Tariffs: Small business, manufacturing could be hit hard

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Springs manufacturers are already feeling the strain of President Donald Trump’s trade tariffs, which some Colorado economists and trade experts warn will hurt the state’s consumers and producers.

“It has been impacting us already,” said Christopher Fagnant, president at Qualtek Manufacturing. “It’s isolating manufacturing and it’s making it harder for U.S. manufacturing to be competitive at a time when corporations are flush with cash and can easily just pivot and go move production elsewhere — because they’ve got vast networks of supply chains.”

It’s damage Fagnant, a third-generation manufacturer, has seen before.

“It’s disappointing that we literally can’t learn from recent history — not even history 50 years ago; we’re talking about 10, 20 years ago,” he said, referring to the tariffs President George W. Bush placed on steel imports in 2002 which, according to a 2003 report from the U.S. International Trade Commission, delivered a $30 million hit to the economy.

“… I’ll use the words of the Republican leaders of the past: ‘They’re picking winners and losers,’” Fagnant said. “They’re picking the steel industry and the commodities industry as the winner, and the losers are the manufacturing base of our country.”

Part I of this series covered the major predicted impacts of the tariffs and showed the U.S. Chamber of Commerce’s analysis, which estimates $277 million of total Colorado exports are threatened by retaliatory tariffs from China, Canada, Mexico and the European Union.

Conner Murphy, diplomacy manager in global business development for the Colorado Office of Economic Development and International Trade, said while it’s important to point out the largest markets affected by tariffs, “it is also important to acknowledge that smaller, niche industries, which appear statistically small, are overwhelmingly burdened by tariffs.”

While some companies can absorb the increased costs associated with tariffs, at least in the short term, “others may be unable to do this, or otherwise decide to increase prices in order to compensate for the increased cost of doing business,” Murphy said in an email. “Small companies are particularly vulnerable in this regard.”

The tariffs are indeed hurting small companies, Fagnant said. And while the tariffs are supposed to target imported steel and aluminum, they’re wreaking havoc among manufacturers who are already buying almost exclusively U.S. melt.

Fagnant gives Qualtek as an example. The family-owned manufacturer typically makes component parts that will go into larger assemblies, and for those they need raw materials.

The problem is, it’s often cheaper for a large corporation to import a finished assembly from China instead of buying components from Qualtek, Fagnant said, because the finished Chinese assembly doesn’t face the same 25 percent tariff as raw material from China.

“So if we’re selling component parts to anywhere in the world, we’re having to pay a higher price for the raw material to make that good than our competition does,” he explained.

“Most people would say, ‘Well, if you’re buying Chinese steel to make stuff then you should be penalized because we want you to buy U.S. steel.’

“We immediately turn around and say, ‘That’s lovely — 99 percent of the raw material we buy is U.S. melt, and our prices still went up.’ And everybody says, ‘Why? This is a tariff on imported aluminum.’ … Well, the steel companies in the U.S., they’re not idiots. They see that all of their competition … just had their price jacked up by 25 or 30 percent, so they’re going to say, ‘All right, we’ll jack ours up by 24 percent and 29 percent respectively, and we’re still not gouging — we’re just operating in today’s environment.’ So our prices go up regardless, even though we’re buying U.S. steel.”

Fagnant said because Qualtek provides a lot of aerospace components and medical device components, they’re already contractually obligated to buy U.S. steel.

“We don’t even have the option of buying foreign melts anyways … they have spec that says you can’t use Chinese steel for aerospace components,” he said.

“Right now the economy’s booming, so along with the price increase there’s just a massive rush to get your hands on whatever material you can, (a) because of all the uncertainty but (b) because now U.S. steel has basically been force-fed the demand of the market by the government, so now their lead times are out double what they were in the beginning of this year,” he added. “Not only do we have to pay more, we have to wait longer…”

These days, quotes might be good for only three or four days, and most customers have wide networks of supply chains they can turn to if the wait becomes too long or the price becomes too high.

