Illinois caught in crossfire of trade war with China
After a year, whiskey, soybeans and metal each face unique challenges
It’s been just over a year since President Donald Trump imposed steep tariffs on foreign steel and aluminum, setting off a cascade of retaliatory tariffs throughout the summer that threatened to upend business at Chicago’s spirits distilleries, Illinois’ soybean farms and dozens of other industries across the nation.
Negotiations continue between the U.S. and the primary target of its trade wrath, China, raising hopes that there could be a resolution soon. But other signs point to escalating trade tensions as the U.S. threatens
$11 billion more in tariffs on the European Union for products like wine, pajamas and Gouda cheese, and Canada discusses refreshing its list of retaliatory
tariffs against the U.S.
Have companies suffered from the tariff battle as much as some people feared?
Local business owners in three industries affected by the trade war describe how it’s affected them.
Soybeans
As the nation’s No. 1 producer of soybeans, Illinois got walloped when China, the world’s biggest buyer of the legume, imposed a 25 percent retaliatory tariff on U.S. soybeans.
Soybean exports from Illinois fell by half last year, a loss of $1 billion, according to U.S. Census trade data. Prices plunged and unsold soybeans piled up, with stockpiles of the crop up 30 percent in Illinois as of March compared with a year before due to the combination of the tariffs and a record year for production in the state.
A $12 billion national aid package offered by the U.S. Department of Agriculture to tariff-affected farmers eased the pain for Illinois soybean producers, most of whom broke even, thanks to the government assistance, said Adam Nielsen, director of national legislation at the Illinois Farm Bureau.
Illinois received $600 million in the first round of payments, the most of any state, and is predicted to be the biggest recipient once the second and final round is finalized in May, he said.
“If the goal was to avert a disaster, it did,” Nielsen said.
But the USDA has said farmers will receive no additional aid to soften the blow of tariffs, and it remains unclear when the soybean market will normalize.
China has started purchasing U.S. soybeans again as the two countries negotiate to end the trade war, but the amount remains well below normal levels. Exacerbating the situation is a swine flu epidemic sweeping China’s pigs that has cut the country’s demand for soybeans, which are primarily used in the country for feed.
John Kiefner, whose family farms about 600 acres in Manhattan, Ill., said current prices don’t cover his cost of production.
Kiefner was a critic of the tariffs and government assistance for farmers when they were announced, but he took the aid because “I wasn’t going to fall on my sword to save my pride.” He has shifted to growing mostly hay rather than corn and soybeans to take advantage of a hay shortage in northern Illinois.
While he is still against the trade war, “now I’m rooting for (Trump) to win,” Kiefner said.
In Princeton, Ill., farmer Evan Hultine worries the damage is already done. Hultine, who farms about 700 acres of corn and soybeans, was able to sell most of his soybeans last year before prices fell, and the aid he received covered his losses, buthe said the effects of the trade war could reverberate for years to come as China gets comfortable buying its soybeans from other countries.
“They’ve already gone to South America, South Africa,” said Hultine, who farms with his father. “They’re making trade partners and investing in those relationships elsewhere.”
As planting season begins this spring, Hultine, who usually splits his land evenly between corn and soybeans, has decided to plant only corn because he is more confident in those prices. He is not alone. U.S. farmers plan to cut soybean plantings by nearly 5 million acres this year, down 5 percent from last year, according to the USDA.
But that’s not always an easy solution. Farmers rotate between corn and soybeans because it is beneficial to the soil and pest control, and planting the same crop two years in a row could lead to lower yields, said Krista Swanson, who farms corn and soybeans with her husband on his family’s farm in Oneida, Ill.
Swanson, who plans to plant soybeans this year as usual to maintain the rotation, supports the effort to update trade deals, but wants negotiations to hurry.
“The coming year presents more concern,” Swanson said. “We are in the make-it break-it time.”
Whiskey
Spirits-makers got dragged into the trade war when some countries slapped retaliatory tariffs on U.S. booze.
Whiskey, which has surged in popularity in recent years, was hit particularly hard by a 25 percent tariff imposed by the EU, which accounts for nearly 60 percent of U.S. whiskey exports and previously had no duties on the product. Whiskey sales to the EU tumbled during the second half of 2018, pulling the overall growth rate for U.S. whiskey exports down to 5 percent for 2018 compared with 16 percent the year before, according to the Distilled Spirits Council.
