Trump’s tariffs look set to ruin the US vaping industry and send consumers back to cigarettes en masse thanks to sky high price rises. To understand why, and in particular why this is so acutely bad for vapes in particular, we need to understand two things: the role of China and the role of taxes.
The co-founders of Clearing the Air – Neil and I – used to run an online vape retail business. So we know a little bit about how the economics of this work.
Let’s start with China.
While there is still some (very limited) production on liquids for vapes in the US, every single vape device in circulation anywhere in the world today is manufactured in the Bao’An district of Shenzen. No other country – particularly the US – has ever shown any interest in bringing this kind of high-throughput, low added value electronics manufacturing onto their shores. The Chinese have been doing it for decades and they’re pretty good at it. Why bother?
So let’s focus on vaping devices, since they’re the simplest to deal with. This is where we need to understand how State excise taxes work, and how the interplay between them and tariffs automatically creates a vicious circle, where taxes are levied upon taxes which are levied upon taxes.
With the new 34% tariff rate announced last week coming on top of the 20% that was already in place, the effective rate on vapes coming into the US from China will be 54%.
Lets say a finished, packaged, open system vape device – like the one Neil and I used to sell when we owned vaping.com – costs around $10 from China today on an ex-works basis (meaning for collection at the point of manufacture in China). Normally, you’d expect to pay about $25 at retail, which is about what we used to charge.
In a post tariff world, the price that the importer will pay for landed goods in the US including the tariff will be $15.40. Delivery will add about another 20 cents to that.
That importer will then usually act as the wholesaler, and in a lot of States, that’s where tax is applied. So let’s say the wholesaler needs to make a 30% margin to stay in business, which is about normal from my experience. In a situation without a State Excise tax, that means they’d charge the retailer $20.28. But in States where there’s a wholesale tax, you’ll need to add that on top.
Pennsylvania, for example, charges a 40% wholesale tax, so the price the retailer pays shoots up to $28.39.
(If you’re interested in how vape taxes work in your state, the Tax Foundation has a useful explainer)
As a general rule, retailers double the wholesale price. In Pennsylvania, that means the vape that used to cost you $25 before tariffs and excise now costs $56.78. Call it $60, which is what most retailers would say in this situation. A price increase of $35, or over 140%.
In a State like Florida (with no vape excise), the device now costs $42, a $17 increase.
But wait, there’s more.
Pennsylvania also has a sales tax of 6%, so the end user actually ends up paying $63.60. Pre-tariff but post-tax, that device would have cost $39.
Not only has the consumer had to pay the tariff (a tax), but that tariff has been multiplied up by state tobacco excise taxes (also tax) and sales tax (again, a tax). That’s how a tariff of just $5.40 at the border means an increase in the price to the consumer of more than twice that in some states, with most of the increase being taxes levied on taxes levied on tariffs. And that’s before you put any liquid into the device.
A pack of cigarettes in Pennsylvania costs around $11.
That’s less than the tariff induced and excise-exascerbated price increase in the vaping device. And that’s before you’ve even bought your juice.
Still, I guess most cigarettes are made in America, right?
In practice, what you’ll now see in the US is an explosion in the black market. You won’t be able to avoid the tariffs at the border, but you’ll see a lot of vapes mislabelled as dildos. Then, once they’ve paid the import tax, they’ll disappear into the black market, where no one can track them. You’ll also see lots of those $10 ex-works vapes declared at – say – $2, to avoid the full value of the tariff, leading to an enforcement nightmare scenario at customs.
For us in Europe, we’ll see a lot of dumping of product that was headed for the US onto our shores, supercharging the black market here too. Public health groups and regulators will do what they always do: blame the apparently omnipresent “big tobacco” for a problem created by ill-fitting regulation thousands of miles away. That will increase calls for more taxes here; or indeed higher import levies. And those additional levies will simply continue to fuel the black market.
It’s the very definition of a vicious circle. Perhaps now we’ve identified it, we can avoid it.
