By now, it is no hidden fact that the price of goods across the sector are about to be hit with a massive hike. In order to prevent having to absorb the excess costs, whilst also preventing the burden from falling on to their customers, retail giant Costco is following in the footsteps of its peer Walmart by making a risky request to its suppliers based in China.
Tariffs imposing major trouble on retail sector
In what is alleged to be a bid to increase support for locally manufactured goods, President Donald Trumped made the executive decision to impose a significantly higher tariff fee on good imported to the United States, particularly from Mexico, Canada, and China. The second reasoning behind this impactful decision was to curb the trade of fentanyl and prevent its entrance into the country.
Whilst on paper these seem like solid enough reasons to impose such a high tariff, the practical applications are leaning closer to disastrous and retailers across the sector are scrambling to find a solution to prevent losses associated to these tariff hikes.
The unfortunate truth of the matter is that consumers are the most likely to bear the brunt of this tariff war. Even if retailers look into relocating manufacturing to America, it is not something that can be achieved on such short notice, nor is it cheap.
Costco makes controversial request
As these increased tariffs continue to pressure retailers, Costco Wholesale has made the decision to follow in the footsteps of Walmart and appears to have asked its suppliers in China to slash their prices.
The idea is that the suppliers would absorb the excess costs from the tariffs so that these big box retailers do not have to impose a price hike on their goods that will likely cost them their customers. Additionally, it will mean that the company does not have to absorb the costs internally either, thereby saving their bottom line.
Chinese suppliers have already been struggling with close to invisible margins and tariffs for years and Trump’s decision to increase tariffs on goods from China to 20% is now an added pressure. As such, these suppliers are not responding in kind to the pressures from U.S. retailers to cut their prices further and understandably so.
In a statement shared to the Financial Times, a Costco supplier shared that, “larger suppliers have the muscle to weather the additional costs, but smaller suppliers are at risk of getting squeezed, and ultimately, screwed.”
Costco CFO, Gary Millerchip shared that the company was aware of the impending tariff hikes back in December 2024. Millerchip also revealed that the retailer had taken some preemptive steps to forward order inventory to ensure their warehouses run smoothly in case of supply chain disruptions as best they can.
“If certain imported items became less competitive due to tariffs, Costco would replace them with better-value alternatives,” he added.
Approximately one fourth of the warehouse giant’s business can be attributed to non-food items and since a portion of those are imported, the company has been faced with tariff related tensions.
Despite being known for its competitively low pricing, Millerchip has warned that the warehouse may have to raise the price of its membership for U.S. based customers. He cited that “tariffs raise costs” as the main driving force behind this possibility, however, he did also acknowledge that it would not yield a positive outcome.
When Walmart pressured its Chinese suppliers to absorb the excess tariff costs, the supermarket giant was harshly criticized by Chinese officials, as well as China’s Ministry of Commerce. According to the Wall Street Journal, Walmart’s request was described as “unfair and irresponsible.”