While big liquor companies have felt the pinch, the larger impact has been on smaller craft distillers, said Frank Coleman, spokesman for the trade group.
Craft products are already expensive overseas given the cost of transport and the small size of their operations, so tacking on a high tariff makes them less desirable to distributors that have access to plenty of brands from other countries.
The long-term concern is that consumers abroad will get used to not having American whiskey on the shelves.
“Our products are substitutable,” said Paul Hletko, who founded Few Spirits in Evanston eight years ago. “You might like bourbon more than Irish whiskey, but when bourbon is 20 percent more than Irish whiskey, maybe you like Irish whiskey better.”
Local craft distillers just getting a foothold into international markets say they are putting expansion plans on hold or redirecting resources.
Few Spirits, which exports its whiskeys and other spirits to 35 countries, is shifting its focus to South America and Africa, where countries have not imposed retaliatory tariffs, Hletko said.
Koval, a distiller in Chicago’s Ravenswood neighborhood that exports to 55 countries, put a planned product launch to mainland China on hold because of that country’s 25 percent whiskey tariff, and now plans to move forward with fewer products and a focus on gin instead of whiskey, said Sonat Birnecker Hart, who co-owns the 11-yearold business with her husband.
Exports account for 30 percent of Koval’s sales, so the tariffs have eaten into profits. The company is extending its reach into Australia and Japan, which are not involved in the tariff battle, Birnecker Hart said.
The tariffs scuttled Chicago Distilling’s plans to start exporting whiskey and gin to Europe and China, said Jay DiPrizio, who coowns the Logan Square distillery with his wife and brother. Importers informed the 6-year-old business that they won’t take on new brands, he said.
Chicago Distilling, which currently sells its products in 10 states and Australia, plans to redirect its resources to expand into new U.S. markets because of the trade war.
“It’s been a hindrance to growth,” DiPrizio said.
Manufacturing
The taxing of foreign steel and aluminum has been a boon for the U.S. steel industry, which saw profits soar last year as imports fell and American companies ramped up production, restarted idle plants and hiked prices.
But Illinois manufacturers that use those metals to make other products have experienced a mixed bag of consequences as the trade war has unfolded.
At Atlas Tool Works in Lyons, a precision component manufacturer for aerospace, medical, defense and general industrial products, owner Zach Mottl credits the tariffs for helping drive a surge in business.
A heavy user of steel, Mottl said the initial rise in his raw material costs has stabilized, and he has since seen byincreased demand for his products that resulted from subsequent tariffs the Trump administration imposed on hundreds of Chinese goods. Customers who used to get parts for X-ray machines or printing presses from China are now coming to him, he said.
“We are exceedingly busy, and we are able to have pricing power again,” Mottl said.
Mottl expects revenues to rise to just under $10 million this year, from $8.5 million last year, and is in the midst of a plant expansion. The company, which employs nearly 80 people, has increased hiring by 5 to 10 percent and pushed entry-level wages to $15 an hour from $13 to attract talent, he said.
But other manufacturers say the tariffs have hurt business.
At Freedman Seating on Chicago’s West Side, which makes the seats on many CTA buses, a 50 percent surge in the price of domestic steel last year took a bite out of profits, said CEO Craig Freedman. Steel still costs 25 percent more than it did before the tariffs kicked in, putting major pressure on his bottom line given that steel accounts for 30 to 40 percent of material purchases.
Freedman, who employs more than 800 people, said he’s absorbed the costs by curtailing investments in machinery, research and development and his workforce, but other companies that strictly fabricate metal are hurting more.
“It certainly curtailed our ability to grow the business because the cash flow wasn’t there,” he said. “I can tell you there are companies that aren’t going to survive.”
Auto parts suppliers, which employ nearly 900,000 people nationally and 40,000 in Illinois, are letting jobs go unfilled, and some have reported selling their businesses and shuttering factories, said Ann Wilson, senior vice president of government affairs at the Motor and Equipment Manufacturers Association in Washington, D.C. They are squeezed not only by higher domestic steel prices but because they are paying high tariffs on certain specialty metals they can only get abroad, and those that import component parts like motors and sensors for further manufacturing are confronting tariffs on those goods too, she said.
The association recently surveyed its members and found the highest level of pessimism since 2008 and 2009, in the midst of the economic downturn.
“It is the compound effect of all these trade actions that is definitely having a negative effect on our suppliers,” Wilson said.