Viewpoint: Corporate America bracing for fallout from Trump's tariffs

Posted at 11:36 PM on Oct 22, 2018

Share:


BY DR. JOSEPH GLASGOW

In January 2018, President Trump imposed tariffs on solar panels and washing machines and on June 1 he imposed tariffs on steel and aluminum with a 25 percent tariff on imports of steel, and a 10 percent tariff on aluminum, effectively increasing taxes on the goods coming into the U.S. from the EU, Canada and Mexico, among other key trading allies. Trump also imposed tariffs on Chinese goods. On July 6, an additional 25 percent tariff on $34 billion of Chinese exports went into effect.

According to President Trump, increased tariffs on goods imported from overseas are necessary for national security, and for the sake of boosting America's business interests and the economy in general.

Tariffs are taxes on goods coming into a country. In the U.S., many tariffs are paid on goods at the time of entry via a customs broker or agent, along with other duties and fees that may apply to the import. According to the Business Insider, the idea behind a tariff is to increase the price of foreign goods in order to make the locally made option more attractive, which is analogous to Trump's campaign promises. The move has, however, elicited negative responses from trading partners who implemented retaliatory tariffs on U.S. goods with China and Canada imposing matching retaliatory tariffs.

Trump's tariffs on durable goods -- steel, aluminum, washing machines, and solar panels -- are estimated to cover 4.1 percent of U.S. imports, according to Reuters, and a vast majority of economists argue that the tariffs are in bad taste and will affect the U.S. economy. The Trump administration argues that the import taxes are small compared to the country’s $18 trillion economy and will thus boost domestic manufacturing and investment.

Notwithstanding those claims, economists say that the tariffs will lead to more harm than gain. A survey by the Initiative on Global Markets showed a general agreement that imposing new U.S. tariffs on steel and aluminum will not improve Americans’ welfare. Studies of the 2002 steel tariffs enacted by the Bush administration show that they caused more job losses than job gains.

The effects of these tariffs are already being felt by a number of corporations. An example is Mid-Continent Nail, which is the largest nail-making company in America. The company has had to lay off hundreds of people and may go out of business. Mid-Continent Nail laid off 60 workers in mid-June and an additional 200 in July because of a 25 percent import tax on steel from Mexico and Canada in retaliation to the Trump tariffs.

Whirlpool, a home appliances manufacturer, which at one point favored strict trade controls, blamed rising aluminum and steel costs for its small earnings. Whirlpool chief executive Marc Bitzer noted that "Global steel cost has risen substantially and, particularly in the U.S., they have reached unexplainable levels." The tariffs on washing machines were initially a boon to Whirlpool because the week the tariffs came into effect, Whirlpool saw its stock price rise. It had been losing market share to Korean manufacturers LG and Samsung. Paul Fiser, the city manager in Clyde, where an Ohio Whirlpool Factory is located, was quoted at that time saying “We were pleased with the tariffs. Some of the overseas companies were dumping product, and we can make as good as anybody, given a level play field.”

Briefly afterwards LG announced it would be raising the price of its washing machines by 4 to 8 percent, or nearly $50 per machine. Samsung also responded by saying that U.S. consumers will "pay more, with fewer choices." As a result, washing machine prices saw jumped by 16 percent between March and May, according to a July article in the Washington Post.

Wisconsin-based motorcycle company Harley-Davidson issued a statement of intent to shift some of its production overseas as a way to avoid new E.U. tariffs being imposed. This is because of the response by the European Union to Trump’s steel and aluminum tariffs with penalties on $3.2 billion worth of American products, including bourbon, orange juice, playing cards and Harley-Davidson. Harley-Davidson sold about 40,000 motorcycles in Europe in 2017, and the E.U. Tariffs would add $2,200 to the average cost of exporting each of its bikes from the U.S. The company said the tariffs on its motorcycles had increased to 31 percent from 6 percent. According to a statement provided to the New York Times, the move represents the only sustainable option to make Harley-Davidson's motorcycles accessible to customers in the E.U. and maintain a viable business in Europe. "As a result of the recently enacted tariffs, we expect to incur approximately $45 million to $55 million of increased costs. This includes incremental costs of approximately $15 million to $20 million for steel and aluminum, and approximately $30 million to $35 million for EU tariffs.”

