The Decisive | Season 3 Ep.3 - Buyers Beware of Potential Tariff Troubles

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Kristen Hallam  

Hello, and welcome to The Decisive. I'm your host, Kristen Hallam. This episode of the podcast is taken from a December 11 webinar. In this excerpt, Emily Crowley, who leads our Pricing and Purchasing team at S&P Global Market Intelligence, analyzes the potential impacts of proposed changes in tariffs and migration policy in President Donald Trump's second term. Let's listen now for insights on how to navigate these changes.

Emily Crowley  

How have our forecast assumptions changed in our fourth quarter forecast to reflect some of the new policy assumptions of the incoming administration? For the fourth quarter forecast, we really were focused on 2 things: tariffs and changes to U.S. migration policy. Most of this presentation is going to be focusing on the tariff piece. Given Trump's previous administration and his use as tariffs as a policy tool as well as some of the campaign announcements that we saw, there's a high likelihood that there will be a new wave of tariffs that will be imposed under President Trump's second administration, and we have assumed those. We see these starting to roll out beginning in the second quarter of 2025 through the end of 2026. What we have assumed in this forecast is that Canada and Mexico remain exempt from any tariffs. There is an area of risk, but for the numbers that are in our Q4 forecast, no additional tariffs on Canada or Mexico have been assumed. We assume a 30% tariff against all mainland Chinese imports. So mainland China is already subject to many tariffs. The key list due to the key tool we saw in the previous Trump administration was Section 301. Most of those lists were tariffed at 25%. Some had a lower tariff rate. Essentially 25% goes to 30%, 0% goes to 30%. We are assuming a flat tariff rate for all Chinese imports of 30%. We are now also assuming a 10% tariff against all other markets. So this would be true for imports from Thailand, from India, any of the other markets that are exporting to the United States. Now we'll be facing that 10% tariff. We do think that there will be an exclusion process. This is something that we saw under President Trump's last administration, but this was something that businesses had to actively apply or build a business case for. It took time. We did get exclusions. They last for 12 months. You need to renew them. So it's one thing that we do expect to see. But again, the process is going to be timely. And given the increased scope of tariffs that we are expecting, you can expect that process to be a little bit more burdensome, and there will be a lot more demand for those exclusions and it would just be like a little bit more bureaucratic traffic essentially to get those exclusions processed. So do expect an exclusion process, don't depend on exclusion process. That would be my key takeaway there. Another key thing to consider is that right now, our forecast does not include retaliatory tariffs. This is likely to change. We do see a risk of this as very high. But for the purpose of this forecast, there are no retaliatory tariffs assumed on U.S. exports to the rest of the world. On the migration piece, on the campaign trail, one of the campaign promises was a mass deportation of 11 million undocumented migrants from the United States. Realistically, we see this as unlikely just given the logistics involved, the amount of time it takes to identify people, the amount of resources needed to move people and then additionally, the types of agreements that we have to have in place with other countries to actually execute those deportations. What we have included in our assumptions is that the pace of removals will accelerate. Removals under the last Trump administration were 300,000 per year, slightly higher for what we're ending the Biden administration at. So that would be an uptick from what we've seen over the past 4 years. We do expect to see channels for legal migration to tighten. This would be H-1B visas. There was an attempt to change the requirements for those under the last Trump administration. We expect to see that revisited in this administration. Cumulatively, these policies will result in around 0.5 million fewer migrants to the United States per year. That does mean a tightening of labor markets. And one thing I will highlight is that there are a couple of industries that are probably likely to see this first, and that would be agriculture, construction, food processing, food services and then another one to consider is building maintenance services. There is a key difference when we think about the impact of tariffs on prices under this administration compared to last administration is that manufacturing is actually pretty weak. We've seen stronger economic growth in the United States, but it has been mostly driven by services. When we look at those manufacturing numbers, they've actually been neutral in the United States. We've actually seen them in contractionary territory. When we look at new orders, this plays out. One thing we would note is that there has recently been an uptick in new orders, PMIs for emerging economies, and we think that this is essentially linked to trying to front-load orders to get goods delivered to the United States before tariffs start to kick in. But the fact that we have a weaker manufacturing sector right now means that there's not as much leverage to pass tariffs directly on to consumers or to businesses that are purchasing in those markets. So what do tariffs mean for U.S. imports? Number one, tariffs are collected at U.S. ports of entry, and they are typically paid by the importer. Under our assumptions, a U.S. firm importing a casting from India in 2025 will pay an additional 10% in U.S. tariffs to customs and border patrol. Like I mentioned, the impact on the market prices is not 1:1. I kind of think about categorizing these things as low impact, medium impact, high impact. Low impact, if there's a ton of domestic producers, if substitutes are easy to find or if these are products that have a low value-to-weight ratio, so that's something like a building material, stone, concrete or something