After a lot of speculation over the last few months, the US Government has confirmed that it will impose 'reciprocal' tariffs on other countries.  Most commentators disagree with the characterisation of these as reciprocal tariffs.  By way of example, the new tariff on goods to be imported into the US from China will be 34%, from the UK it will be 10% and from Thailand it will be 36%.  The US Government also announced a minimum baseline tariff of 10% from across the world.

Background

Generally speaking, a big driver for imposing tariffs on the import of goods manufactured in another country is to safeguard and to encourage the growth and development of the importing countries own manufacturing industry.  The theory being that doing this will help create jobs, encourage economic growth and make a country less reliant on the whims of other countries.

Impact on the video games industry

The gaming industry very much relies on a properly working global supply chain - whether that is for consoles or graphics cards made in China or physical video games produced in Mexico.  The imposition of tariffs imposes significant frictions in the movement of goods (both economically and administratively) and can lead to the re-routing of supply chains.

For video games companies who export goods to the US, the points they will need to give careful consideration to going forward include:

• what is the origin of the good?  If you import a console made in China into the UK and then onward sell it to a US customer the console will retain its origin of China (and so the tariff that applies to imports from China into the US will apply to it) unless the UK seller has done something to substantively transform it in the UK;  
   
• for larger games studios, should at least part of their manufacturing capability be relocated to countries to which the new tariffs won't apply?  A decision to relocate should not be taken lightly.  It can often take years to do, will involve relocation costs and you still run the risk that the new tariffs are expanded to country you have relocated to in the future (which is what has now happened with the new 46% tariff for imports into the US from Vietnam – a country to which manufacturers had previously relocated from China to);
   
• or should larger games studios relocate part of their manufacturing capability to the US itself?  Donald Trump announced that Apple, Nvidia and TSMC have committed to investing hundreds of billions of dollars between them directly into building plants in the US.  This is helpful in the sense that US import tariffs won’t apply to goods made in the US, but if other countries impose rebalancing/retaliatory tariffs on exports from the US, it could make it difficult for those companies to export goods from the US to the rest of the world;
   
• what terms are used by them in their existing contracts for exports to the US and do they need to change them for future contracts?  Is the video games company responsible for US import clearance (and paying import duty) under those agreements or is that the responsibility of their US customers?
     
• should games studios continue to focus more on selling digital games as opposed to physical video games?  This has long been the trend, and despite the impending launch of the Nintendo Switch 2 scheduled for June this year, tariffs on physical media could just accelerate the move to digital-only sales (although the question of whether the US Government could 'tariff' digital sales has also been raised, see below);
   
• given the ever-increasing price for customers of video games (it’s anticipated that GTA 6 will cost somewhere between £60 and £100) how much of the additional tariff cost can be passed onto customers? and
   
• for international companies and groups, they will need to decide how much of the tariff cost is borne by local customers (so, customers in the country imposing the tariffs) and how much is borne by its customers on the international market more generally?

What about a software tariff?

While there has been discussion on whether the US Government would impose a tariff on cross-border software and other digital tools, so far such a tariff has not been implemented.  If it were to be implemented in the future, given the cross-border nature of many international studios, this could lead to such studios refocusing on having centralized hub studios in specific countries (as opposed to having specialist teams spread across a number of different countries).  Such a move would slow down game development in the short term and could increase the cost of game development in the longer term.

Final thoughts

Given the shifting mood on the global stage towards protectionism, it is likely that this is not the last tariff related changes we will see in the near future.  The current round of US tariff changes will likely see the imposition of rebalancing (or retaliatory) tariffs by countries affected by them.  As we enter a new era of trade and customs, countries (including the US) will likely take the opportunity to renegotiate existing trade agreements.  The video games industry will need to remain agile in the face of a changing customs world.