The auto and aerospace industries will also be hit by the tariffs because they use steel and aluminum. Toyota Motor Corp., Ford Motor Co. and Hyundai Motor Co. have all proposed to increase prices of vehicles sold in America. Christin Baker, a spokeswoman for Ford Motor Co., was quoted as saying “Despite the fact that Ford buys the vast majority of its steel and aluminum for U.S. production, this action could result in an increase in domestic commodity prices harming the competitiveness of American manufacturers.” Similar sentiments were issued by Toyota and Honda corporations.

The solar-power market also will feel the pinch. According to Dan Whitten, a spokesman for the Solar Energy Industries Association, said a 25 percent tariff could add as much as 2 cents per watt to construction costs in addition to the tariffs Trump placed on imported panels in January. Additionally, increase in taxes on imported solar panels will cause the loss of an estimated 23,000 jobs this year, with more job cuts expected. This is according to a group representing the solar power industry.

Tech companies will also be hit by the tariffs. Many of Apple’s gadgets are made in China, including phones with aluminum or steel edges, iPhones, laptops and other tech products. Other industries in the agricultural sector and manufacturing are worried about retaliation because production of wheat and other crops could be hurt if trade partners choose to retaliate. Retaliations are the riskiest part of Trump’s trade war, according to the Washington Post. So far, seven countries and the European Union plan to impose or have imposed tariffs on approximately $38 billion worth of U.S. exports in retaliation. According to the Trade Partnership, higher steel and aluminum prices will also lead to higher costs for commercial construction, the building of roads and bridges, as well as for a wide variety of consumer products.

Adding to the costs of estimated impact of retaliation from U.S. trading partners, the overall cost to the country’s economy as a result of the steel and aluminum tariffs will be $37 billion. The Association of Oil Pipe Lines also estimates that the steel levy would add $76 million to the cost of building a typical pipeline. The latest casualty of the ongoing trade war is a TV manufacturing plant in South Carolina that was forced to cut back to a skeleton crew. Such layoffs are another step toward the 2.6 million American jobs the U.S. Chamber of Commerce says could be lost because of Trump’s tariffs on Chinese goods. These are just but a few companies and industries that have been hit by the tariffs.

With this in mind, a few surveys show the impact of the tariffs as more companies post their quarterly financial earnings. The Association of International Certified Professional Accountants reported that 38 percent of the executives it polled were concerned about potential conflicts between the U.S. and its trading partners, with 40 percent saying U.S. tariffs or retaliatory measures would hurt their businesses. Morgan Stanley’s business conditions index fell from 65 in May to 63 in June and the Business Roundtable’s economic outlook survey recorded its first decline in nearly two years in the second quarter of this year, according to the Financial Times.

With such current negative outcomes and expected increase in prices of commodities, there is no doubt that corporate America cannot wait for the Trump tariff fallout. To the many businesses that use imported products, the cost of producing their items will increase, either because the company will have to use more expensive domestic parts or pay more for the finished products. Economists have argued that Trump's tariffs are particularly damaging because they focus on intermediary goods. By increasing the cost of parts, the tariffs will force companies to either pass on the cost to customers in the form of higher prices, cut costs in other areas like the workforce, or opt to offshore their operations in an effort to avoid the tariffs altogether. Erica York, an analyst at the right-leaning Tax Foundation, explained that "Because these higher prices would reduce the return to labor and capital, they would incentivize Americans to work and invest less.” This does not bode well for corporate America because labor and capital are among the key factors of production. Decreased production means decreased profits.

Ultimately, it is my strong conviction that corporate America is now bracing for economic woes which may necessitate the tariffs to be revised or alternative solutions found.

Dr. Joseph Glasgow is a former professor in the University of Phoenix School of Business and Mitchell Community College.

Join the VIP Readers' Club!

Creating an account entitles you to the following perks:

Already a member?

×

Subscribe to SVL Free News Email Alerts

* indicates required
×