that has a low volume-to-value ratio, like plastic containers, plastic packaging, those are areas where, number one, we don't have a high penetration of international imports into these markets. Also, there's a ton of domestic suppliers. So do not focus on anything that kind of falls in that category. Where you need to be concerned is that if we don't have domestic production or if some imports are a significant share of domestic consumption or if it's an intermediate input. So if we're dependent on imports for an intermediate input, that's where we start to see medium impact, high impact, and this is where you should be focusing your concern on is, is there domestic supply? If the answer is no, you're going to have to pay that tariff. You're going to have to get those goods somewhere or shut down production. So that's number one. So if you're sole sourcing or there's no domestic suppliers of that, that should be your primary concern. Second thing, are you importing something that is a specialized or precision good? That's a lot of engineering. It's not easy to find new suppliers for that. So anything that you need to qualify new suppliers for, whether that's to meet your own internal standards and quality control measures or if you have to meet federal quality control measures, right, that's where you're most highly exposed. Among this, there are offsetting factors. We do expect to see strengthening in the U.S. dollar. So that's actually going to be counteractive to tariff prices. So a stronger dollar means that we're actually paying fewer dollars for something that's denominated in a different currency. This will have a hit to global demand, and we may see some producers actually lower prices to maintain market share. And then additionally, retaliatory tariffs actually may lower U.S. prices for things that we are primary exporters of. So that's agriculture and energy primarily, but there also may be some finished goods, semi-finished goods that fall into that bucket as well. So blind spots and opportunities really is understanding, one, are you sole sourcing? Two, are you exposed to suppliers that are sole sourcing and make sure that you're on top of that. If it is coming from a supplier, you can use cost models to evaluate the impact. If your supplier is dependent on an impeller, again, using India as an example, that's now subject to a 10% tariff. You should not be accepting a 10% price increase for your pump, you should be looking at something in the 1% to 2% range, right? Like 1 tariff on import does not necessarily mean your prices go up 10%. Assess your exposure to exclusions or quota systems. Like I said, exclusions may not be renewed. Quotas may be replaced by tariffs, have a plan in place. Understand if you're exposed; if you're exposed, have a plan in place. Assess your exposure to global benchmarks, prices like the LME. If you're using a price that is an LME price, if you're using a price with the tungsten price, that's a Chinese price, those prices will not reflect tariffs, right? The location of the price benchmark is key. These tariffs occur at the U.S. border. So make sure that you're not tying your contracts to something that isn't going to include these tariff prices. So we're thinking about things from all angles. Opportunities, like I mentioned, tariffs, they increase the barriers to foreign producers. This is an opportunity to increase market share if you are selling to a domestic market. This also means that some supply of U.S. goods, some supply of international supply that would have been going to the United States will be rerouted. So this actually might have a deflationary impact on prices in Asia and Europe as those goods that were destined to the United States try to find a new home. Bottom line, tariffs are inflationary. Don't expect 100% pass-through, but do really do the due diligence on where you are exposed. And I would strongly suggest triage, triage your exposure and tackle from the top down. We will be continuing to monitor any sort of updates. We've been really focusing on the pricing impact. There is a question about what impact will the potential Trump tax cut have on the U.S. economy. So part of our baseline assumptions is that the consumer tax cut that's currently in place will not expire. So that is baked into our forecast. What is not baked into our forecast is a corporate tax rate cut, but that does look more likely with an incoming administration. So tax cuts generally are stimulative of spending and tariffs are going to raise prices. So at this point, we'll wait to see what our macro team is saying, but there is a stimulative effect from a corporate tax cut, which would boost U.S. economy. The extent to which that's offset by some other policies, we're still waiting for guidance from our macro team to do the assessment on that. Another question that we have, are there current expectations around tariffs on components versus finished goods? One of the things that we saw in the last administration was that tariffs were very much targeted to hit components, to hit intermediate components for capital goods. Tariffs really steered away from hitting consumers. Our forecast right now, we don't have that type of nuance given the breadth and the intensity of what was put out on the campaign trail, really, I think some of the frustration that we have seen imports not necessarily result in improvements in domestic industry or domestic manufacturing, but rather getting rerouted to other areas of the world. Our assumption is that these end up being broad-based. We are not expecting to see consumer goods get spared. We expect that consumer and intermediate goods for capital equipment will be kind of treated in a similar manner. There are likely to be exclusions. The kind of the thing that comes to mind is we don't grow coffee in the United States. So does it make sense to put a 10% tariff on coffee to the United States? Probably not. We're never going to be able to onshore that. So there will be that exclusion process to carve out some of those nuances. But for the moment, the forecast assumes that consumer goods and intermediate goods get treated simply under the new regime.

Kristen Hallam  

Thank you for listening to The Decisive.