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When men stop buying underwear, things can take a turn for the worse. This is the view held by many leading economists, including former Federal Reserve Chairman Alan Greenspan.
Greenspan is a follower of the ‘men’s underwear index’, a theory that pants sales can be used to predict recessions. Put simply, guys buy more new underwear when they have more disposable income; they make do with what they’ve got when they start to feel the financial strain.
There are various factors for economic downturns and there has been plenty of speculation this year about whether US President Donald Trump’s protectionist trade policies could cause a global recession.
Trump has imposed significant new tariffs on many countries, including the UK and Europe, despite reaching deals with some to reduce the highest of the rates he has threatened.
De minimis
Another protectionist measure that will affect many US consumers is the White House’s decision to bring forward the ending of a scheme allowing lower value items into the US without incurring import duties or requiring full customs documentation.
The ‘de minimis’ exemption that has applied to goods valued under US$800 has been used by many SMEs for years, particularly those selling direct-to-consumer on e-commerce platforms.
Trump’s decision to withdraw it this coming Friday (29 August), two years earlier than initially planned, is causing shockwaves throughout the SME community.
For Deadgoodundies.com, a British SME selling underwear to consumers around the world, the change could lead to them leaving the US market.
“We were aiming for £50,000 at wholesale prices at least this year,” Jane Garner, a partner at the company, told the Daily Update.
“The US market has been consistently good for Deadgoodundies.com for 20 years. We’ve always offered US customers a very personal service and know a lot of our ‘originals’ by name.
“Now that market is gone for us, at least for now.”
Garner notes that the changes will not just impact her company and its US consumers, but it will affect a wide range of SME exporters, potentially affecting the wider UK economy.
“The sudden imposition of this new system in the US is not just a blow to thousands of UK exporters, it will surely hit the UK’s export figures immediately and in the long run. All those small businesses add up and so do their taxes.”
Sophie Cooke, the founder of Sheffield-based milliner Imogen’s Imagination, said the ending of de minimis was already affecting her business before the White House decided end the scheme earlier than expected.
“Between January and April, I received orders approximately every other day,” she told the Daily Update. “However, since May, this rate has dropped to one a week.”
Over the year so far, the US has accounted for over a third (35%) of her orders received via Etsy.
Lack of awareness
Such has been the rate in which the Trump administration has made seismic trade policy announcements this year, many retailers didn’t even know the change was coming.
“Most of our shipped products for now are valued less than the US$800, so definitely this will affect us,” one SME told us, after we informed them of the changes.
One Reddit user, commenting in a thread about the changes, said: “This is the first I heard of this and it is a big problem. Shipping is bad enough without having to add 15%. No idea how to collect or how to pay it”.
Paul Alger, the international business director at the UK Fashion and Textile Association (UKFT), told us that most companies he’d come across “had not prepared for this” but he added that the “writing had been on the wall for many years”.
“The US, and now also the UK and the EU, are looking at de minimis and how larger companies from China and India have used it to build massive businesses. It was only ever a matter of time.
“UK companies used US de minimis more extensively and effectively than our EU competitors so the adjustment is likely to be painful!”
Disruption
Couriers and e-commerce platforms are also now dealing with the fall-out from the changes.
Etsy, for example, published new guidance last week advising sellers to start using the delivered duty paid (DDP) shipping option to ensure a smooth consumer experience.
While many US couriers offer this, the sudden nature of the de minimis withdrawal is expected to cause a surge in demand in the industry. This could cause major disruption with many European couriers already restricting low-value shipments.
“The reason for these anticipated temporary restrictions is new processes required by US authorities for postal shipping, which differ from the previously applicable regulations,” a DHL Group statement says.
“Key questions remain unresolved, particularly regarding how and by whom customs duties will be collected in the future, what additional data will be required, and how the data transmission to the US Customs and Border Protection will be carried out.”
The US Postal Service (USPS) has been granted a six-month exemption from completing declarations due to concerns over its capacity to handle the likely surge in demand. It has also been allowed to flat-rate the tariff charges.
However, these costs will be prohibitive for many SME exporters, ranging from US$80 to US$200 per item depending on the tariff rate.
“The short-term impacts have been frustration and confusion,” says Cooke.
“This is through no fault of the shipping companies, who in their defence, have acted as swiftly as possible to provide workable solutions.”
