Costco Wholesale (NASDAQ:COST)
Historical Stock Chart
1 Year : From Dec 2018 to Dec 2019
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.
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.
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
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.
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.
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."
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.
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.
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.
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.
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."
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.
(END) Dow Jones Newswires
May 11, 2019 11:24 ET (15:24 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.