A Wall Street Journal Roundup
The increased tariffs enacted by the U.S. on products coming
from China raise the costs for many American companies and threaten
their future profits.
On Friday, the U.S. raised import tariffs to 25% on $200 billion
of Chinese goods, such as circuit boards, microprocessors, vehicle
parts and machinery. President Trump also has warned about imposing
25% tariffs on $325 billion in Chinese goods that aren't currently
taxed. Such a move would cover virtually all Chinese exports to the
U.S. and spread the pain to consumers.
Consumers haven't felt the brunt of the U.S.-China trade fight
since the tariffs so far have largely targeted components used by
manufacturers or because businesses absorbed some of the initial
10% tariffs.
Below is a look at some of the industries grappling with the
effect of tariffs.
Autos
The tariff increase will cover a range of auto-parts imports,
from spark plugs to exhaust pipes, and likely cascade through the
supply chain, potentially affecting prices on new and used cars,
industry experts said.
While the 10% tariff levied in September had little effect on
parts pricing, auto-sector lobbyists said an increase to 25% could
push up makers' costs for cars assembled in the U.S. using imported
parts. The higher duty also could increase prices for car owners
replacing worn-out parts -- some of which are built mostly in
China.
As the auto industry has globalized, Chinese suppliers have
become dominant at certain points in the supply chains. There are
few affordable alternatives for some of these materials and parts,
industry trade groups said.
"Somebody has to eat that 25%. Either it gets passed along in
the supply chain and reduces margin, or that's passed onto the
consumer," said Aaron Lowe, a senior vice president at the Auto
Care Association, a lobbying group for auto-parts manufacturers,
distributors and retailers.
More than 1,000 Chinese companies export auto parts to U.S. car
companies and retailers of replacement parts. The U.S. imports
about $10 billion in parts from China annually, according to a
recent Boston Consulting Group study.
Most auto makers didn't have an immediate comment on the
tariffs. Toyota Motor Corp. said it is investigating the impact of
tariffs on its operations and will closely monitor the
situation.
The Commerce Department delivered a report to the White House
earlier this year on whether imported cars and auto parts could
pose a national security risk, a key justification for imposing
tariffs under U.S. trade law. But so far, the administration hadn't
acted on the report.
If a 25% tariff were levied on all automotive imports, the
average price of a vehicle sold in the U.S. would increase by
$4,400, according to a report from the Center for Automotive
Research. The price of an imported vehicle could rise by as much as
by $6,875, the group said.
--Adrienne Roberts
Manufacturers
Executives at major U.S. manufacturers said they would respond
to any change in the tariff by sourcing from other countries and by
raising prices.
Caterpillar Inc. Chief Executive Jim Umpleby said this month
that the company had encouraged U.S. officials to reach a deal with
Chinese counterparts. The heavy-equipment maker had said it expects
tariffs, including those on foreign-made steel and aluminum, to
cost it between $250 million and $350 million this year.
"We're cautiously optimistic here that, as we had been for some
time, that the issues will be resolved and we'll all move forward,"
Mr. Umpleby said in a May 2 interview. "Free trade is good...for
all of us."
Washing-machine maker Whirlpool Corp. last month lowered its
estimate for the tariff impact on its business this year to between
$200 million and $250 million, down from $300 million -- assuming
the tariff on Chinese goods remained at 10%.
Caterpillar and Whirlpool didn't immediately respond to
questions Friday.
More than 1,200 companies have applied for exemptions from
tariffs for products they said they could get only from China.
Through May 3, about 13% of requests had been granted.
One manufacturer whose request was rejected is engine maker
Cummins Inc., which imports turbochargers from its own plants in
China for further assembly in the U.S.
Cummins has said tariffs would cost it $150 million this year,
$30 million more than in 2018. The company said it has relocated
production of a small number of engines to the U.K. from China to
avoid the tariff impact.
"We continue to mitigate the impact on our company by creating
supply chain efficiencies, price increases and using the
flexibility we have with our sourcing capabilities," a Cummins
spokesman said.
--Austen Hufford and Bob Tita
Farmers
Fresh data from the U.S. Department of Agriculture on Friday
underscored how much the domestic supply of crops and livestock is
piling up amid trade tensions with China.
The department's estimate for the size of U. S.corn, soybean and
wheat stockpiles grew more than expected in May to 995 million
bushels of soybeans, 2.1 billion bushels of corn and 1.2 billion
bushels of wheat.
President Trump said on Twitter Friday that the federal
government would make bigger purchases from U.S. farmers and send
the foodstuffs as aid to poor countries. The pledge appeared to be
meant to help buoy farmers in the event that officials in China
place additional retaliatory tariffs on U.S. farm goods after the
U.S. raised duties on many imports from China.
