The Toll of a Tar­iff War

It’s not just giant com­pa­nies that are be­ing hurt by Trump’s tar­iffs on Chi­nese goods.

Inc. (USA) - - UP NEXT - Norm Brod­sky is a vet­eran en­tre­pre­neur. He is the co-au­thor of Street Smarts: An All-Pur­poseTool Kit for En­trepreneurs. Fol­low him on Twit­ter: @norm­brod­sky.

Op­ti­mism, we’re told, is at an all-time high in the world of small to mid­size com­pa­nies, thanks in no small mea­sure to Pres­i­dent Trump’s tax cuts and dereg­u­la­tion, but his trade poli­cies are al­ready threat­en­ing to put a damper on the good mood. His China tar­iffs, es­pe­cially, are jack­ing up the costs of the thou­sands of U.S. busi­nesses with Chi­nese sup­pli­ers. One such busi­ness is owned by my friend Ryan Za­gata, founder and pres­i­dent of Brook­lyn Bi­cy­cle Co. We hadn’t talked in more than a year when he called me out of the blue this fall and asked if we could have lunch. I read­ily agreed.

Brook­lyn Bi­cy­cle, with slightly less than $2 mil­lion in an­nual sales, is known for the in­no­va­tive de­signs and crafts­man­ship of its bikes, one of which was se­lected by the Mu­seum of Modern Art to be sold through its gift shop. They are man­u­fac­tured in China us­ing parts from five or six coun­tries, mostly in Asia. Over lunch, Ryan told me that, al­though the busi­ness was do­ing well, he had ques­tions about what to do if Trump car­ried through on his threat to add $200 bil­lion in new tar­iffs on Chi­nese im­ports, which would in­clude an ad­di­tional duty of up to 25 per­cent on bi­cy­cles and bi­cy­cle parts. He was al­ready pay­ing a duty of 5.5 per­cent. An in­crease to 30.5 per­cent would force him to make some tough de­ci­sions.

One pos­si­bil­ity would be to sim­ply ab­sorb the ad­di­tional cost. On a typ­i­cal bi­cy­cle cost­ing him $200 to man­u­fac­ture, he would have to pay an im­port duty of $61, as op­posed to the $11 he was pay­ing cur­rently. That would be a $50 in­crease in the bi­cy­cle’s cost of goods sold and an equiv­a­lent de­crease in the gross profit it gen­er­ated.

Al­ter­na­tively, he could ask his cus­tomers to cover the in­crease and raise the bike’s price by $50. But the bi­cy­cle mar­ket is very com­pet­i­tive. Ryan couldn’t be sure what ef­fect the price in­crease would have on his sales. So maybe, I told him, he should do some com­bi­na­tion of the two, rais­ing prices by a smaller amount—say, $10 or $15—and ab­sorb­ing the rest.

Or maybe he should move pro­duc­tion to an­other coun­try, such as Viet­nam? “That’s not as easy as it sounds,” he said. “To be­gin with, it’s not worth do­ing un­less the cost sav­ings is go­ing to be more than $50 per bi­cy­cle. Not to men­tion the R&D and travel costs of sourc­ing a new fac­tory, and hav­ing sam­ples made and tested. Ev­ery bike model we bring into this coun­try from a new sup­plier we have to send to the Con­sumer Prod­uct Safety Com­mis­sion for test­ing. So mov­ing pro­duc­tion to an­other coun­try would be a big ef­fort with a lot of costs we would never re­cover. There’s also a risk if you’ve built your rep­u­ta­tion, as we have, work­ing with one or two sup­pli­ers. Will a new man­u­fac­turer un­der­stand what we’re look­ing for and give us the same level of qual­ity?”

What about man­u­fac­tur­ing do­mes­ti­cally? “For us, it’s the same prob­lem,” he said. “There’s no­body in the United States mak­ing rims, hubs, spokes, sad­dles, chains, driv­e­trains—all the things we’d need in the quan­ti­ties we’d need them. We’d have to im­port the com­po­nents, and they’re sub­ject to the same tar­iff as the bi­cy­cles them­selves.”

Ryan could see no sim­ple so­lu­tion to the prob­lems he’d face if the 25 per­cent tar­iff was im­posed, and I couldn’t ei­ther. I asked what he planned to do. “I’ll watch my com­peti­tors,” he said. Mean­while, he was tak­ing a closer look at each of the pos­si­ble op­tions, “mak­ing sure we’re dot­ting all the i’s and cross­ing all the t’s,” as he put it, so that he would have all the in­for­ma­tion he would need if he did have to make a de­ci­sion.

No doubt thou­sands of small to mid­size com­pa­nies are strug­gling with sim­i­lar is­sues be­cause of Trump’s trade wars. I’m glad to see that the ma­jor busi­ness or­ga­ni­za­tions have fi­nally be­gun to raise a stink about them. Let’s just hope they can get him to end the tar­iff war sooner rather than later.

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