“So it’s just created all these layers of uncertainty in lead time, in price, in availability, that are totally unnecessary and they’re not helping us in any way, shape or form,” Fagnant said.

“The head-scratcher here is it’s not like the steel industry has been trying to drastically increase its output or capacity,” he added, noting that The Aluminum Association has opposed the tariffs. Heidi Brock, CEO of The Aluminum Association, told NPR last month that tariffs will “ultimately alienate allies that we need to help us” on the problem of illegally subsidized Chinese overcapacity.

As for protecting U.S. jobs — Brookings researchers found the economic ripple effects from the tariffs would put a vast number of jobs in peril across the industry categories most connected to steel and aluminum production and consumption, dwarfing the number of jobs protected. In Colorado, for example, Brookings found 225 workers are directly employed in steel and aluminum production, but 65,863 workers are employed in the industries that use steel and aluminum. Researchers noted these industries and workers can be expected to suffer as the price of metals goes up.

Fagnant said Qualtek will spend $1.5 million-$2 million this year on raw material, and between the tariffs on steel and aluminum they’ll face an approximately 25 percent increase on costs.

“So you can just ballpark it — if it’s $2 million, that’s a half-a-million dollars of added spend, where there’s no value add to us having spent that money,” he said. “It’s just more money going to aluminum companies, or processors for aluminum, or processors for steel.

“Every person I’ve ever explained this to, whether they’re in manufacturing or not, when I tell them this is how this plays out … they say, ‘Well that doesn’t make any sense,’ and I’m like, ‘Yeah. I know. That’s the point.’ … To the most seasoned multi-generation manufacturing business owner, this makes no sense. At the end of the day the only thing that comes out of it is steel companies basically get an injection for doing nothing — an injection in cash and demand and revenue.”

And at least close to home, it’s not local owners who are benefiting, Fagnant said.

“Who [owns Evraz,] the steel company in Colorado?” he said. “It’s a Russian oligarch. I’m dead serious.”

Evraz Corporation’s ultimate beneficiaries, as of May 2018, are Roman Abramovich (30.52 percent), Alexander Abramov (20.92 percent) and Alexander Frolov (10.45 percent), according to the company’s website.

Karen Gerwitz, president and CEO at World Trade Center Denver, said the organization is “not thrilled” about the new tariffs.

“If the president’s looking for attention, he’s definitely getting it,” she said. “Do I think it’s the basis for a strong negotiation forward? No. I think it’s too much, too far. …

“Tariffs and trade [are] so much more complicated than a win/lose sum on individual goods,” she added. “We should not be looking at bilateral, individual products, because trade is so complicated and our supply chains are so intertwined that it impacts a lot more than just the cents on the dollar of those products. It’s impacting investments across borders, and it’s impacting who’s opening up operations across borders, because of the political risk.” Gerwitz said she questions the premise behind the new tariffs.

“That’s the thing that’s bothering me the most. The administration … is stating we’re victims as a country, we’re being mistreated with trade policy, and they’re taking what they say is a defensive approach to other countries’ treatment of us. Yet we’re the No. 1 economy in the world — and trade is usually win/win, it’s not a win/lose scenario. So if that’s the case, why is it that we are such a ‘victim’ in this global economy and why is it that we need to take a defensive approach … especially with our No. 1 and No. 2 allies? … I wonder where he’s going with this — where is it going to end? Is he trying to change a behavior — to what end?”

Fagnant puzzles over the motivation too.

“I’m assuming what the Trump administration thinks they’re going to get out of this is a stick — instead of a carrot they’re using a stick to try and get something. I don’t know what it is,” he said. “My hope is that the country, as a whole, sees the value in not continuing to squeeze the small businesses out of existence. Because that’s really what we’re talking about, is just companies that are too small to be able to offset this somewhere else.”

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