of COGS to resist further financial impacts.
Increase your prices
Raising your RRPs for US customers will enable you to cover the costs of taxes, however, this may impact your market position and deter price-sensitive customers, especially if your brand competes on price.
Expand into new markets
Dig into your data and assess whether purchases and buying patterns from countries less susceptible to tariffs are worth shifting focus and re-allocating your advertising budgets to.
Diversify production
Source production and manufacturing from multiple regions to alleviate relying on any one country, including emerging markets.
Pros and Cons: Pricing Strategies
Not sure which path to take? We’ve weighed up the peaks and pitfalls of each of these strategies so you can make the best decision for your business.
Strategy 1: Switch to DDP and charge customers upfront
Pros:
- With your customers informed of the total cost, including duties, at the point of purchase, there will be no hidden surprises when they receive the order. Shipping DAP, on the other hand, offers no transparency and almost always results in either an unhappy customer experience or a return to sender, which means:
- The product is out of the business for an extended period of time, which reduces its ability to sell through at full price.
- Additional returns and restocking costs further impact margins.
- Prepaid duties can facilitate smoother customs clearance and doesn’t risk order hold-up at customs or run the risk of lengthy return delays if the customer doesn't pay the duties at delivery.
- Passing on additional costs to the customer means no impact to margins
- Great tools to calculate duties at checkout and manage cross-border duties & taxes: Zonos, Global-E, Swap Ecommerce, and Shopify
Cons:
- Including duties in the checkout process increases the immediate expense for customers, which may lead to higher cart abandonment and an impact on overall conversion rates. Especially for repeat customers who are used to ordering under $800 to avoid import duties.
- This will require accurate and reliable tools at the checkout to streamline and automate this process for customers, adding additional costs to the business.
Strategy 2: Absorb the cost of duties within the product margin
Pros:
- By absorbing the duties, customers face no additional charges and your existing customer experience and conversion is not impacted
- Maintaining stable prices can make your products more attractive compared to competitors who pass duties onto customers.
Cons:
- Absorbing duties directly impacts profitability and erodes profit margins, which may not be sustainable in the long term.
- Effective assortment planning must be a priority to negate the absorption of additional taxes into margins.
- Look at the business holistically and just as a product range will include a balance of high margin and low margin products, brands must consider their markets similarly. Which regions are bringing me volume? Which regions are bringing me full-price sales?
- Ask yourself, if we are absorbing an additional 20% margin for US orders, where can we take this back from other aspects of the business? Pull on other levers where you can.
- Brands must be more strict on markdowns and have a deep understanding of initial margins. Optimize your supply chain, raw materials, and production to reduce your initial COGS.
- Other strategies include supplier negotiations, supplier diversification, MOQ re-evaluation, FOB, and Freight costs negotiations.
With lower margins, it will be more important than ever to prioritise your most profitable products across your advertising to the US.
Make sure you implement gross profit minimums in product feeds within your paid search and social campaigns to new US customers. Without this, you risk putting advertising budget behind products that will have low or negative contribution margins.
Think about it this way: the more US customers that convert on your high-margin products, the bigger the buffer your business can accrue to help offset the duties and taxes.
Strategy 3: Increase prices to cover the taxes
Pros:
- Adjusting prices to reflect additional costs ensures that profit margins remain intact.
- An RRP or advertised price online that includes all duties and taxes is a great USP, streamlining the conversion path and ensuring a seamless customer experience
- Uniform pricing that accounts for duties simplifies pricing strategies across markets and lowers cross-border confusion
Cons:
- Higher prices may deter price-sensitive customers, leading to potential declines in sales volumes, and positions your product outside of an acceptable range for your target market.
- If you’re unable to absorb the costs of additional taxes without increasing prices for US customers, test a minor price increase (e.g., 5-10%) to balance conversion and margin to see how the customer reacts.
- Brands will need to decide how they are going to maintain a strong perceived value to their products across their loyalty, customer experience and brand storytelling. Add perceived value by bundling products, offering gift-with-purchase options, and improving packaging and shipping/return policies to enhance customer service and convenience.
- Take into consideration any previous price increases due to inflation, and avoid multiple price increases within a short period of time
Tariffs are constantly shifting, and the landscape could change again within weeks or even days. The only certainty in this uncertainty is that tariffs remain a persistent challenge. Retailers must stay agile and ready to adapt as new developments emerge.
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