Trump tariffs force hard choices

Small factory gets caught in escalating trade war

PHILADELPHIA – Sitting in his office beside photos of grandchildren decked in Philadelphia Flyers jerseys, Christopher Scott shakes his head. Another email has come in from another supplier. It wants to raise prices to cover the cost of President Donald Trump’s tariffs.

For weeks, emails and letters have been arriving in a steady stream at Howard McCray, the small Philadelphia factory Scott runs with about 85 workers. It’s mostly bad news. One supplier is charging more for shelving brackets, another for electrical switches, a third for wheeled castors. McCray needs those parts for the refrigerated display cases it produces for convenience stores and restaurants.

Since Trump imposed tariffs on imported steel and aluminum and on Chinese products, Scott, like many other American manufacturers, has had to rapidly switch gears.

He had been optimistic about 2018, with plans for hiring and investment in new machinery. He had hoped, for example, to replace two 30-year-old machines that cut holes in stainless steel sheets with a newer version that uses lasers and works twice as fast.

All that’s now on hold. This year, McCray has slashed in half its spending on large equipment. Scott is also leaving four jobs unfilled and instead adding more overtime for his current staff.

“That’s what the tariffs are doing to us,” Scott, 59, said while giving a visitor a tour of the factory floor, straining to be heard above the pneumatic drills and hydraulic equipment. “We’re just going to delay it until they come off.”

Tax cuts that Trump pushed through Congress last year sharply reduced the tax burden on businesses. The administration argued that lower taxes would accelerate investment in machinery and high tech equipment. Over time, such capital spending tends to make workers more productive and speed the economy’s growth. Yet Scott says that for his company, the higher tariffs – which are taxes on imports – have largely nullified any benefit from the tax cuts.

There is growing evidence that other companies are feeling similar strains. Business investment in large machinery and other equipment grew just 0.4 percent in the July-September quarter, the government said Friday. It was the slowest pace in nearly two years. And demand for computers, industrial equipment and other capital goods has dropped in the past two months.

“The prospect of a full-blown trade war with China and tariffs more generally are prompting some companies to delay investments for next year,” noted Diane Swonk, an economist at Grant Thornton.

The tariffs have also injected a new layer of uncertainty into Scott’s business. Right now, for instance, Scott is trying to decide what prices to quote for two potential customers he is pitching. Should he pass on to those customers the higher costs of the tariffs – or eat them, as he is doing now?

“If you price the tariffs in now, you risk losing the account,” he says. “If you don’t price them in, you risk losing money on the account.”

Trade concerns are among the factors that are rattling the U.S. stock market; the Standard & Poor’s 500 stock index has tumbled 9.3 percent from its record high in September.

Rob Martin, an economist at UBS, notes that U.S. tariffs are now at their highest levels since 1971. And back in the early ’70s, trade constituted a much smaller portion of the economy.

Though Scott has absorbed his higher costs for now, he hopes to eventually pass some of them on to his customers, which include Shell Oil’s convenience stores and Texas Roadhouse restaurants. First, though, he wants to see how his larger competitors handle the higher costs.

“Little Howard McCray can’t go out and raise prices 10 percent and lose all the market share that we’ve worked so hard to gain,” Scott said.

Howard McCray buys its parts from distributors that acquire them from other manufacturers. If its American suppliers were to acquire their parts from China or some another country, Scott wouldn’t always know about it – maybe not until an email arrived announcing a price hike to reflect new tariffs.