- President Donald Trump’s trade war with China has dragged on for nearly four months, and American businesses are starting to feel the pain.
- Surveys from Markit and the Federal Reserve found that businesses face increasing costs that are in some cases being passed on to consumers because of Trump’s tariffs.
- Additionally, major companies like Tesla, 3M, Ford, and Harley-Davidson have said they’re feeling the burn and expecting millions of dollars in costs from the tariffs.
Surveys from the Federal Reserve and market-research firms released Wednesday found widespread worries about the tariffs, while individual companies have started to tabulate the tens of millions of dollars in new costs they’re likely to incur from the tariffs.
Surveys look messy
While surveys in previous months exposed worries about soon-to-come cost increases from the tariffs, new data seems to show that businesses are now facing that reality.
The Federal Reserve’s Beige Book – a collection of perspectives from the Fed’s 12 regional banks – outlined concerns with the effects of the mounting trade war. The word “tariff” appeared 51 times in Wednesday’s edition, up from 41 mentions in September and 31 in July.
Concerns over the tariffs boiled down to a few issues:
- First, businesses were concerned that goods coming into the US from other countries were more expensive.
- Many of those goods were used in products sold by these American companies to consumers, so the increased import prices prompted a boost in costs for firms and an increase in prices for consumers.
- Second, the retaliatory tariffs made it harder for businesses to sell goods to markets like China and Canada.
- In turn, the buildup in US supply for those goods subject to tariffs abroad – notably farm goods like pork and soybeans – caused prices to sink in the US and businesses to receive less for their products.
Here are a few examples of those concerns from the Fed’s Beige Book (emphasis added):
- Boston Fed: “Also, three manufacturing firms faced higher input prices due to tariffs on Chinese goods and services that were not readily substitutable, and the firms expected to pass on (or had already passed on) to consumers at least some of the tariff burdens.”
- Philadelphia Fed: “Other firms reported difficulty meeting the prices of foreign competitors who are not exposed to tariffs on the primary input commodities of their products.”
- Cleveland Fed: “The majority of contacts attributed at least some of these increases to import tariffs. One trucking contact noted that prices for pallet jacks, tires, and packaging material were higher because of the tariffs.”
- Chicago Fed: “Contacts reported a notable drop in Chinese purchases of US soybeans following an increase in Chinese tariffs.”
- Dallas Fed: “Among manufacturers, roughly 60 per cent of contacts said the tariffs announced and/or implemented this year have resulted in increased input costs. The share was even higher among retailers, at 70 per cent.”
In addition to the Fed’s survey, Markit’s purchasing manager index released Wednesday reported the largest jump in input cost inflation since September 2013, due in large part to the tariff costs.
Chris Williamson, the chief market economist at IHS Markit, identified several other recent highs set because of the tariff costs.
“Tariffs also drove a further marked rise in prices, exacerbating an upward trend in price pressures borne out of robust domestic demand,” Williamson wrote. “Average prices charged for goods rose at one of the fastest rates seen over the past seven years while average charges for services showed the second-largest rise since the global financial crisis.”
Businesses are starting to feel the burn
Business concerns aren’t limited to general surveys – many large corporations expressed concerns about the trade war in their recent quarterly earnings calls.
Those corporations are already estimating the tariffs’ effects, and for some firms, the costs could exceed $US100 million a year.
Auto manufacturers, retailers, and home-goods makers have weighed in on the downsides of the tariffs. Here are a few examples:
- 3M (consumer-goods manufacturer): “If I fast-forward a little into 2019, we think tariffs will be having a negative impact on our total sourcing cost,” Nick Gangestad, 3M’s chief financial officer, said on Tuesday, adding, “I’ll talk more about this in on November 15, but our view is we have an approximately $US100 million headwind from tariffs.”
- Tesla (automaker): The company said on Wednesday in its earnings release that the tariffs on Chinese parts could cost $US50 million in its fourth quarter alone.
- Harley-Davidson (motorcycle manufacturer): “In total, we now expect to incur approximately $US43 million to $US48 million of increased costs related to tariffs during 2018,” CFO John Olin said on Tuesday.
- Ford (automaker): “From Ford’s perspective, the metals tariffs took about $US1 billion in profit from us, the irony of which is that we source most of that in the US anyway,” CEO Jim Hackett said earlier this month. “If it goes on any longer, it will do more damage.”
- Sleep Number (mattress and bed manufacturer):“The latest tariff rate hikes affect about 5% to 6% of our overall” cost of goods sold, CFO David Callen said on Wednesday. “We are working with our global sourcing providers to mitigate the potential for 40 basis points to 60 basis points of margin rate pressures arising from this fast-changing tariff landscape.”
- Polaris (motorcycle, ATV, and vehicle manufacturer): “As I mentioned earlier, these efforts have largely been effective so far, allowing us to hold our 2018 gross tariff impact to the previous communicated $US40 million,” CEO Scott Wine said on Monday, adding, “Through recent discussion and analysis, we now believe it is unlikely there will be a short- or medium-term agreement with China on trade issues, and with substantial impact of the 301 list looming, we are considering and taking more aggressive action.”
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