‘Just like Brexit’
Garner notes that the changes remind her of Brexit, when new customs requirements and subsequent disruption in the logistics industry affected her company’s trade with the EU.
“When Brexit took hold, the couriers had had a long time to prepare but moved their best people to the front line and newbies to core roles. The result was not pretty” she says.
“The US situation calls on couriers and intermediaries who want to help businesses like ours by taking on thousands, millions of small business-to-consumer (B2C) parcels.
“They are not set up for this small-scale business, the software for online retail websites is untested, and USPS is faced with a tsunami. Expecting the likes of DHL, FedEx and UPS to take up the slack is King Canute country.”
Cooke is hoping that the Royal Mail’s Postal Delivered Duties Paid (PDDP) scheme will allow Imogen’s Imagination to continue exporting hats to the US in a cost-effective way.
“This is between 33-50% cheaper than DHL Express as my packages are very light and generally very small – the cost of shipping is now going to be even more important in light of the additional tariffs.”
However, she adds that she won’t be sure if this service provides a “simple process” until it is launched on Thursday 28 August – the day before the de minimis changes come in.
She further says that Etsy has so far not been forthcoming in providing solutions to businesses. The platform’s terms of use were also recently updated so that sellers “could not include ‘service’ based product listings - i.e. stand-alone express shipping or rush order fees,” she says.
Cooke adds that Etsy discourages buyers from clicking links on the platform that takes them away from its website.
“I have not found a solution for how I can bill my two recent US customers for their tariffs without breaking Etsy's TOU if they choose to go ahead with their orders,” she says.
‘Extra expense is too much’
These new charges and processes pose a range of difficult commercial questions for SMEs, with many needing to reconsider the US as a market or needing to rethink their entire business models.
Roger Marshall and Lyn Dewsbury, customs and trade consultants at the Chartered Institute of Export & International Trade, have been advising a number of businesses on ways to mitigate or lessen the impact of tariffs, including bulk shipping, establishing subsidiaries in the US and working with American distributors.
However, for many SMEs, the additional costs are simply too much for the consumer or business to bear.
“For my lowest price item, a £12 pair of hairclips, the US postage for these is currently £12,” says Cooke.
“I may remove these from sale to the US as the shipping with tariffs will exceed the cost of the product!”
She says that for other products she will have “no choice but to pass on the full cost of the tariff and brokerage fees to my customers”.
Garner notes that there are other costs and risks beyond tariffs that also make the market too unpredictable.
“We don’t know how the US system might work in reality which would play havoc with customer service, timing and costs to customers. Never mind the uncertainty of getting something to customers correctly – has anyone successfully addressed returns and associated refunds?
“No business could stand the costs of ‘storage fees’ for unclaimed goods nor paying US$80 or US$200 up front and never getting that back if the customer decides the extra expense is too much.”
‘Survival’ mode
Alger notes that many businesses will now look to focus their efforts away from the US in response to the changes, including to the EU. However, this won’t be without its own difficulties:
“Many will look back to the EU market again but the shortcomings of the UK-EU Trade and Cooperation Agreement mean that only the larger of them can bear the additional costs associated with leaving the single market and customs area.”
Cooke notes that Imogen’s Imagination could stand to lose as much as 35% of their orders on Etsy, which could also have a knock-on impact on how often the platform’s algorithm shows her products to consumers beyond the US.
This could be “devastating” she says, but she has found that there has been a lot of “solidarity” among e-commerce exporters online.
“There has been a huge show of solidarity as we have all try to understand what the tariffs mean for us – in terms of how to apply them, how to charge them and alternative shipping methods to help us achieve our goals of selling to the US.
“Sellers from across the globe have been plunged into uncertainty and every other thread over the last 10 days has been in relation to tariffs and shipping in one way or another.”
Deadgoodundies.com will “survive”, Garner says, in part due to it having already diversified the markets it sells into – it now exports to 80 countries.
However, the US was a major market for the business and the changes are just the latest in a string of challenges for her business.
“Unlike other businesses that have a massive percentage of B2C, Christmas or gift trade with the US, we have a policy, post-Brexit, of keeping our eggs in lots of baskets. There is no obvious replacement for this business but we will survive.
“Isn’t it sad that small businesses have to see survival rather than success as a win?”
It’s a question that’s keeping many SME owners in the UK, EU and globally awake at night.
If Alan Greenspan is to be believed, governments around the world should also be concerned.
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