GE GE Aerospace

By Theo Francis 

If the U.S. imposes sweeping tariffs on imports from China early next month as planned, the levies will be felt not only in ports ringing the Pacific, but also across companies, product lines and factory towns in the U.S.

For General Electric Co., that includes its business making magnetic resonance imaging machines, or MRIs, many of which are assembled at plants in Florence, S.C., and Waukesha, Wisc.

GE, which is struggling to boost profits and revamp its operations after a series of missteps, has argued to federal policy makers that it is counterproductive to impose tariffs on components the company imports from its own plants in China, including some assembled using parts that were originally made in the U.S.

"Putting tariffs on the parts they produce will not hurt Chinese businesses or sway Chinese decision makers," GE executive Karan Bhatia said in a May hearing held by a committee of the Office of U.S. Trade Representative. "Rather, they hurt U.S. companies that own these facilities, as well as the U.S. workers and suppliers who rely on these parts from China to make world-class products in the United States."

GE's MRI business is just one part of the company's health-care division, which last year accounted for about 16% of companywide sales, or $19 billion. Still, it offers a window into the complex interconnections of global trade, where components made in one country get assembled in another -- and, once in finished form, may be sold back into the first. Some parts make more than a single roundtrip.

"Global supply chains have become so integrated over the last few decades that it's really hard to put tariffs in place that are not going to harm some domestic manufacturers," said William Hauk, an economics professor at the University of South Carolina.

The administration has said tariffs are needed to prevent China from dominating key industries with unfair state subsidies. A senior administration trade official said a forthcoming product-by-product exemption process will seek to take into account the kinds of scenarios raised by GE, without creating so many exceptions that it weakens the tariffs' impact.

"We are being as sensitive as we can to these types of problems, given the overall problem that we're trying solve," the official said. Still, he acknowledged, some U.S. companies could see costs rise.

GE, which makes everything from LED bulbs to jumbo jet engines, has said it expected to be affected by levies imposed on about three-quarters of an initial list of products facing U.S. tariffs. But it considers some three dozen products to be critical, in part because obtaining them elsewhere will prove difficult or require months to arrange.

That shorter list includes parts for aircraft-engine turbines, submersible electric pumps, locomotives and steam boilers. It also includes key parts for X-ray machines and other equipment made by GE Healthcare -- including MRIs.

GE sells its U.S.-made MRIs for anywhere from $500,000 to $10 million depending on service and other options, analysts say. Nearly $1 of every $5 in circuit boards and other components for the scanners is imported from China, the company said.

Some analysts expect the ultimate impact of the China tariffs on GE to be muted. Chinese imports make up only part of the manufacturing cost, and end-users will likely be reluctant to switch brands of complex machinery for a relatively small savings, said Nicholas Heymann, an analyst for William Blair & Co. Moreover, competitors, who also manufacture in the U.S., face the same tariffs.

All told, GE Healthcare's MRI business directly employs about 950 people in the U.S., the company said, plus more who spend at least part of their time on the products, such as by selling or servicing multiple products.

At GE's Florence location, workers make the giant magnets at the heart of the MRI scanners -- each magnet can weigh as much as 9 tons -- and assemble the "cabinet," which contains electronics and much of the rest of what makes the scanners work. Workers in Waukesha, a town that is home to about 72,000 people, also assemble MRI cabinets.

Florence's mayor, Stephen Wukela, said GE has employed people for decades in the 38,000-person town and is an important part of an expanding economy that also boasts a paper mill and an Otis Elevator plant. The region is already feeling the pinch from rising construction costs, exacerbated by separate U.S. tariffs on steel, aluminum and lumber.

"If tariffs spread into more products, then there's more anxiety," said Mr. Wukela, who has run as a Democrat.

In Wisconsin, makers of industrial equipment and parts are also seeing costs rise with tariffs on Canadian steel, aluminum and lumber, said Noah Williams, director of the University of Wisconsin's Center for Research on the Wisconsin Economy.

Still, he added, "the economy is doing relatively well -- this is a shock, nobody likes it, but they feel like they can absorb it for now."

Like other companies, GE isn't simply waiting for tariffs to drive up prices. Mr. Bhatia, GE's president for government affairs and a former U.S. trade official, has pushed for broad exceptions for certain imports from China, including those made at U.S.-controlled factories and those with a significant proportion of U.S.-made components. The company plans to seek exemptions for specific products where possible.

The company also is exploring how it could revamp its supply chain to produce more of the components elsewhere in the world. But that can't happen quickly, Mr. Bhatia has said. Stringent U.S. quality and safety rules for medical equipment mean new factories can take a year or more to bring on line.

The stakes are higher for companies like GE that own the factories producing their imported parts, said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, a Washington, D.C., think tank. In addition to operating costs for ramping up production in a new location, they may also have to try to sell or repurpose their specialized factories in China.

"The factory may become economically obsolete even though it's technically very good," Mr. Hufbauer said.

In the meantime, GE could find it tough to pass the cost of the tariff on to the buyers of its MRI scanners. Three-quarters of GE Healthcare's medical equipment is sold within the U.S., much of it to hospitals and other buyers facing tight spending constraints. The rest is exported to markets, including in China, where competitors aren't troubled by the U.S. tariffs. Alternatively, GE, like other industrial companies, could absorb the tariffs, reducing profit margins in the process.

"Either consumers bear more cost, or we bear the cost and it ultimately flows down to investment expenditures," Mr. Bhatia said in an interview. "Either way, you're talking about bad things happening, ultimately, to the economy."

Write to Theo Francis at theo.francis@wsj.com

(END) Dow Jones Newswires

June 24, 2018 10:10 ET (14:10 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.