United States

Q2 2018 Business Products and Services Industry Spotlight



Tariffs begin to bite

The United States imports $2.4 trillion of goods and services each year that it otherwise does not produce. Potential import targets based on the administration’s threats include autos (about $176 billion, or 8 percent of total trade), aluminum (around $13 billion) and steel (roughly $30 billion). Together, those industries account for about 0.21 percent of total gross domestic product. The most exposed middle market businesses to recent tariffs imposed by the Trump administration are those downstream in the manufacturing, agricultural, construction and industrial products ecosystems. If the trade spat intensifies and begins to include consumer products, the broader retail, footwear and apparel industrial ecosystems will be hardest hit in the near- to mid-term. A tit-for-tat retaliatory trade war that spills over into the broader consumer industry would have the greatest impact on the two lowest quintiles of income earners.

Big picture

Both private equity (PE) and mergers and acquisitions (M&A) activities continue apace in the business-to-business (B2B) space. Almost $60 billion of PE capital was invested in Q2 2018, in line with recent strong quarters, while another $212 billion was spent on B2B-related M&A deals last quarter, which was also in line with recent figures. It is unclear how either number will be affected by the tariffs imposed by the United States on China, Canada, Japan and several members of the EU. Some RSM clients are concerned about the impact on importing and exporting goods. RSM estimates that the U.S. tariff structure amounts to a cost of approximately $915,000 per job to protect the steel and aluminum industries; and the 25 percent tariffs on steel and 15 percent tariffs on aluminum on key trading partners are estimated to shave 0.2 percent from potential growth and put more than 2 million jobs at risk.

Looking ahead

The uncertainty imposed on the U.S. industry due to the intensification of trade spats will likely cause MM businesses that have export exposure to China, or are consumers of steel and aluminum, to absorb higher prices in advance of full implementation. There are already signs that tariffs are impacting investment activity. The price of Canadian soft lumber has increased by 20 percent already this year, which has caused U.S. home prices to appreciate by more than 1 percent, an increase directly linked to the tariff. Similarly, aluminum prices are up more than 25 percent this year, while steel prices are up nearly 30 percent. As a result, MM businesses will likely need to adjust to narrower profit margins and net revenues going forward as they explore passing price increases on to customers.


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