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Trade War a Threat to U.S. Cannabis Companies?

The cannabis industry is well on its way to becoming a multi-billion-dollar global industry. Unfortunately, cannabis companies in the United States are already being forced to play catch-up against their global competitors, and a trade war with China could further devastate U.S. interests.

While the cannabis industry explodes in Canada — a trend most recently exemplified by Constellation Brands’ CA$5 billion investment in Canopy Growth — and legalization opens up new opportunities in western Europe, U.S. companies are struggling to keep up, despite promising retail growth figures. That is because the United States’ traditional competitive advantages are being nullified: state-level regulation means companies are competing in smaller markets, rather than a large, unified one, and Fed overhang has stalled access to crucial institutional capital. As Canadian producers cut licensing deals and secure footholds around the world, U.S. companies are left struggling to build out even mid-sized multi-state infrastructure.

The degree to which U.S. companies will be able to “catch up” will of course depend largely on how far ahead their competitors are by the time the U.S. legal environment changes to become more favorable to the industry. International markets could be locked up by the time U.S. companies really “get in the game,” and even if U.S. companies succeed at fortifying their domestic markets, they will become highly vulnerable once the market is opened up and companies like Canopy spend billions of dollars rolling up assets.

The United States’ trade war with China could significantly exacerbate these disadvantages. Generally, the costs of tariffs – such as those imposed in June on $50 billion worth of Chinese imports “containing industrially significant technology” — are borne by the consumer. When costs go up, consumers tend to look for alternative options, which governments in most cases hope is a domestic product. However, with cannabis, the alternatives will likely consist of black- or grey-market products; either products manufactured illegally, or else products smuggled in without tariffs that work with other legal products. Cannabis, having only been recently legalized at the state level in many jurisdictions, has already been forced to compete with black-market alternatives in California.

Perhaps the best illustration of how a trade war could push consumers to a black/grey market — and risk U.S. companies’ future competitive advantages — lies in the proposed tariffs on vaporization hardware and products. The 25% tariffs proposed in May by the Office of the United States Trade Representative (USTR) include “personal electric or electronic vaporizing devices,” including vaporizer batteries and pre-filled cartridges.

Cannabis concentrates, including vape cartridges, is currently the fastest-growing consumer segment of the cannabis industry, estimated to comprise up to 30% of sales in some markets, and with the potential to overtake flower as the primary consumption method in the near future. In 2017, the U.S. imported more than $42 million worth of vaporizer products from China, a 92% increase in the importation of these products from 2016.

The tariffs on vapor product devices are unlikely to change consumer preferences; people will continue to consume cannabis in their own desired way, and if prices get too high as a result of duties, consumers will look to grey- and black-market products as alternatives. This is especially likely given the nascent nature of the industry: cannabis is only recently legal in many states, and the black-market infrastructure is already well established.

Of course, vaporizer hardware and products manufacturers, including Pax and e-cigarette market leader Juul Labs, will feel the pain of any large-scale shift among consumers to grey- or black-market alternative products. But the shift will also significantly damage the broader cannabis market, as U.S. companies lose share to non-licensed competitors, states lose tax dollars, and consumers are pushed into unregulated markets. Money that would ostensibly be going to U.S. cannabis companies — which could conduct crucial R&D to innovate on products and medicines, build infrastructure and distribution capabilities, and attract top talent – will instead disappear underground. Meanwhile, global cannabis companies will remain unencumbered by these issues, and will continue to consolidate their leadership positions.

Other factors also contribute to the strong headwinds facing U.S. cannabis companies. Issues including a lack of access to banking, a lack of access to institutional capital, and tax complexities are already causing U.S. companies to lag behind their global competitors. In fact, my company, Tidal Royalty Corporation, was founded to help provide banking, financing, and regulatory guidance to cannabis companies in challenging markets. U.S. companies will need to meet these challenges head-on to acquire dominant market position in the global cannabis industry.

The current legal environment in the United States already poses significant challenges to U.S.-based cannabis companies seeking prominent position in the industry. A trade war could be catastrophic not just to consumers, but to state coffers, and to the position of U.S. players on a global basis for the foreseeable future.

 

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