How manufacturers are responding to proposed tariffs
INSIGHT ARTICLE |
The current administration launched a volley across the global trade bow with the announcement of proposed tariffs on $50 billion of goods imported into the United States from China. China had its own response, threatening to target U.S. products such as soybeans, chemicals, automobiles and planes.
The rhetoric is high and, as Joseph Brusuelas, RSM chief economist, recently observed, "This is a classic lose-lose proposition, no one wins."1 The National Association of Manufacturers noted that tariffs are “likely to create new challenges in the form of significant added costs for manufacturers and American consumers,” but the association looks to the U.S. administration to negotiate “a fair, binding and enforceable rules-based trade agreement with China that requires them to end their unfair trade practices once and for all.”
Current impact of recent legislation
U.S. markets responded to China with an increase in steel prices even though the proposed tariffs on steel and aluminum have not yet gone into effect. The fear of a trade war sent stocks tumbling.2 The price of soybeans, a large export to China, dropped immediately when China responded with their own tariffs on U.S. food products. One company announced that a shuttered steel mill will be re-opened on the expectation that prices will rise and make operation of this facility economically viable. On the other hand, the increased prices are driving up raw material costs for trucks and trailers.
This uncertainty can make strategic supply chain planning difficult. For manufacturers, there is a ripple effect throughout the supply chain. For example, China’s planned 25 percent tariffs on soybean imports would threaten the livelihoods of U.S. farmers, who export about $1.24 billion-worth annually.3 Less spending by these farmers naturally means lower sales for manufacturers serving the farm equipment industry. In anticipation of a potential trade war, some middle market companies are raising prices to customers, evaluating their contracts with key customers and vendors, and considering supply chain changes. Economics drive key decisions and the new tariffs, if they go into effect, could have a profound impact on these decisions.
How middle market manufacturing companies are responding
While the 2008 recession in the United States caused a significant reset, the lowering of worldwide commodity rates and some cost reductions enabled U.S. manufacturers to ride out the recession, then eventually come back in a resurgence of the industry. The United States was once again competing across the global marketplace.
But with the uncertainties that arise with the potential of a trade war, how will middle market companies succeed now?
Companies are raising prices as a precaution against the potential of the tariffs being imposed, even on some close North American trading partners. Ultimately, the end consumer could be the biggest loser in this confrontation: Chinese imports have reduced prices for goods paid by American consumers damping inflation over the past 20 years.
Not surprisingly, these uncertainties have companies delaying expansion plans, deferring the purchase of equipment and seeking alternative sources of commodities in order to remain competitive. It may simply be too early to make investments until these trade disputes are resolved.
Stepping back from the immediate crisis of the day requires a cohesive approach throughout the entire supply chain. While this is generally a good time for U.S. manufacturers, the benefits of lower taxes and a softer regulatory environment may be offset by the uncertainties of global trade.
1P. Gillespie, “US-China trade war fears: How bad could this get?” (April 4, 2018) CNNMoney.
2W. Watts, “Here’s why the Dow took the Trump tariffs so hard” (Mar. 2, 2018) MarketWatch.
3I. Sheldon, “Why China’s Soybean Tariffs Matter” (Apr. 5, 2018) EcoWatch.
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