China's Conversation with Walmart: Are Retail CEOs Underestimating the Impact of Tariffs?

TradingKey - According to Bloomberg, this week Chinese authorities summoned Walmart officials due to the retailer pressuring some Chinese suppliers to lower prices in order to absorb the costs associated with U.S. tariffs. 

Walmart and other American retailers have informed certain suppliers that they would like discounts on products made in China. Meanwhile, these suppliers are being asked to shift production outside of China.

Chinese officials have formally called upon Walmart representatives to clarify the company's actions, asserting that it is irresponsible and unfair to Chinese suppliers. So far, few suppliers have complied with this demand, as Walmart's low-price procurement strategy has significantly squeezed their profit margins.

Officials have issued implicit threats, warning Walmart that pressuring suppliers to reduce prices may breach contracts and disrupt market order, with potential legal ramifications. They further indicated that consumers shopping at Walmart could readily find substitutes.

Walmart representatives stated that they would collaborate with Chinese suppliers to find solutions that protect the interests of all parties involved.

Trump aims to address the U.S. trade deficit through tariffs and has opted to impose an additional 20% tariff on top of existing tariffs, placing China in a challenging position. The country is grappling with sluggish domestic consumption and relies heavily on exports for economic support. 

However, this predicament also complicates matters for U.S. retailers like Walmart. Moreover, China has responded with retaliatory tariffs on U.S. energy and agricultural exports.

Notably, tariffs will also apply to products from Canada and Mexico, in addition to those from China.

Walmart CEO Doug McMillon noted during the company’s latest earnings call that they have been managing tariffs and believe they can effectively navigate such challenges. 

Is that really the case?

Walmart executives revised their 2025 outlook downward, citing macroeconomic uncertainties, including tariffs. Consequently, the stock experienced a 6% decline. Furthermore, in 2024, nearly 28% of their sales growth was attributed to China.

According to the Alliance for American Manufacturing, approximately 80% of Walmart’s suppliers are located in China, providing a wide array of products, from clothing to household appliances and certain food items. The company also maintains operations in Canada and Mexico. This reliance implies that Trump's fluctuating tariff policies might have a more pronounced impact on Walmart's overall performance compared to other companies.

Some retailers are exploring alternative suppliers outside the affected regions. However, restructuring supply chains is a complex and time-intensive process that may not yield immediate relief. Despite efforts to realign supply chains during Trump's first term, a significant volume of imports still flows from China.

Not all retail executives remain optimistic regarding the situation. Kroger's leadership anticipates that the prices of fresh produce, such as lettuce, along with other staples imported from warmer climates in Mexico during winter months, will rise. This trend also affects the expanding grocery operations of major retailers like Walmart and Target. Cornell indicated that if tariffs are enacted, consumers could witness price increases on fresh fruits and vegetables within days.

Costco CEO W. Craig Jelinek revealed that approximately one-third of Costco's U.S. sales derive from products sourced internationally, with less than half originating from Canada, Mexico, and China.

Best Buy and Target rank among the top ten online retailers. During their earnings calls at the end of February and early March, both companies, along with others such as eBay, expressed uncertainty about how to incorporate tariffs into their operations as they begin to diversify their supply chains.

Best Buy CEO Corie Barry stated, “Tariffs at this level will result in price increases.” She further underscored, “International trade is critically important to our business and the industry. The consumer electronics supply chain is highly global, technical, and complex, with China and Mexico remaining the primary sources for the products we sell.”