Those of you following the news will be aware that President Trump has imposed substantial tariffs on thousands of products that Americans purchase from China. Many industries will be affected by this policy and the cannabis industry is no exception. This article explains all the possible ramifications that the tariffs will have on the different areas of the legal cannabis industry.
Hit hardest will be companies that produce and manufacture vaporizers. Since almost all the components used to manufacture vapor products come from China, there will be an increase in production costs which may be passed along to consumers in the US. The expectation is that vaporizers, vape pens, vaping device batteries, pre-filled pod and cartridges, lighters and butane will soon cost more. Vaping products account for the largest growing slice of the cannabis market.
Here is how the tariffs affect businesses:
- Those who use imported Chinese products are facing an increase in production costs either due to using more expensive US made goods or paying more for the Chinese imports.
- The tariffs hit those who use intermediate goods or parts in order to make their finished products. This will affect many small to medium-sized companies.
- The end result of the tariffs will be to pass the cost onto consumers, to cut the workforce, or to force companies to leave the US altogether to avoid the tariffs.
Cannabis owners will have to decide whether to pass the increase on to consumers or to absorb the cost themselves. This may be a make or break situation for small companies who are struggling to survive. Because cannabis is still federally illegal, cannabis companies are not allowed to deduct their business expenses from their taxes. Also affected is their lack of access to banks, business loans and lines of credit. That has a big impact on their profit margins.
My initial question was why aren’t there any American companies manufacturing vaporizers and their components? The simple answer is cost. While there are vaping companies that engineer their products in the US, they manufacture the finished product in China. American companies just cannot compete with Chinese companies.
In addition to the vaporizer industry, other cannabis related products will also be affected. These include:
- Lighting equipment for growers
- Steel for greenhouse facilities
- Extraction equipment which typically uses steel and aluminum from China
- Cell phones, computers, televisions and other technology equipment
Instead of spending their time running their operations and developing new technologies, cannabis manufacturers are having to look for new American suppliers in order to avoid having to pass on the tariff increases to consumers. If they are unable to do so, they risk remaining competitive with other similar manufacturers.
Arnaud Dumas de Rauly is Co-CEO of The Blinc Group. His company develops technologies and sells vape products as well as other cannabis paraphernalia. In July, he testified as part of The Office of the US Trade Representative public hearings regarding the proposed tariffs. He is convinced that the tariffs will increase prices for American medical cannabis patients who use vaping products. In addition to higher consumer costs, Dumas de Rauly sees a ripple effect of the tariffs. Higher prices means decreasing sales which leads to a decrease in tax income for each state.
Companies are trying to avoid having to raise their prices. Some are sharing the cost of the tariffs with their customers. Convectium, the top global provider for vape products and equipment, has announced that they will not increase their products by the entire 25% tariff. They are one of the companies whose products are engineered here in the US, but who manufacture and import the finished goods from China.
Some companies who use Chinese steel and aluminum were able to buy enough of it before the tariffs were imposed. They will be able to keep their prices from rising. If the tariffs are not rescinded, over time, every company will have to choose whether or not to pass the costs on to consumers or absorb them and take a reduction in their profits. For many companies with a very small profit margin, this has put them in a terrible position.
Source: Forbes.com, Trump Tariffs Set To Hit Cannabis Industry, Julie Weed, August 12, 2018
MJBizDaily.com, How Trump’s Trade Battles Are Affecting The Marijuana Industry, Bart Schaneman, August 2, 2018