President Trump pleased the country’s millions of e-cigarette smokers by ousting a surgeon general who opposed vaping for public health concerns in 2017. That surgeon general, Vivek Murthy, was supposedly dismissed for a controversial report on the effects of e-cigarette use. Several industry publications and pro-industry science groups challenged this report citing that Murthy published purposefully negative findings. With such a move, Trump won praise among e-cigarette users and industry leaders. But, that praise could soon vanish.
As a part of Trump’s global trade war, the administration has proposed levying duties on an additional $16 billion of imported products from the People’s Republic of China. Given that most vaping devices are manufactured in China and are targeted products, Trump’s proposed 10 percent to 25 percent levy could threaten the growing industry.
Bloomberg’s Mark Niquette and Matthew Townsend covered this topic in an excellent expose published July 20. Niquette and Townsend report that Trump’s tariffs on vaping and e-cigarette devices from China could diminish American jobs and close various small businesses.
First, it’s not a surprise that vaping has become a billion-dollar industry. The Vaping Technology Association represents more than 600 manufacturers, wholesalers, distributors and retail shops all over the world, signifying that this industry is a global market. Large multinational tobacco giants like Altria, Reynolds American, Philip Morris and Imperial Brands also play in this market. But, the majority of these firms are small businesses. There are more than 10,000 vape shops all over the United States.
Due to a volatile regulatory climate in the United States attributed to the Food and Drug Administration, most manufacturing is done overseas. According to the Bloomberg report, industry conditions are so toxic that there are “no realistic prospects for anyone to open a factory in the U.S.,” until 2022. At that point, the FDA would have determined which vaping products are approved for sale within the United States under a defined national regulatory regime. Even at this point, chances of a sustainable market are relatively bleak.
Chinese manufacturing thus becomes the only market-viable option for American distributors and sellers. Americans are the global leaders in creating e-liquid for vape products; given this market climate, the only vape imports coming to the United States are overwhelming sourced to manufacturers in China.
The Government Accountability Office reports the United States earned $9 million in tariff revenue on $342 million of imports in 2016. Imports from China accounted for 91 percent, or $313 million, of overall imported products. Simply put, most of the industry’s imported products — vape devices, parts and components, and non-American made e-liquid — are sourced to Chinese manufacturers.
Sixty percent of all related imports are e-cigarette and vaping devices, 32 percent are parts and components, and a remaining 9 percent is e-liquid. The same GAO report also indicates that at least 98 percent of customs value for these devices derives from trade with Chinese firms.
With this data, the 25 percent levy on vaping devices will add to current tariff rates between 1.9 percent to 6.5 percent of dutiable customs values of imports from China and 40 other countries. Proposed tariffs on components range from 10 percent to 25 percent.
According to the presented data and calculations factoring in Trump’s proposed levies, the existing market will hit a negative, downward curve if tariffs are enacted. This is troubling. The vaping industry is expected to exceed $61 billion in 2025 with an average compound annual growth rate of 20.8 percent over the next 10 years. Trump’s trade war could hinder this ambitious growth.
Going back to the effects on small businesses within this industry, Trump’s tariffs could also shut down an entire segment of the American market. Given the slim margins of running a vape shop, a tariff levy could shut down entire chains.
Gregory Conley, the president of the American Vaping Association, said in testimony to a panel of the U.S. Trade Representative’s Office that “a rapid rise in the tariffs assessed on vaping products will only result in a tax increase on American businesses and consumers.”
“Worse, it will narrow the price differential between combustible cigarettes and vaping products, which will discourage adult smokers from switching to these harm reduction products,” Conley said.
Conley further argues that the tariffs add to a state of growing uncertainty thanks to the FDA’s 2022 regulatory goal. According to some projections, FDA’s deeming regulations and their proposed effectivity date could force the closure of 90 percent of all domestic e-liquid producers. Tariffs are ultimately another punch in the gut. Regardless of where you stand on vaping, all of Trump’s duties and tariffs threaten far more than just a few global competitors. Trump has justified his massive trade war — started by washing machines, of all things — as a means to protect intellectual property. In no way does Trump’s new round of tariffs or past levies do that.
Competitive Enterprise Institute senior fellow Ryan Young agrees.
“Instead of punishing intellectual property theft, the Trump tariffs will hurt American consumers and producers who had nothing to do with IP theft,” Young argued last month. In addition to hurting American consumers, Trump has ruined the institution of free trade by levying a series of de facto taxes on said consumers. In the immediate case of e-cigarette and vaping devices, mountains of academic work support the sentiment that these tariffs are taxes.
University of Illinois-Chicago scholars Jidong Huang, John Tauras and Frank J. Chaloupka published research in the scholarly journal “Tobacco Control” in 2014, directly attributing tariffs and taxes on these products as a diminishing factor to overall sales.
“Policies increasing e-cigarette retail prices, such as limiting rebates, discounts and coupons and imposing a tax on e-cigarettes, could potentially lead to significant reductions in e-cigarette sales,” they concluded. Provided that this research does approach the topic from a public health standpoint and addresses concerns that challenge the industry, the point remains.
Tariffs, in general, are regressive taxation methods that harm all components of the direct and indirect industry. As scholar Robert W. McGee wrote in a 1999 piece for the Journal of Accounting, Ethics & Public Policy, “Tariffs are a form of sales or excise taxation in the sense that they force people to pay more for a product than would be the case in a free market.”
Trump has proven himself a hypocrite and must attest for his verbose politicking at the expense of the American taxpayer, consumer, and — above all — his support base. These proposed levies could also destroy the meteoric growth of recent years in a wildly pro-Trump industry.
