China Hits Walmart Hard

China’s government objects to Walmart Inc.’s (NYSE: WMT | WMT Price Prediction) attempt to get China-based suppliers to cut their prices by 10%. The world’s largest retailer and America’s largest company by revenue has started to squeeze suppliers worldwide. Because of the burden of tariffs on Chinese goods, Walmart anticipates a sharp increase in the cost of many items it sells. The company knows that its operating margins, already only 5% of revenue, will shrink further due to an emerging trade war between the world’s two largest nations based on gross domestic product.

According to China-based media, Walmart was summoned to the Ministry of Commerce to discuss the U.S. retailer’s plans to pressure Chinese companies to lower the prices they charge Walmart. “Now, Walmart is not only asking Chinese suppliers to lower prices, but also asking them to do business at a loss,” CCTV reported. It also reported that many of these Chinese suppliers have asked the government to intervene.

Why It Matters

Walmart employs 1.2 million people in the United States. A margin drop raises the problem of whether it can operate at current expense levels. That, at least on paper, puts some of these jobs at risk. If the company does cut jobs, its employees lose purchasing power, which creates another drag on the U.S. economy.

Declining margins also put Walmart’s stock price success at risk. Over the past year, it has been up 44% compared to an increase of only 8% in the S&P 500. The stock has retreated considerably in the past two weeks, almost certainly because of the risk that tariffs will hurt its financials. If Chinese suppliers do not cut what they charge Walmart, the stop price will almost certainly go lower.

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