Debt Ceiling, Interest Rates, China, And Biden Trade

With a dose of cost control and less discounting – plus lower inbound shipping prices – big retailers have managed to keep their heads above water. However, that being said, the next two quarters could unleash a tale of woe. Retailers are fatigued with “Supply Chain” being the subject-du-jour and, as the drums pound in the media about the debt ceiling and potential default, retailers worry for their future sales and margins. China watchers are also concerned about sourcing new product, and they fret about their level of inventory – because inventory costs money and borrowing has become quite expensive. Too much or too little inventory will make or break the season.

Over the past few years, the “Supply Chain” topic actually spawned entire networks, numerous conferences, books, a few TV shows, and even has created the position of Chief Supply Chain Officer. Rumors are swirling that the much-heralded Biden Indo-Pacific Economic Framework (IPEF) will soon announce an agreement on supply chain coordination – and the finalization of the issue may actually flattened the terrain to signal an end of the discussion. Many think that the IPEF agreements will be great, but IPEF doesn’t go far enough and avoids the much bigger retail wish of improved market access for trade. With “Supply Chain” now seemingly under control, the discussion quickly relegates to post-game coverage – making room for the new topic-du-jour which is: “Inventory Management” – a distant cousin of one of Peter Navarro’s former 7 deadly China sins.

In this current retail environment, “inventory management” is key to driving a retail business towards success or ends up wearing a company down – like a dog after the chase. Proper “inventory management” can create profits or (if not handled well) can steer the ship towards bankruptcy. As has been noted many times, retail historians quote inventory slogans from past heroes who coined phrases like: “Stack ‘em high and sell ‘em low, or Crazy Eddie – his prices are insane.” The commonality was that inventory management determined their marketing strategy. Now, in the era of high interest rates and financial uncertainty – concerns about the cost of inventory are reaching their peak. Inventory stress appears almost daily – simply because the American debt ceiling could be breached, or high interest rates will linger, or inventory purchasing from China needs to be de-risked (per recent statements from federal officials). Serious questions are aggressively asked by retailers about the best “Inventory” paths to follow. No one really knows the answer and China sourcing looms quite large on everyone’s inventory agenda.

In the old days, you could “Stack ‘em high and sell ‘em low” if there was enough inventory to lower the margin. You could also create “insane prices” if you brought in enough inventory to lower the cost. Today, the retail crisis is about interest rates being VERY high – and tight inventory management has become both a necessity and a curse.

When retailers look at the purchasing of inventory – all eyes will typically turn towards China, because it’s the largest source of import product flowing into the USA. Data indicates that in 2022 China imports to America hit $582 billion or 16% of all China’s global exports.

During the Trump administration, it was former trade adviser Peter Navarro who articulated concern about China flooding the USA market with low-cost “inventory.” He named his policy “China’s 7 Deadly Sins” in an attempt to draw media attention to the problem. The 7 sins became the bedrock justification for the Trump era tariffs. Per Mr. Navarro’s sin list: China should stop stealing intellectual property, stop forcing technology transfers, stop hacking computers, stop state owned enterprises (SOE’s), stop fentanyl, stop currency manipulation, and stop dumping any product that was below the fair market value of other inventory goods.

The 7 sins supported former President Trump’s China trade position, but the USA actually had little control over most of them. Theft of USA intellectual property was already being stopped by the China courts, forced technology transfers had a lot to do with American companies wanting to do business in China and willingly sharing their technology (in exchange for market access). State owned enterprises (SOE’s) are clearly hard to compete with – but China points out that American states (and even the federal government) provide tax breaks and funding to incentivize business development. China currency manipulation was also ruled out by the U.S. Treasury Department.

In retrospect, the bigger issue of Navarro’s 7 sins was about inventory product dumping – which is quite real and created an excess of below fair market value inventory. America already had policies in place to deal with the issue but, politically speaking, many of the laws did not go far enough to be effective. To be fair, when the Trumpian tariffs were added – nothing really changed except for the political rhetoric and the introduction of the (failed) 2020 China Phase One Trade Agreement. The bigger inventory procurement problem from China – is that the Democrats have now taken over where the Republicans left off – following the same route and weaving the same path towards trade nationalism. The sentiment on Capitol Hill is now firmly against China with little resolution or softening in sight.

In an excellent speech articulating the probable Biden agenda at the Brookings Institute on April 29, 2023 – National Security Advisor (NSA) Jake Sullivan talked about the new economic direction for the Administration as a “foreign policy for the middle class.” His speech probably frightened many retail and sourcing leaders – as NSA Sullivan discussed “moving beyond traditional trade deals” and asked the question as to how trade fits “into our International economic policy, and what problems (trade) is seeking to solve?”

Looking towards China, NSA Sullivan also repeated what has become the cornerstone trade-with-China phrase (from Ursula van der Layen – President of the European Commission): indicating that dealing with China is about “de-risking and diversifying – not decoupling.”

As Peter Navarro’s 7 sins unfolded, retail was forced to take a hard look at their individual China positioning. Questions arose when analysts asked companies to explain the percentage of their reliance on China. If the response was too high of a percentage, that quickly became a problem for the company. Factually, the retail world is STILL heavily reliant on China, and while de-risking is an option, decoupling is not.

On a daily basis, retailers know that inventory is just another name for money. If the cost of inventory goes up, retailers must raise their prices, and that generally triggers the sale of less units. Plus, if the cost of consumer credit cost also rises, and personal debt increases, then less units are purchased – leaving the retailer with too much inventory.

The bottom line to all this – is that the debt crisis has heightened awareness of the cost of money and inventory. Couple that with high interest rates and a slowdown in consumer spending and all this has the potential for a direct path to retail bankruptcy court. The hope is that something will change, that the cost of inventory will drop, and the debt ceiling issue will be resolved. However, retail still needs to push back on the newly articulated trade vision from the Biden Administration or, for sure, there will be a void of new import partners – and that alone could be the iceberg that finally sinks the retail trade ship.

Retail will forever recall the great businessman and politician Ross Perot who once said:

“Inventories can be managed, but people must be led”