A strong consumer base is keeping the U.S. economy humming, but businesses are struggling to make crucial investment and hiring decisions given questions about relations with each of the top 10 U.S. trading partners.
This month alone, Trump announced higher tariffs on U.S. imports of steel and aluminum from Argentina and Brazil here; threatened 100% tariffs on $2.4 billion of French cheese, Champagne and other goods here; and vowed to further hike tariffs on other European Union products over aircraft subsidies here
Meanwhile, progress on talks to resolve the 17-month trade dispute with China remains illusive and a trade deal signed with Mexico and Canada is still awaiting ratification by the U.S. Congress.
“We are drowning in uncertainty. This guessing game is chilling investment, putting hiring plans on hold, and sowing sourcing chaos throughout our industry,” said Steve Lamar, executive vice president of the American Apparel & Footwear Association, whose members have been hit especially hard by tariffs on Chinese imports.
Trump has said China would pay for the higher tariffs. But a study by the New York Federal Reserve found that Americans are feeling most of the pain. Tariffs Hurt the Heartland, a campaign grouping more than 150 trade groups that oppose tariffs, said U.S. consumers and businesses have paid an extra $42 billion due to the tariffs since the trade war began.
Just ask Win Cramer, president of privately held JLab Audio.
The San Diego-based maker of Bluetooth headphones has paid out millions of dollars in tariffs since September to keep consumers from bearing the cost, Cramer said. Now, Trump's recent threat to impose even higher tariffs here "scares the hell out of me."
“The uncertainty makes it nearly impossible to make mid- to long-term business decisions,” he said. “We have to make really short-term decisions almost week by week by week, because that’s how quickly it’s changing.”
JLab, which builds 100% of its products in China, is now investing more in expanding its sales and marketing operations in Europe than in the United States because the climate there is more stable.
Cramer visited factories in Vietnam in October, but found the infrastructure and capacity insufficient to ensure production of the 65,000 pieces of equipment per day he needs.
“The scale we need doesn’t exist,” he said. It would take five to seven years to set up outside of China fabrication of the silicon chip sets needed for JLab’s air buds and headsets, the second-best selling in the world behind Apple’s Air pods.
UNCLEAR WHERE TARIFFS WILL HIT NEXT
Phil Marfuggi, president of Ambriola, a U.S.-based unit of Italian cheesemaker Auricchio SpA based in West Caldwell, New Jersey, said he has put off spending $1.5 million for two cheese-cutting and wrapping machines because it’s unclear how long tariffs on Italian cheese will last and whether they could go higher.
“It’s all speculative. You really can’t invest in your future,” he said. He had paid over $350,000 in tariffs on five recent Italian cheese shipments, money that he cannot easily recoup.
Marfuggi is also holding off adding imported Italian pasta to his lineup, since it may be zapped next under Trump’s “carousel” approach to tariffs.
For now, he has slashed marketing and sponsorship outlays by 30% to 40% to offset higher tariffs that have cut revenues by 25% to 30%.
R&D SPENDING DOWN
MISCO President Dan Digre said his Minnesota-based company, an audio equipment maker with 100 employees, has paid hundreds of thousands of dollars in tariffs on Chinese parts since September 2018, instead of using the money to launch a new line of higher-end speakers that would be built in the United States.
“It’s probably set us back by two years,” said Digre, who has retained U.S. production long after other rivals moved to Asia. The new line was expected to boost sales and generate 20 more jobs at the plant.
“It just seems wrong. We’re not creating anything new. We’re spending all this time and money trying to deal with a problem that’s more or less self-inflicted,” he said.
Business spending in the United States declined for the second straight quarter in the July through September period as the trade war eroded confidence. Factory activity contracted for a fourth consecutive month in November as new orders slid, and U.S. factory executives predict here capital expenditures will drop 2.1% in 2020 vs. 2019.
The labor market has remained resilient, however, in part due to companies’ reluctance to let go of workers.
Digre, whose father started the company 70 years ago after serving in World War Two as a B-17 gunner, has tried to stave off any job cuts. “That’s the last resort, so you cut in other areas, like innovation and R&D.”
“STRAIGHT UP WASTE OF TIME”
On the East Coast, Jeff Greenstein, president of Boston-based Delta Cycle, a privately owned maker of bike racks, padded seats and other accessories, said he has cut his marketing budget by a quarter.
“Our sales are probably lower than they would have been, our margins are squeezed and we’re definitely spending less on advertising,” Greenstein said.
One of the biggest problems for Delta, which has annual revenues of $5 million to $10 million, is that tariffs keep changing, often with short notice.
The tariff increases have cascaded through the 35-year-old business, forcing time-consuming and complex changes to the pricing schedule and negotiations with customers and suppliers about how to split the extra costs.
“For a company of our size to have five or six pricing changes in a year is a straight up waste of time,” he said.
FABRIC OF AMERICA
For Mount Vernon Mills, a South Carolina-based manufacturer of apparel fabrics, uncertainty about congressional passage of a new U.S.-Mexico-Canada trade deal has raised questions about investments in new automation equipment.
The private company, founded in 1847, produces 75 million yards of denim and other fabrics each year, much of it in the rural towns of Trion and Alto, Georgia. Most is shipped to Mexico to be sewn into jeans and other apparel, which is then shipped back for sale to American consumers.
There have been some signs of progress on the USMCA trade deal. Mexican President Andres Manuel Lopez Obrador said this week the country’s senators had accepted proposed changes to the pact, perhaps smoothing the way toward ratification by U.S. lawmakers. That’s good news for the companies that make jeans, and the people who wear them.
Scott Deitz, vice president of Greensboro, North Carolina-based Kontoor Brands (KTB.N), one of MVM’s biggest customers, said the price of the Wrangler and Lee jeans it produces in Mexico could rise by $10 to $15 if Trump makes good his threat to cancel the current North American Free Trade Agreement if Congress fails to pass the replacement accord.
MVM President David Hastings said the yearlong stalemate has stalled investment by his customers and could fuel interest in shifting production from Latin America to Asia and elsewhere, a move that would pose huge challenges for his firm.
“It’s important for Congress to adopt this agreement so that these companies have the incentive to continue to invest in this hemisphere,” he said. “We’re worried. We’re the last major denim manufacturer in the United States.”
Reporting by Andrea Shalal; Editing by Dan Burns and Andrea Ricci
Our Standards:The Thomson Reuters Trust Principles.
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