Trade war’s wounded: Com­pa­nies im­pro­vise to dodge cost hikes

The Times Herald (Norristown, PA) - - NEWS - By Paul Wise­man

WASH­ING­TON >> In Rochester, New York, a maker of fur­naces for semi­con­duc­tor and so­lar com­pa­nies is mov­ing its re­search and de­vel­op­ment to China to dodge Pres­i­dent Don­ald Trump’s im­port taxes — a move that threat­ens a hand­ful of its 26 U.S. jobs.

In Cal­i­for­nia’s San Joaquin Val­ley, the CEO of a com­pany that makes pre­ci­sion parts for the bio­med­i­cal and chip mak­ing fields jokes bit­terly that he’s run­ning “a non­profit” and might have to cut jobs.

And west of De­troit, a metal stamp­ing com­pany that sup­plies the auto in­dus­try is los­ing busi­ness to for­eign ri­vals be­cause Trump’s steel tar­iffs have raised met­als prices in the United States.

Trump fre­quently boasts that the taxes he’s im­posed on im­ports — steel and alu­minum and nearly half of all goods from China — have show­ered the U.S. Trea­sury with new­found rev­enue. “We are right now tak­ing in $bil­lions in Tar­iffs,” he tweeted last month. “MAKE AMER­ICA RICH AGAIN.”

Yet tar­iffs like Trump’s ac­count for barely 1 per­cent of fed­eral rev­enue. It’s ac­tu­ally com­pa­nies like Lin­ton Crys­tal Tech­nolo­gies in Rochester, Accu-Swiss Inc. in Oak­dale, Cal­i­for­nia, and Clips & Clamps In­dus­tries in Ply­mouth, Michi­gan, that are pay­ing the price for his trade wars.

Tar­iffs tend to swell the cost of these com­pa­nies’ ma­te­ri­als and leave them at a com­pet­i­tive dis­ad­van­tage to for­eign ri­vals un­bur­dened by im­port taxes. And their ex­ports can be taxed when other coun­tries re­tal­i­ate with their own tar­iffs.

“Wars are messy,” said Todd Bar­num, chief op­er­at­ing of­fi­cer at Lin­ton Crys­tal Tech­nolo­gies. “All the troops get hurt.”

Back in De­cem­ber 2017, Trump gave those com­pa­nies and oth­ers a gift when he signed a mea­sure that slashed the cor­po­rate tax rate from 35 per­cent to 21 per­cent. The next month, though, he started slap­ping tar­iffs on im­ports — be­gin­ning with so­lar pan­els and dish­wash­ers, be­fore mov­ing on to steel and alu­minum and then hit­ting $250 bil­lion in Chi­nese goods.

“Thank you for the tax cut,” said Jeff Az­na­vo­rian, pres­i­dent of Clips & Clamps. “How­ever, I’m not go­ing to be ben­e­fit­ing be­cause I’m not go­ing to have any prof­its to pay tax on.” For his com­pany, “tar­iffs have com­pletely un­der­mined ev­ery­thing good that those tax cuts brought.”

The higher costs re­sult­ing from Trump’s tar­iffs have yet to in­flict much over­all dam­age to a still-ro­bust Amer­i­can econ­omy, which is less re­liant on in­ter­na­tional trade than most other coun­tries are. Fu­eled by lower taxes, the econ­omy grew at an im­pres­sive 3.4 per­cent an­nual rate from July through Septem­ber after hav­ing surged 4.2 per­cent in the pre­vi­ous quar­ter. And em­ploy­ers added 2.6 mil­lion jobs last year, the most since 2015.

And while nu­mer­ous com­pa­nies are hurt­ing from the pres­i­dent’s con­fronta­tional trade stance, some are ben­e­fit­ing from it. An alu­minum smelter in Mis­souri re­opened un­der new own­er­ship this year, for in­stance, and cred­ited the alu­minum tar­iffs for re­duc­ing for­eign com­pe­ti­tion and bring­ing 450 jobs to New Madrid County.

But for many busi­nesses, the tar­iffs are es­ca­lat­ing costs, cre­at­ing hard­ships and mag­ni­fy­ing uncer­tainty. The In­sti­tute for Sup­ply Man­age­ment’s man­u­fac­tur­ing in­dex plunged last month to its low­est point in more than two years partly be­cause of the tar­iffs. And the Fed­eral Re­serve ap­pears in­creas­ingly wor­ried that dam­age from the trade war will un­der­cut the econ­omy.

The po­ten­tial costs of Trump’s tar­iff cam­paign be­came clear early this month when Ap­ple warned that trade hos­til­i­ties with Bei­jing were hurt­ing its busi­ness in China — a key rea­son why its firstquar­ter rev­enue would fall below ex­pec­ta­tions.

