Trade War: Manufacturers Reflect on 90-Day Tariff Cease-Fire

When it comes to coping with the shifting tides of tariffs and the trade war between the U.S, China and other countries, there is no one size fits all. The steel and aluminum tariffs that were imposed in early 2018 are affecting U.S. manufacturing companies differently, depending on the nature of their business, the links in their supply chains and their type of customers.

As 2018 comes to a close, the status of the trade war between the U.S. and China and other countries is uncertain. Although the Trump administration and China agreed to delay the imposition of new tariffs that were supposed to go into effect Jan. 1, 2019, in order to allow for further negotiations, the details are fuzzy. If the two sides fail to reach agreement within 90 days, the administration says it will move ahead with raising tariffs on $200 billion of Chinese goods from the current 10 percent to 25 percent.

Insteel Industries Inc., which makes steel wire reinforcing products used in concrete construction, has seen the price of hot-rolled steel rise 30 to 35 percent since the tariffs were enacted, says H.O. Woltz III, chairman, president and CEO of Insteel.

The increase has come not only from foreign suppliers but also domestic ones. With such high material costs, it is hard to compete with imported finished products that do not have tariffs, which in Insteel’s case are pre-stressed concrete strand and welded wire fabric.

“Imports of finished products are having a field day in the U.S.,” says Woltz. “In a nutshell, this is a case where the elevated market price for hot-rolled carbon steel in the U.S. is not competitive with world markets,” he explains. “That has created a tremendous opportunity for foreign producers of downstream products to capture market share in the U.S.”

As long as U.S. hot-rolled steel prices remain substantially higher than world market prices, a significant part of the downstream industry is at risk, he says. While the steel melting facilities in the U.S. employ less than 100,000, “more than 8 million U.S. manufacturing jobs exist in downstream steel fabrication industries,” he says.

Insteel is struggling in some cases to cover the cost of production for certain finished products, and in those cases it is in the process of determining how to protect itself. “It’s very likely that we’ll begin to reduce operating hours and reduce our payrolls,” unless the situation changes, he says.

Woltz pointed out, however, that only 30 percent of the company’s business is subject to import competition. The rest—70 percent—are specialty products engineered for specific uses, where there is little competition from imports.

Precision Manufacturers Are Absorbing Increased Costs, Surcharges

Edward C. Farrer, director of purchasing at Principal Manufacturing Corp., says that even though prices for steel have dropped a bit recently, they are still significantly higher than in the rest of the world. The company is a precision manufacturer of metal parts, especially metal stamping and fine blanking, and also offers value-added services. It mostly sources specialty steels and has had to absorb much of the increased material cost.

In some cases, existing contracts allow for price adjustments. “In other cases, it has gotten contentious,” Farrer says. A substantial part of its business is automotive parts, which have strict requirements, so Principal can’t just switch suppliers, he notes.

“We’re pinched between our customers and our metal suppliers,” says Farrer. In other parts of the business, the company “down gauged,” i.e., made slight changes, to reduce the metal content of a part. Principal also applied for Section 232 exclusions but as of early December, it is still awaiting a decision. Principal also doubled-down on existing continuous improvement programs to increase automation and eliminate costs where it could, says Farrer.

Troy Turnbull is president of Industrial Innovations, which manufactures equipment for the die casting industry. It is the largest manufacturer of metalworking lubricant proportional/mixers and spray application systems in the U.S., and also does machining, fabrication and foundry services. “We not only have our own product line, but are also making products for other companies,” Turnbull says.

As the tariffs took hold, the most confounding development has been a “surcharge” that some suppliers have said they would be adding to invoices. These included hydraulic, electronics and pneumatic suppliers, he says. “When we called to ask them specifically how much the surcharge was going to add, they couldn’t give us a response,” Turnbull says. “That’s because they don’t know what’s going to get a tariff and what’s not.” That in turn makes it difficult for Turnbull to deliver accurate quotes to his customers. “Quotes used to be good for 30 to 60 days. Now you give a quote and have to say it’s only good for 24 hours,” he explains.

Some Manufacturers Are Also Seeing Sales Dip Due to Tariffs

Industrial Innovations customers are also getting hit with such surcharges from some of their suppliers, so much so that Turnbull’s bookings have started to dry up. “The companies that we sell to—predominantly in the metal stamping, metal fabrication, and foundry industry—are now struggling to get their material,” he says. “They are paying the surcharge and are not able to pass that on in some instances because of the contracts they have.” Thus, their profits are dwindling.

Turnbull says his sales have dropped by about 30 percent a month since July. “Projects that were supposed to be released in the third or fourth quarter are being pushed out to the first or second quarter of 2019,” he says. “Currently, our December volume is virtually nil, which is highly unusual,” he says. “This is very shocking to us.”

Turnbull has laid off six employees already, and is considering more. He has cut back expenses, including holding off on buying a new press brake with a price tag of $150,000. “We can’t justify the purchase because the work isn’t there,” he says.

While the Trump administration and China try to hammer out some kind of truce, these impacts are beginning to weigh more heavily on companies. For instance, even though Insteel has not yet closed any facilities, delayed hiring or put capital expenditures on hold, all of that is possible if current conditions persist, says Woltz.

Others may not be able to last much longer. “If [the Trump administration and China] don’t find common ground within 90 days, I think you’ll see smaller companies start to go out of business,” says Turnbull.