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China tariff uncertainty limiting investment, expansion for American companies


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China tariff uncertainty limiting investment, expansion for American companies

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The China-U.S. trade war has had a bruising impact on some American companies, and it could get worse if President Donald Trump follows through with even higher tariffs in the event that the two countries cannot resolve their differences by March 1.

Many American companies are putting decisions on hold until the outcome is clear.

"Uncertainty is bad for business," Jake Parker, vice president of China operations for the U.S.-China Business Council said in an interview with S&P Global Market Intelligence. "When you're uncertain you don't hire, invest more in the market, or plan major expansions."

The council's members, which include Target Corp., Tyson Foods Inc. and several other big box retailers, are still evaluating whether the trade conflict is a short-term or a long-term phenomenon, according to Parker. Moving sourcing out of China could become a necessity.

"In the meantime and until the answer to this question is clear, most companies have delayed new investments," he said.

Washington began to levy tariffs on goods from China in March 2018 as the Trump administration embarked on a campaign to reduce the U.S. trade deficit with the world's largest exporter. A tariff of 10% was slapped on a variety of imports, including electronics, furniture and food.

Some companies have applied to the government for exemptions but few have been granted. Other companies are having to adapt, which means swallowing higher costs, seeking alternative suppliers in other countries or shifting manufacturing out of China.

According to a Jan. 10 survey of 277 companies about the impact of tariffs — from by Panjiva Inc., a division of S&P Global Inc. — 42.8% of respondents said they had postponed investment or other key decisions due to the tariffs. In total, 71.2% of those companies are formulating new strategies and another 25.5% expect to see slower growth due to the tariffs. Less than 10% said they had not seen a material impact on their businesses.

More than 500 companies have commented thus far on the tariffs through earnings and the survey, according to Panjiva.

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Due to the tariffs imposed on hundreds of billions of dollars of American and Chinese goods, 70.7% of respondents to the Panjiva survey said they have switched sourcing, while another 66.7% said they have had to raise prices for consumers, and another 54.6% said they have been forced to accept lower margins. Should tariffs rise, the percentage of those companies forced to raise prices for consumers rises to 73.6%, while those forced to source elsewhere shoots up to 87.4%.

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In an interview with S&P Global Market Intelligence on the sidelines of the National Retail Federation's Big Show in New York City on Jan. 15, Galagher Jeff, vice president of merchandising operations and business analytics for Walmart Inc. said the U.S. retailer was looking for ways to mitigate the cost of additional duties.

"What we're trying to do is work with suppliers the best we can to offset those costs," Jeff said. "When we can't offset them we'll pass them on. It's unfortunate that we have to raise costs on customers but it's really unavoidable."

Walmart is not alone in passing on higher costs to consumers. Industrial conglomerate 3M Co., which makes Scotch tapes and Scotch Brite cleaning products, said in its third-quarter earnings report that it had raised prices due to the higher cost of raw materials. Tools and storage company Stanley Black & Decker Inc. said in its third-quarter earnings statement that tariffs contributed to $50 million in costs in the quarter, requiring it to raise the prices of its products and to cut expenses by $250 million in 2019.

In a meeting at the G-20 summit in Buenos Aires, Argentina, on Dec. 1, 2018, Trump and Chinese President Xi Jinping agreed to a 90-day détente to resolve their trade dispute. However, in the absence of a deal, Trump has vowed to forge ahead with a scheduled hike in duties to 25% from 10% on $200 billion of Chinese imports that include bicycles, juice products, furniture, kitchen appliances and vacuums.

Beyond that, there is also the threatened tariffs on $267 billion of Chinese goods repeatedly threatened by Trump that would include all consumer goods imported from China.

Trump has expressed optimism that a deal can be reached, but in the meantime, businesses are hesitant to make short-term decisions while the threat of higher tariffs remains.

"In case the 25% tariff is imposed there will be less demand for the products, meaning you don't need that extra warehouse space," Rajeev Dhawan, the director of the Economic Forecasting Center at Georgia State University's Robinson College of Business, said in an interview. "You won't take the risk of expanding if the demand isn't there."

Some companies have adapted to the new environment better than others. Womenswear brand Nicole Miller has navigated around the threat of future tariffs on clothing by moving much of its production out of eastern China to places such as Indonesia and elsewhere in Asia.

“We're well-positioned countrywise to take advantage," said Bud Konheim, the co-founder and CEO of Nicole Miller. "We've had to work around everything like everyone else."

Companies that cannot easily find alternative suppliers have stockpiled goods in recent months, but with 10% tariffs already in effect, there is a chance that higher-priced products could be more difficult to sell to consumers.

Gary Philbin, president and CEO of Dollar Tree Inc. warned in August — ahead of the implementation of the U.S. tariffs on $200 billion of imports — that the company would be forced to stop selling thousands of products or to offer lower-value products instead. The value shopping chain relies on inexpensive Chinese labor to offer most of its products for $1 or less, he said.

Target Corp. is one of the hundreds of companies that have petitioned the administration to drop its tariff stance due to the financial burden it would impose on its shoppers in the form of price hikes.

Mark Tritton, Target's chief merchandising officer said in a September letter to the Trump administration that the company was "deeply troubled" by the tariffs that he said would raise the price of cribs, desks, bookshelves and infant car seats, according to CNBC.

"Some products are not so easy to substitute, and then the consumer faces somewhat higher prices where the company has not diversified its supply chain," said Rajiv Biswas, Asia-Pacific chief economist for IHS Markit, in an interview. "There is some risk."

The combination of the trade war and the U.S. government shutdown has contributed to pushing business confidence in the U.S. to the lowest level since the lead-up to the 2016 presidential election, said Scott Hoyt, senior director for Moody's Analytics.

"It appears to be impacting investment plans, although so far hiring plans seem to be holding up," Hoyt said.

China's retaliatory tariffs have been much more effective than those imposed by the Trump administration, said Chris Rogers, research director at Panjiva.

Further tariffs on consumer electronics will lead to higher prices on cell phones and laptops, while U.S. companies sourcing furniture and apparel likely will lead to manufacturer shifts to other countries due to easier production skillsets required, he noted.

"On the U.S. side, most companies have passed through tariffs via higher prices as well as accelerating imports even in the most recent month," Rogers said in an interview.

Apple Inc. maker of the iPhone, on Jan. 2 cited tariffs as a factor in its weak fiscal first-quarter sales in China.

Janet Yellen, the former chair of the Federal Reserve, recently weighed in on the tariffs, noting that the trade tensions "really concern" businesses in terms of planning for the future.

"We're hearing anecdotal reports of —although there's not much in the hard data— about businesses beginning to put investment plans on hold because of the uncertainties that they face in the global environment around supply chains and trade," Yellen said Jan. 14 at the NRF Big Show.