How Do Trump's Tariffs on China Affect the U.S. Cannabis Industry?

President Trump's tariffs on China could potentially increase the prices of certain cannabis products, as the industry heavily relies on Chinese manufacturing. However, some companies have already begun to diversify their production in order to mitigate the rising costs.

Since the beginning of President Trump's second term, he has imposed tariffs on imported goods from China, Canada, Mexico, and the European Union. Despite facing potential economic challenges and market fluctuations, these measures are aimed at encouraging domestic manufacturing in the United States, protecting jobs, and addressing trade imbalances, among other issues.

In February, Trump imposed a 10% tariff on all Chinese imports, which was subsequently increased to 20% in March. Combined with the tariffs levied during his first term, the total tariffs on certain Chinese goods have now reached as high as 45%. In response, China imposed additional tariffs of 10-15% on American food products, further escalating trade tensions between the two countries.

Trump's trade war has impacted a wide range of industries, and the cannabis industry is no exception, experiencing unexpected ripple effects that many did not anticipate.

Move out of China

Although the U.S. federal government has declared the import and export of cannabis products such as marijuana flowers and hashish as illegal, the industry still heavily relies on imports from China for a wide range of items, from large-scale equipment necessary for cannabis cultivation, related machinery, and accessories, down to smaller items like vaporizers, batteries, cartridges, and even packaging materials.

Tariff increases are compelling leading cannabis companies, particularly manufacturers of cannabis vaporizers, to relocate some of their production facilities from China to other Asian countries in order to maintain competitiveness. Currently, Malaysia, Indonesia, and other parts of Southeast Asia have become hotspots for such relocations.

Michael Wang, the Co-CEO of the renowned e-cigarette manufacturer Wismar Technologies, stated that the company established a manufacturing base in Malaysia three years ago. He anticipates that geopolitical risks and tariff increases will persist.

Similar to ISPR, Justin Tacy, the Vice President of Marketing at PAX, a cannabis brand that sells cannabis products and vaporizers, also relocated part of their production facilities to Malaysia during the first term of the Trump administration. While addressing the challenges posed by tariffs, Tacy is more concerned about the broader impact they have on the industry and consumers.

"High marijuana taxes coupled with tariffs could lead to increased costs, potentially driving consumers towards the illegal market or forcing producers to cut costs, thereby affecting product quality," Tacy added. "Currently, companies can still absorb the cost increases brought by tariffs without raising the purchase prices for consumers."

In reality, while some cannabis companies are relocating part of their production facilities from China to avoid tariff increases, they must also prepare themselves to deal with the potential tariff war between the United States and Canada.

Fredrik Rading, Co-Founder and Chief Operating Officer of Custom Cones USA, manages a business that primarily imports pre-rolled paper cones, plastic tubes, and glass tubes from China and Indonesia, and exports some of these products to Canada. The company also utilizes triangular shipping, where materials are first sent to Indonesia before the final products are imported into the United States.

However, the continuous rise in tariffs has prompted Custom Cones USA to shift from Chinese plastic tube suppliers to American suppliers whose pricing can "match the landed cost of Chinese products," although completely replacing Chinese manufacturers remains a significant challenge.

In terms of exports, Fredrik Rading stated, "Canadian customers are concerned about tariffs and are looking to reduce their reliance on U.S. suppliers. Some customers have even downgraded us to a backup supplier, preferring Canadian alternatives instead. Our export volume is currently around 15%, and I wouldn't be surprised if it drops to around 10%." To reduce costs, the company is exploring the possibility of shipping directly from Indonesia to Canada.

Relying on China's Manufacturing Hub

In fact, major companies are striving to reduce their reliance on Chinese manufacturing, but this is no easy task. China possesses everything that cannabis companies need for their production lines, all of which have been accumulated through years of experience. Relocating production facilities to other Southeast Asian countries is also challenging, as China controls certain key components and possesses expertise and technology that are difficult to replicate.

Michael Brosgart, President of the cannabis vape company Active, stated that two years ago, they relocated the production of vape pen cartridges, all-in-one devices, batteries, and automated filling and capping components from China to a broader region in Southeast Asia. This move was aimed at reducing regional risks, stabilizing costs, and enhancing the reliability of the supply chain. However, although they have not been directly impacted by tariffs, they are now facing logistical bottlenecks and new import regulations caused by the tariffs.

"With the Customs and Border Protection constantly revising import regulations and documentation requirements, we are witnessing increasingly severe delays at U.S. ports," said Brostoff. "In the face of all this, diversifying production outside of China has played a crucial role."

However, shifting production from China to other Southeast Asian countries will encounter short-term challenges due to the continued reliance on China's efficient supply chain. While it may be beneficial in avoiding tariff increases, small-scale production can lead to additional costs, logistical hurdles, and longer lead times. Nevertheless, Mr. Wang, the CEO from ISPR, also mentioned that as the supply chain evolves, countries like Malaysia and Indonesia will become more competitive in the long run.

"For instance, in the short term, products manufactured in Malaysia are 15% to 20% more costly than those made in China. However, when a 45% tariff is imposed on Chinese goods, Malaysia will gain a significant advantage—a total cost advantage of nearly 30%," said Mr. Wang.

The Impact of U.S. Tariffs on China on the Cannabis Industry

Despite the possibility that increasing tariffs on certain Chinese products may have a negative impact on the cannabis industry in the short term, some American companies believe that, in the long run, the cannabis industry will make adjustments.

Tacy from PAX Corporation explained that tariffs could raise prices, pushing consumers toward illegal markets and forcing small businesses to close due to the inability to bear the increased costs, leading to industry consolidation. This might stifle innovation but also reduce competition. The President of Active, Broskate, added that in the long run, higher costs could become a turning point for the industry, promoting the development of a more decentralized and resilient supply chain, reducing dependence on any single country, ultimately making the industry stronger.

However, if Trump's trade war aims to use tariffs to revive American manufacturing, this may not bode well for the cannabis industry.

Mr. Wang explained that the U.S. manufacturing industry needs to fully automate to survive because the high cost of labor makes small-scale production inefficient. To maintain competitiveness, the U.S. must focus on long-term, large-scale automated production, as any changes can disrupt this process.

In this sense, Brosgart indicates that while his company has already invested in automation and established efficient production processes, the high cost of labor in the United States and the dependency on Chinese components still remain hurdles. With ongoing innovation and supply chain adaptation, we will witness the emergence of manufacturing in various jurisdictions most suited for it, potentially including the United States itself.

"However, due to the highly specialized nature of the e-cigarette supply chain, Tacy explained that the United States currently does not possess the necessary expertise. It's simply not possible. The issue isn't about cost, but whether there are companies capable of taking on the burden of research and development."

Finally, the founder of Custom Cones USA, Rading, pointed out that moving the production of glass tubes to the United States is not feasible due to the lack of domestic suppliers and the massive volume of orders. Furthermore, even if tariffs necessitate the relocation of plastic tube production to the U.S., the glass tubes would still be sourced from China.

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