Trade war's wounded: Companies improvise to dodge cost hikes
In this Wednesday, Jan. 9, 2019, photo, invited guests watch a video presentation showing an astronaut making contact with a robot during a new product "CloudEngine 16800 Built for the AI Era" by laugh by Huawei at a hotel in Beijing. (AP Photo/Andy Wong)
Paul Wiseman, The Associated Press
Published Sunday, January 13, 2019 3:03PM EST
WASHINGTON -- In Rochester, New York, a maker of furnaces for semiconductor and solar companies is moving its research and development to China to dodge President Donald Trump's import taxes -- a move that threatens a handful of its 26 U.S. jobs.
In California's San Joaquin Valley, the CEO of a company that makes precision parts for the biomedical and chip making fields jokes bitterly that he's running "a non-profit" and might have to cut jobs.
And west of Detroit, a metal stamping company that supplies the auto industry is losing business to foreign rivals because Trump's steel tariffs have raised metals prices in the United States.
Trump frequently boasts that the taxes he's imposed on imports -- steel and aluminum and nearly half of all goods from China -- have showered the U.S. Treasury with newfound revenue. "We are right now taking in $billions in Tariffs," he tweeted last month. "MAKE AMERICA RICH AGAIN."
Yet tariffs like Trump's account for barely 1 per cent of federal revenue. It's actually companies like Linton Crystal Technologies in Rochester, Accu-Swiss Inc. in Oakdale, California, and Clips & Clamps Industries in Plymouth, Michigan, that are paying the price for his trade wars.
Tariffs tend to swell the cost of these companies' materials and leave them at a competitive disadvantage to foreign rivals unburdened by import taxes. And their exports can be taxed when other countries retaliate with their own tariffs.
"Wars are messy," said Todd Barnum, chief operating officer at Linton Crystal Technologies. "All the troops get hurt."
Back in December 2017, Trump gave those companies and others a gift when he signed a measure that slashed the corporate tax rate from 35 per cent to 21 per cent. The next month, though, he started slapping tariffs on imports -- beginning with solar panels and dishwashers, before moving on to steel and aluminum and then hitting $250 billion in Chinese goods.
"Thank you for the tax cut," said Jeff Aznavorian, president of Clips & Clamps. "However, I'm not going to be benefiting because I'm not going to have any profits to pay tax on." For his company, "tariffs have completely undermined everything good that those tax cuts brought."
The higher costs resulting from Trump's tariffs have yet to inflict much overall damage to a still-robust American economy, which is less reliant on international trade than most other countries are. Fueled by lower taxes, the economy grew at an impressive 3.4 per cent annual rate from July through September after having surged 4.2 per cent in the previous quarter. And employers added 2.6 million jobs last year, the most since 2015.
And while numerous companies are hurting from the president's confrontational trade stance, some are benefiting from it. An aluminum smelter in Missouri reopened under new ownership this year, for instance, and credited the aluminum tariffs for reducing foreign competition and bringing 450 jobs to New Madrid County.
But for many businesses, the tariffs are escalating costs, creating hardships and magnifying uncertainty. The Institute for Supply Management's manufacturing index plunged last month to its lowest point in more than two years partly because of the tariffs. And the Federal Reserve appears increasingly worried that damage from the trade war will undercut the economy.
The potential costs of Trump's tariff campaign become clear early this month when Apple warned that trade hostilities with Beijing were hurting its business in China -- a key reason why its first-quarter revenue would fall below expectations.
"It's not going to be just Apple," Kevin Hassett, chairman of the White Council of Economic Advisers, acknowledged to CNN. Companies with significant sales in China will "be watching their earnings downgraded next year until we get a deal with China."
Trump's tariffs are, in theory, supposed to help U.S. producers by raising the prices of goods their foreign competitors ship from abroad. But tariffs, a tax paid by importers, can backfire. They tend to hurt American companies that buy foreign goods for resale or for use as components in U.S.-made products.
Many U.S. importers face a wrenching choice: They can pass their higher costs on to their customers and risk losing business. Or they can absorb the extra costs themselves and sacrifice profits.
And tariffs, of course, invite retaliation. The European Union, Canada, Mexico and others have retaliated against U.S. products as payback for Trump's steel and aluminum tariffs. China has imposed tariffs on $110 billion in American goods.
Among the products on Beijing's hit list are American soybeans, an important export among Trump supporters in the U.S. heartland. To ease the pain, the administration last year handed farmers relief worth $11 billion -- money that reduces the trade war's contribution to the Treasury. Peter Meyer, head of grain and oilseed analytics at S&P Global Platts, said the payments allowed soybean farmers to recoup their losses from the trade war.
But the damage could prove longer-lasting. Before the trade hostilities erupted, China bought 60 per cent of U.S. soybean exports. Now, it's turning to Brazil and other countries for soybeans.
"It takes you months to years to cultivate a client and only weeks to piss them off," Meyer said. "The concern now is that we've pissed of the Chinese and they're going to go away."
Linton Crystal Technologies is being walloped by tariffs both coming and going. The components it sends to an assembly plant in Dalian, China, are subject to import taxes when they arrive in China. And the assembled furnaces it ships back to Rochester for sale are hit with Trump's tariffs at the U.S. border.
The U.S. import tax on a $2 million furnace amounts to $500,000. So, in desperation, the company has decided to move operations to China to avoid the tariffs. And it plans to lay off four or five American workers.
"It just doesn't make any sense for me to ship it back here so I can be penalized half a million dollars," Barnum said.
In the meantime, the higher costs are hurting Linton's business. It expects revenue to drop 25 per cent in 2019.
Accu-Swiss, which buys imported stainless steel on the tariff list, is negotiating with customers to split the higher costs. It's also trying to make its operations leaner. It has, for example, reengineered its California factory so production can continue at night when the lights are off and employees are gone. Still, it, too, expects a 25 per cent drop in revenue this year.
"I'm just hoping against hope that this thing will go away," said CEO Sohel Sareshwala. "I'm just sustaining myself, almost becoming a non-profit organization."
Clips & Clamps, the Michigan auto supplier, buys steel from U.S. producers that don't have to pay the tariffs. But domestic steel suppliers have been able to sharply raise their prices because Trump's tariffs have priced out foreign competition.
"I am losing business to competitors outside the United States," Aznavorian said, "and I am losing it due to raw materials pricing."
Initially, Sareshwala and Aznavorian say, they assumed that Trump's metals tariffs were just a negotiating tactic, intended in part to pressure Canada and Mexico to embrace a new North American trade pact. But the tariffs remained intact even after Trump signed a revamped regional agreement in November.
"My jaw dropped," Aznavorian said. "I thought, 'You've got to be kidding me.' "
Now, he can't tell whether the tariff squeeze is ever going to end. "The uncertainty is horrible," he said.