Livestock futures have been rising despite the trade fight. That
is due largely to an outbreak of African swine fever, a fatal pig
disease that has sparked large-scale culling of China's pig herd.
That is prompting Chinese buyers to restart purchases of U.S.
pork.
Some analysts were optimistic that Friday's tariff increases
would give the U.S. leverage to secure a better trade deal for
farmers overall.
"President Trump wants a deal, but you never want a car salesman
to see how bad you want the car on his lot," INTL FCStone chief
commodities economist Arlan Suderman said in a note.
Some traders said any government purchases of U.S. farm goods
were unlikely to make up for business lost to China's huge and
growing market.
"Farmers are getting welfare instead of trade," said Joel
Karlin, an economist with Western Milling LLC of Goshen, Calif.
--Kirk Maltais
Semiconductors
U.S. chip makers that manufacture in China won't face an
additional sting from the new tariffs because their products are
already subject to a 25% duty, industry insiders say. At the same
time, they have blunted the hit by routing chips through third
countries instead of importing them directly from China to the
U.S.
China's reliance on the U.S. for its computer chips, meanwhile,
could discourage any retaliation against the industry after the
latest round of tariffs. Only about 14% of China's semiconductors
are forecast to come from domestic suppliers this year, according
to International Business Strategies Inc. China imported about $6.7
billion worth of chips from the U.S. last year, trade statistics
show.
--Asa Fitch
Consumer Electronics
The higher tariffs will encompass telecommunication and
networking equipment, as well as electronic devices ranging from TV
components to burglar alarms. Naomi Wilson, senior policy director
for Asia at the Information Technology Industry Council in
Washington, said that while the Trump administration's challenge to
China's trade practices was welcome, the tariff increase would only
"raise the toll" on American businesses, workers and consumers.
"This specific tariff increase will affect everyday
telecommunications equipment like modems and routers that help
Americans connect to the internet and with each other," Ms. Wilson
said. "Increased tariffs on hardware components also mean that
companies large and small will find it more difficult to use
digital and cost-saving solutions in their daily business."
--Asa Fitch
5G Wireless Networks
U.S. development of next-generation 5G wireless networks will
feel the effects of 25% tariffs, the Consumer Technology
Association warned Friday.
In less than a year of 10% tariffs, U.S. tech companies have
already paid more than $745 million extra for 5G-related products,
which include routers, switches and gateways that form the backbone
of new networks, CTA president Gary Shapiro said.
"Beyond the damage to American businesses, the tariffs actually
hurt us -- and help China -- in the global race to 5G technology,"
he said in a statement.
American companies such as Juniper Networks Inc. and Cisco
Systems Inc. are among the biggest purveyors of networking
equipment in the world. A Juniper spokeswoman said the company
would resist any impact on its global supply chain. "We continue to
aggressively implement measures to minimize the impact of potential
tariffs as much as possible in order to uphold our competitive
pricing and value," she said. A Cisco spokeswoman declined to
comment.
--Asa Fitch
Bicycles
Higher tariffs mean more pain for the bicycle industry, which
was already struggling with weak sales. The number of bicycles sold
in the U.S. dropped by about 15% in the first quarter compared with
the same period a year earlier, according to the market research
firm NPD Group. Revenue dropped by about 2% as bicycle companies
passed along higher costs.
The tariffs added to the pain from the bankruptcy filings by
retailers Toys "R" Us and Performance Bicycle.
"It's made it a much more challenging environment," said Matt
Moore, general counsel of Quality Bicycle Products Inc., a
distributor.
Bicycle companies have been looking to shift production to other
locations, but such moves are very disruptive to the industry's
supply chain, which operates with a three- to six-month lead time,
he said.
Kent International Inc., which sells about 3 million bicycles a
year, said the 10% tariffs imposed by the Trump administration last
year pushed the company from a profit to a loss. Kent passed along
much, but not all, of the added cost to its customers in the form
of higher prices, but "sales dropped 5% to 10% below forecast
because of sticker shock," said Arnold Kamler, chief executive for
more than 30 years.
The Kearny, N.J., company early last year put a hold on plans to
expand production at its Manning, S.C., factory because of higher
tariffs on imported steel and parts. Its main supplier recently
purchased a large property in Cambodia, but Kent slowed plans to
shift production when it appeared a trade deal was near. Given the
company's size, that type of shift isn't easy, said Mr. Kamler, who
plans to revisit a potential move at the end of May.
