Drowning in uncertainty: Trade questions slow investment, squeeze
profits across U.S.
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[December 10, 2019]
By Andrea Shalal
WASHINGTON (Reuters) - From a denim plant
in rural Georgia to a St. Paul, Minneapolis loudspeaker maker, nagging
uncertainty over when President Donald Trump's trade wars might end, if
ever, is confounding many U.S. manufacturers.
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 https://www.reuters.com/article/us-usa-trade-trump/trump-citing-u-s-farmers-whacks-metal-tariffs-on-brazil-argentina-idUSKBN1Y614O;
threatened 100% tariffs on $2.4 billion of French cheese, Champagne and
other goods https://www.reuters.com/article/us-usa-trade-france/u-s-vows-100-tariffs-on-2-4-billion-of-french-products-over-digital-services-tax-idUSKBN1Y62HC;
and vowed to further hike tariffs on other European Union products over
aircraft subsidies
https://www.reuters.com/article/us-wto-aircraft/us-may-increase-tariffs-after-wto-rejects-eu-claims-over-airbus-idUSKBN1Y60YJ.
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 https://www.reuters.com/article/us-usa-trade-china/trump-threat-of-more-china-tariffs-could-hit-consumer-goods-before-christmas-idUSKBN1XN2TE
"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.
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Employees are seen at work at Mountain View Mills, a privately owned
company that produces denim at four sites across the South, in
Trion, Georgia, U.S. December 3, 2019. Picture taken December 3,
2019. REUTERS/Elijah Nouvelage
"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
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)
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