“It’s not go­ing to be just Ap­ple,” Kevin Has­sett, chair­man of the White House’s Coun­cil of Eco­nomic Ad­vis­ers, ac­knowl­edged to CNN. Com­pa­nies with sig­nif­i­cant sales in China will “be watch­ing their earn­ings down­graded next year un­til we get a deal with China.”

Trump’s tar­iffs are, in the­ory, sup­posed to help U.S. pro­duc­ers by rais­ing the prices of goods their for­eign com­peti­tors ship from abroad. But tar­iffs, a tax paid by im­porters, can back­fire. They tend to hurt Amer­i­can com­pa­nies that buy for­eign goods for re­sale or for use as com­po­nents in U.S.-made prod­ucts.

Many U.S. im­porters face a wrench­ing choice: They can pass their higher costs on to their cus­tomers and risk los­ing busi­ness. Or they can ab­sorb the ex­tra costs them­selves and sac­ri­fice prof­its.

And tar­iffs, of course, in­vite re­tal­i­a­tion. The Euro­pean Union, Canada, Mex­ico and oth­ers have re­tal­i­ated against U.S. prod­ucts as pay­back for Trump’s steel and alu­minum tar­iffs. China has im­posed tar­iffs on $110 bil­lion in Amer­i­can goods.

Among the prod­ucts on Bei­jing’s hit list are Amer­i­can soy­beans, an im­por­tant ex­port among Trump sup­port­ers in the U.S. heart­land. To ease the pain, the ad­min­is­tra­tion last year handed farm­ers re­lief worth $11 bil­lion — money that re­duces the trade war’s con­tri­bu­tion to the Trea­sury. Peter Meyer, head of grain and oilseed an­a­lyt­ics at S&P Global Platts, said the pay­ments al­lowed soy­bean farm­ers to re­coup their losses from the trade war.

But the dam­age could prove longer-last­ing. Be­fore the trade hos­til­i­ties erupted, China bought 60 per­cent of U.S. soy­bean ex­ports. Now, it’s turn­ing to Brazil and other coun­tries for soy­beans.

“It takes you months to years to cul­ti­vate a client and only weeks to piss them off,” Meyer said. “The con­cern now is that we’ve pissed off the Chi­nese and they’re go­ing to go away.”

Lin­ton Crys­tal Tech­nolo­gies is be­ing wal­loped by tar­iffs both com­ing and go­ing. The com­po­nents it sends to an assem­bly plant in Dalian, China, are sub­ject to im­port taxes when they ar­rive in China. And the as­sem­bled fur­naces it ships back to Rochester for sale are hit with Trump’s tar­iffs at the U.S. bor­der.

The U.S. im­port tax on a $2 mil­lion fur­nace amounts to $500,000. So, in des­per­a­tion, the com­pany has de­cided to move op­er­a­tions to China to avoid the tar­iffs. And it plans to lay off four or five Amer­i­can work­ers.

“It just doesn’t make any sense for me to ship it back here so I can be pe­nal­ized half a mil­lion dol­lars,” Bar­num said.

In the mean­time, the higher costs are hurt­ing Lin­ton’s busi­ness. It ex­pects rev­enue to drop 25 per­cent in 2019.

Accu-Swiss, which buys im­ported stain­less steel on the tar­iff list, is ne­go­ti­at­ing with cus­tomers to split the higher costs. It’s also try­ing to make its op­er­a­tions leaner. It has, for ex­am­ple, reengi­neered its Cal­i­for­nia fac­tory so pro­duc­tion can con­tinue at night when the lights are off and em­ploy­ees are gone. Still, it, too, ex­pects a 25 per­cent drop in rev­enue this year.

“I’m just hop­ing against hope that this thing will go away,” said CEO So­hel Saresh­wala. “I’m just sus­tain­ing my­self, al­most be­com­ing a non­profit or­ga­ni­za­tion.”

Clips & Clamps, the Michi­gan auto sup­plier, buys steel from U.S. pro­duc­ers that don’t have to pay the tar­iffs. But do­mes­tic steel sup­pli­ers have been able to sharply raise their prices be­cause Trump’s tar­iffs have priced out for­eign com­pe­ti­tion.

“I am los­ing busi­ness to com­peti­tors out­side the United States,” Az­na­vo­rian said, “and I am los­ing it due to raw ma­te­ri­als pric­ing.”

JEFF ROBER­SON — THE AS­SO­CI­ATED PRESS FILE

This June, 28, 2018, photo shows rolls of fin­ished steel at a fa­cil­ity in Gran­ite City, Ill.

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