Some companies already have made the move. Pedego Electric
Bikes, based in Fountain Valley, Calif., had been looking to shift
manufacturing out of China because of European tariffs imposed
early last year. It accelerated that shift in response to the
tariffs imposed by the Trump administration; the company now makes
70% of its bicycles in Vietnam and 30% in Taiwan.
"We were big enough that we could afford to do it, but not so
big that we can't find production capacity," said Don DiCostanzo,
chief executive of Pedego, which sold about 12,000 electric
bicycles last year. Mr. DiCostanzo is looking at building bicycles
in the U.S., but so far can't find anyone here who can make bicycle
frames. "We our considering opening our own frame factory," he
said.
--Ruth Simon
Solar Equipment
The higher tariffs will impact Chinese-made solar inverters, a
piece of electrical equipment that converts the output of solar
panels to alternating current. But the effect may be muted, because
many inverter makers have already begun to shift manufacturing away
from China to avoid the existing 10% tariffs and in anticipation of
potentially higher tariffs.
Both Enphase Energy Inc. and SolarEdge Technologies Inc., which
between them control the majority of the residential market for
solar inverters, are expected to open manufacturing operations in
Mexico and Vietnam this year, said Jeffrey Osborne, an analyst who
covers the solar industry for Cowen Inc.
"I really don't see solar having an issue," he said.
The higher tariff could accelerate a move by solar-industry
manufacturing away from China. Existing tariffs and anti-dumping
duties have significantly affected the cost of Chinese solar panels
in the U.S. Manufacturing of panels has shifted to Southeast
Asia.
There has been a small increase in U.S manufacturing as well.
Existing taxes on imported panels has slowed the growth of solar
installations in the U.S., said John Smirnow, general counsel of
the Solar Energy Industries Association, a Washington, D.C., trade
group.
--Russell Gold
Apparel and Footwear
Apparel and footwear aren't affected by the current round of
tariffs and wouldn't be impacted unless the U.S. administration
targeted all remaining Chinese imports. If that were to happen, the
categories could take a big hit. Sixty-nine percent of all footwear
and 42% of all apparel sold in the U.S. is imported from China,
according to the American Apparel and Footwear Association.
--Suzanne Kapner
Retailers
Walmart Inc. and other large retailers have prepared for
potential tariff increases since last year, importing goods early
and working with suppliers and manufacturers to lower production
costs. But shelf prices are likely to rise on a host of common
products with a 25% tariff, Walmart said in a September letter to
trade officials arguing against the measure.
The largest U.S. retailer by revenue could weather higher
tariffs better than smaller rivals, said retail analysts. Stores
that earn a higher percentage of sales from groceries, including
Walmart, Costco Wholesale Corp. and others, will see lesser
impacts, according to a Bernstein report. Larger retailers also
have more robust sourcing teams and greater ability to pressure
suppliers to lower prices.
Around 56% of Walmart's U.S. sales come from groceries, which
are less likely to come from China than other products like
Christmas lights or apparel. Around two-thirds of Walmart's
purchases are made in the U.S., company executives have told
investors.
Prices are already rising on some goods like home products and
bicycles at Walmart and its competitors under the earlier 10%
tariff, said Walmart finance chief Brett Biggs at a March analyst
conference. "Our merchants are watching day by day, category by
category. They've always been working with suppliers on their own
cost structure," he said. "But we want to continue to be the
low-price leader."
Retailers have worked to fight tariffs, with the National Retail
Federation calling the tactic "taxes paid by American businesses
and consumers, not by China." Many retailers started to move supply
chains outside China, but those efforts take time and are still in
progress, said Jonathan Gold, a vice president at the NRF. "Folks
are still trying to figure out what the right thing to do is."
--Sarah Nassauer
Medical Devices
The U.S. tariff hike on certain Chinese imports largely spares
finished medical devices, though they include some categories such
as electrical nerve-stimulation machines and medical-imaging
components.
Medical-technology manufacturers and their allies in Congress
have lobbied to exclude many products from the Trump
administration's tariff actions.
In a prior round of tariff actions last year, industry lobbyists
persuaded the administration to reduce the total value of medical
technologies subject to new tariffs to less than $1 billion, from
initial proposals of about $3 billion.
Industry trade group AdvaMed, whose members include Johnson
& Johnson and Medtronic PLC, has opposed the tariffs. "We
remain hopeful for a successful conclusion of the negotiations,
which are delicate and with broad-reaching implications that our
industry is watching closely on behalf of the patients we serve,"
Ralph Ives, AdvaMed executive vice president of global strategy and
analysis, said in a statement.
--Peter Loftus
(END) Dow Jones Newswires
May 11, 2019 11:24 ET (15:24 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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