Increases from tariffs ultimately get handed down to the customer

 

By Jim Spencer, Minneapolis Star Tribune

 

At General Equipment Co. in Owatonna, Dennis Von Ruden buys steel castings and forging products from China that now cost 25 percent more as a result of President Donald Trump’s protective tariffs.

Von Ruden, whose 45-person company makes construction equipment for sale and rent, said he cannot find a U.S. source for those parts or several other Chinese-made parts now subject to double-digit U.S. import tariffs.

“Tariffs will ultimately increase our material costs and directly increase our product costs, which will be passed on to our customers as the market permits,” Von Ruden said. “I view tariffs as just another tax, which adds no value back to the company or its employees.”

Executives at small and midsize businesses in Minnesota may disagree about the merits of Trump’s tariffs on $50 billion worth of Chinese imports, but there’s little question that more state businesses are feeling the effects of a trade war between the world’s two biggest economies. Several executives said they are taking hits that could hurt their bottom lines.

Nevertheless, U.S. aluminum production facilities are reopening. Steel workers on Minnesota’s Iron Range are going to back to work at once-shuttered plants. Businesses that sell to these re-employed workers are springing up, too. That’s the upside.

The downside is a financial beating to businesses without the size, history or capital to withstand reduced revenue that comes with higher production costs or sales expenses, as well as to consumers who see prices rise without equivalent increases in pay.

Economists said the number of businesses affected will expand dramatically if the Trump administration follows through on threats to apply 25 percent tariffs to an additional $200 billion in Chinese imports. Public hearings on that proposal took place last week in Washington, with a decision expected soon.

“If they add $200 billion in products (to the tariff list), there are not going to be domestic substitutions for some of them,” said Robert Kudrle, a specialist in international trade at the University of Minnesota. “We don’t make many of these things any more.”

The administrations application of tariffs is meant to level the economic playing field so the number of American manufacturing jobs can grow and the country can offer more domestically made products priced competitively with foreign goods.

BioPlastic Solutions CEO Gary Noble has not seen his 17-person plastics manufacturing company grow much from the imposition of tariffs on Chinese products. But the Blooming Prairie businessman said he understands the need for them. The Chinese keep prices down by ignoring pollution and workers rights and by propping up production with government money, Noble said.

“If you buy from China, you get a totally subsidized product,” he said. “The U.S. should hold every single country to the same standard or should charge them for (unfair tactics).”

Putting that theory into practice has left smaller businesses and startups nervous. A recent national poll of small firms paid for by the Wall Street Journal found the lowest level of confidence about growth since the 2016 presidential election.

Scott MacDonald employs four people in his family distribution business, Mac Mac. For 30 years MacDonald has represented a variety of manufacturers, selling their products to retailers.

“I am paid based on sales,” he said.

A booming economy has bred demand that pushed up manufacturer prices on the Chinese-made patio furniture, dinnerware, Christmas decorations and lighting fixtures MacDonald sells.

“You show retailers a 14 percent price increase and put a 25 percent tariff on top of that,” MacDonald said, “and the (consumer) price point may jump so high that they don’t feel they can sell as many units.”

When the number of units purchased by MacDonald’s customers shrinks, it “comes right out of my bottom line,” he said.

Soybean farmers face a 25 percent retaliatory tariff on sales to China at a time when commodity prices are down, and they are hard-pressed to find alternative tariff-free markets.

Minnesota companies that use metal in their production processes now pay a 25 percent levy on imported steel and a 10 percent levy on imported aluminum. Those that choose to use only U.S.-made metals, such as aluminum parts maker Alexandria Industries, still face cost increases of 15 to 20 percent without the tariff, said Steve Schabel, the company’s chief sales and marketing officer.

“A strong economy played an influential role in increased prices because demand was strong while supply tightened up in the United States due to the tariffs,” Schabel said.

He noted that Alexandria Industries was disappointed in the current tariffs because they are so broad brush.

Alexandria sells to companies that make finished products that are then sold to consumers.

“Unfortunately, our customers are bearing the cost of our materials,” Schabel said. “It is up to them if they want to pass it on.”

Schabel said makers of aluminum-rich finished products, say boats, may be forced to increase prices to consumers.

Kudrle knows of no study that equates price hikes on imports with political behavior. Yet people such as Noble, who endorse tariffs for countries that don’t play fair, acknowledge that U.S. shoppers probably have a threshold for higher prices that could keep them from buying. Noble thinks the number is in the 8 to 10 percent range.

Meanwhile, bigger companies like Alexandria, which employs 550 workers and generates $130 million in annual revenue, are in strong growth mode.

“We have 40 job openings,” Schabel said.

That’s almost six times as many openings as Jerry Goodwald’s entire seven-person payroll. With his sons, Goodwald, a former steel executive and metallurgical engineer, developed a process for extracting metal particles from the ash left in the bottom of incinerators. He started his business, GEM-Ash Processing, in January 2015. His company mines the leftovers at Hennepin Energy Recovery Center, which turns solid waste into electricity sold to Xcel Energy.

Goodwald sells nothing to China, but the trade war is hurting him badly all the same.

“Even though I don’t sell to China, my product gets there from the people I do sell to,” Goodwald said.

When China retaliated against Trump’s initial tariffs by taxing certain imported U.S. metals, Goodwald’s customers couldn’t sell as much in China. So they needed to buy less from GEM-Ash.

“If you look at me as a small-business man and an entrepreneur,” Goodwald said, “my profits go down and lower the amount I make. Then the tariffs increase (consumer) prices so I have to pay more for things. For me, it’s a double whammy.”