2 Ways Tariffs Could Impact Amazon's Business

If artificial intelligence (AI) has been the buzzword for the last two years, then the new keyword is tariff.

The latest tariff proposal on countries globally (temporarily set at a flat rate of 10% on all countries except for China at 145% for the next 90 days as of this writing) will be a game changer for all companies.

This article aims to investigate the impact of tariffs on Amazon's (NASDAQ: AMZN) business in the short and long term.

Image source: Getty Images.

Tariffs will directly impact the e-commerce businesses

Amazon has been the most successful e-commerce company over the last two to three decades, riding on megatrends like the internet and globalization. The former allows it to reach global consumers directly, while the latter is the engine behind its massive supply chain, supplying an ever-expanding selection of affordable goods. The introduction of tariffs on the global supply chain threatens to permanently impair the latter, with significant short- and long-term implications.

Let's start with the obvious: Amazon's first-party business. This part of the business buys goods directly from suppliers in China and other countries and then resells them to consumers for a profit. As Amazon relies on low prices to delight its customers, introducing tariffs (potentially as high as 145% for China-imported goods) will burden the first-party business. The e-commerce company has to either absorb the additional cost of tariffs -- which would eat into its already thin margin -- or pass it on to consumers and risk losing sales.

The silver lining here is that the tariff will also affect its peers, so Amazon could still have a comparative advantage thanks to its economies of scale. Still, higher tariffs will mean lower discretionary spending from consumers, which inevitably affects sales across the board for all retailers.

Similarly, Amazon's marketplace sellers will face a direct hit since they now have to operate under a much higher cost structure. And since these sellers (many of whom import products directly from China) don't have the scale of Amazon's first-party business, they will face enormous pressure to raise prices or risk going out of business. Besides, the uncertainties around the final tariff policy will naturally lead merchants to hold back on their procurements to avoid unexpected outcomes, leading to inventory stockout, logistics inefficiencies, etc.

While the final tariff policy is still unclear (the Trump administration is still negotiating with global leaders), it is almost certain that we will have some form of tariff. What remains is just the question of how high the rates will be, and that has strategic implications for Amazon over the long term.

For instance, a prolonged trade conflict may compel Amazon (and its third-party sellers) to seek new supply chain partners in other countries. While doable, such transitions are slow, costly, and risky, particularly for smaller sellers who lack sourcing flexibility. The result could be a gradual erosion of Amazon's competitive advantage around pricing and product selections.

While Amazon's long-term competitiveness might still prevail in the event of a tariff war -- after all, the e-commerce company could adapt to the new reality and rebuild its supply chain -- the road forward is likely to be bumpy.

The indirect impacts of tariffs on other segments

One of Amazon's strengths is its diversified business model thanks to its expansion into adjacent areas like cloud computing and advertising. These businesses generate revenue mainly from offering digital services, which are not subjected to tariffs (at least not for now), making them relatively safe from tariffs in the near term.

Still, these businesses may experience ripple effects from the ongoing tariff war. Take Amazon Web Services (AWS), for example. While tariffs don't directly touch AWS revenue, the broader economic uncertainty they create can weigh on enterprise spending. If tariffs slow the economy or dampen business confidence, companies may delay or reduce IT investments, impacting AWS's revenue. Also, the tariffs would result in higher capex spending when Amazon invests in data centers and other technological hardware, which could reduce AWS's long-term profitability.

Similarly, the advertising business could also face headwinds amid the tariff war. If tariffs make it harder for merchants to do business -- either by eating into their margin or even rendering their business model obsolete -- advertising demand on Amazon could take a hit. Similarly, weaker consumer discretionary spending due to higher product prices could lead to a lower advertising budget.

Even Amazon's logistics and fulfilment network could face challenges in the future if the trade war persists for a long time. The company has spent years building a sophisticated, vertically integrated delivery network. However, with sellers adjusting supply chains, Amazon must redesign its networks or invest in new infrastructure to support the latest adjustments. That could raise fulfillment costs and reduce efficiency, further reducing margins.

What it means for investors?

The tariff war will impact Amazon, so investors must be mentally prepared for it. The e-commerce business will likely face direct and more significant impacts, while the digital businesses may experience indirect disruptions.

Given the uncertainties surrounding the final tariff policy (and Amazon's response to it), investors should closely monitor the company's performance in the coming months, focusing on metrics like revenue growth and margin trends.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.