Within the realm of tourism, the trade war between the United States and China is likely to have a significant impact on luxury retail. And yes, luxury retail is a major player in the tourism industry.

While Chinese buy roughly one-third of the world’s luxury goods, 73 percent of this consumption occurs outside the country, according to estimates from Bain & Company, a global management consulting firm. Statistics released by the Chinese Tourism Academy and Ctrip show Chinese travelers spent more than $115 billion during their overseas trips in 2017.

The Outbound Chinese Tourism and Consumption Trends Survey, jointly issued by Nielsen and Alipay, contrasted overseas spending patterns of the Chinese with travelers from the United States, the United Kingdom, France, Japan, and South Korea. Nielsen found that the Chinese not only spend more on shopping per person when abroad ($782 versus $486), they prioritize shopping in their budgets.

Outbound Chinese actually spent more of their budgets on shopping (25 percent) than on hotel accommodations (19 percent) and dining (16 percent). The non-Chinese tourists spent the highest proportion of their travel funds on hotel accommodations (29 percent), followed by dining (18 percent) and shopping (15 percent).

Given that Chinese tourism to the United States has started to slow recently — in fact the number of visitors actually dropped last year from 3.2 million to three million — the impact on luxury retail could be monumental.

”The Chinese tourism market is so important to a luxury company that it can fuel up to double-digit growth versus a decline. It’s critical in terms of the number of people traveling and the value of their purchases,” said Milton Pedraza, CEO and founder of research and consulting firm The Luxury Institute.

Chinese spending dynamics fuel global luxury sales.

“China continues to dominate the luxury scene,” said Claudia D’Arpizio, a partner with Bain & Company and co-author of the Bain Luxury Goods Worldwide Market Study Spring 2019, presented in collaboration with Fondazione Altagamma.

Geopolitical Dynamics

However she warned that “geopolitical uncertainty [could] shape and reshape tourism spending patterns.”

The Nielsen and Alipay survey found that 47 percent of Chinese globetrotters surveyed stated that safety of the destination would affect their travel choice. While 45 percent cited ease of visa procedures a prime consideration, and 35 percent felt it important that the locals make them feel welcome. All of these factors are coming to the fore in 2019, thanks to China’s new travel warning against coming to the United States and Trump administration policies.

“Some Chinese consumers are already alienated due to the current political rhetoric, and the Chinese government has fueled the flames [with its recent travel warning] by saying people may not want to go to the United States because of the crime, when it’s really about trade wars,” said Pedraza.

If the Chinese feel unwelcome or are encouraged not to come to the United States by their government, the expected shrinkage of tourist market share does not bode well for U.S. luxury retailers.

Their international luxury spending was already on the decline, as the Chinese government has been encouraging high-end spending at home by price harmonization policies and governmental initiatives, like reduction of consumption taxes.

“Since last year, European brands including Louis Vuitton and Hermès, have lowered retail prices in China in some categories, after authorities cut import tariffs on a range of consumer goods as part of Beijing’s effort to encourage domestic consumption,” said the Nikkei Asian Review.

Shift in Spending

As a result, spending patterns suggest that Chinese shoppers will soon make half of their luxury purchases at home.

“Our belief is that the split between shopping abroad and shopping at home will shift from 75-25 a few years ago to an equitable 50-50 split within the next 12 to 24 months,” HSBC’s consumer and retail research division suggested.

Does that merely mean that consumers will buy Gucci and Prada at home rather than on the road? Maybe. But for American luxury companies, a trade war with China could mean that, according to Pedraza, “U.S. luxury imports into China could be hit with tariffs while European products will not.” And that will impact profits.

For an example, look no further than Tiffany & Co. This month, the jeweler reported a decline in first-quarter tourism-related sales, with CEO Alessandro Bogliolo singling out the massive decrease of tourism spending from China as a key reason to lower the company’s full-year outlook.

Additionally new tariffs could spell smaller profit margins on goods sold in China. All of which points to a very challenging future.

Photo Credit: The Hermès Spring-Summer 2019 Ready-to-Wear collection fashion show in Paris. The trade war between China and the United States threatens the luxury goods industry. Bertrand Guay / AFP via Getty Images