Manufacturers buffeted by the tariffs imposed by the Trump administration two years ago are now dealing with the effects of the COVID-19 pandemic. For some, it’s been a one-two punch.
In March 2018 President Trump announced a 25 percent tariff on imported steel and a 10 percent levy on imported aluminum, aiming to steer manufacturers toward U.S. commodity producers and away from Chinese exporters. That resulted in manufacturers paying higher prices for raw materials and price hikes for their customers.
In a letter to Trump on March 18 of this year, more than 160 manufacturers and industry advocates urged the administration to roll back the tariffs, at least temporarily.
The rollback would help mitigate the economic harm from the spread of the novel coronavirus, they said in the letter, and bring tax relief to American manufacturers, farmers and consumers.
“These tariffs are taxes that Americans pay,” the letter said.
It went on to say that, according to research by international consulting firm Trade Partnership Worldwide, “suspending the … tariffs currently imposed on imports from China, and China’s associated retaliation, would provide a boost to the U.S. economy of over $75 billion, or 0.4 percent of U.S. GDP.”
Although the administration has temporarily suspended tariffs on some medical devices and equipment imported from China, Trump responded in a press conference that he would not suspend the tariffs on steel, aluminum and other products.
But on March 27, the Wall Street Journal, quoting a senior administration official, reported that the tariffs on imports would be lifted for three months.
In his press briefing later that day, Trump angrily denied the report, calling it “fake news.”
That dashed hopes for some relief of local manufacturers like Steve Kaczmarek, whose company, Borealis Fat Bikes, is struggling to hold on through the pandemic.
“I was optimistic that finally, somebody is thinking rationally and saying, ‘All right, these businesses aren’t going to be able to survive,’” Kaczmarek told the Business Journal.
For Kaczmarek and other business owners, the tariffs made business planning tougher, and the virus has further complicated his business decision-making.
The tariffs have hit operations and investments across borders, said Karen Gerwitz, president of the World Trade Center Denver.
“So many companies here, in particular, our small to mid-size manufacturers, are having to hold up production on certain items because certain components … come from China and may only come from China,” Gerwitz said.
The trade center recently conducted a survey of its members; some said it would take them six months to find another source for customized parts.
“Changing supply chains doesn’t happen overnight, especially for smaller businesses,” Gerwitz said. “In order for them to stay competitive, I do think that the tariffs ought to be eliminated — not only for medical devices and medical equipment, but for all things right now, because that is in [the president’s] power to do so.”
Gerwitz pointed out that many people think China is paying the tariffs but, in fact, “it’s the U.S. manufacturer that’s importing these things, or it’s the consumer directly.”
U.S. exports are going to dip over the next quarter, Gerwitz predicted, “mainly because of the economy and people taking a pause on investing or in purchasing equipment. But because of the continued tariffs, we are also having retaliatory tariffs in China. … For our manufacturers, that means they’re going to take a hit on the revenue side as well.”
Since the coronavirus crisis started, port delays and transit from ports to manufacturers have also been concerns.
“Since truckers are hindered and since ports are limited in the COVID crisis, or at least delayed, it’s causing a lot of stress around transportation and logistics,” Gerwitz said. “That’s huge for Colorado because we rely on all modes of transport to get to here, unlike places on the coasts.”
Gerwitz said sales also will take a “huge hit” in the next quarter because trade shows and conferences are being canceled.
“So business development teams that are going to those to try to set up new partnerships and new sales are not able to do that,” she said.
“I want to give the administration credit, along with the Senate, for passing the stimulus act that will help, especially small businesses,” she said.
But many Colorado companies need the relief that tariff cuts could provide.
“Tariffs in general are bad policy,” Gerwitz said. “People may change their supply chains, but it’s not usually a tariff that makes them do that. It’s usually cost of operations, labor and many other factors that come into play.
“Since the tariffs have been put in place, our exports have declined and imports have declined. So I don’t think it’s doing what the [Trump] administration wants to see it do. … I hope he reconsiders.”
STRUGGLING TO COPE
Kaczmarek said Borealis has been struggling because of the tariffs, and the pandemic has been an additional blow.
For March, he said, sales of the company’s bikes are at about 60 percent of forecast.
“We had a decent fourth quarter,” he said, “but the first quarter has been just awful.”
Kaczmarek has cut his workforce in half, from eight during the company’s busy season (September through the end of February) to just four now. Two were recently laid off due to the pandemic.
Still, Kaczmarek said, “we are at least sort of existing — a lot of companies are doing worse than we are.”
In response to the tariffs, Borealis made changes where it made financial sense to do so. The hubs it uses for its wheels used to be sourced in China, and the company moved to a new supplier in Taiwan to avoid the tariffs.
“The hard part is our frames, which require molds that are very expensive,” Kaczmarek said.
Switching to a country like Vietnam would require him to find a new supplier, fly there, spend $100,000 on a new mold and get it set up and tested.
“And then you never know — Trump may wake up one day and just say, ‘You know what, the tariffs have gone away,’ and now I’ve spent $150,000 by the time it’s all said and done, for nothing. We’re just too small — we can’t afford to do that.”
So Borealis continues to source its frames in China at prices that are 25 percent higher than before the tariffs were imposed.
“Consumers are very price-sensitive,” Kaczmarek said. “The price point has had to go up to accommodate that, and as a result, sales are down.”
Orders have perked up since the company started offering 15 percent discounts on all of its products plus free shipping directly to customers’ doors.
“The optimistic side of me says people are going to order bikes and we’re going to stay busy, and maybe I can bring my two guys back,” he said. “And at the moment, I would rather keep my guys employed than make a profit.”
Kaczmarek said he is getting by for now because of a lot of inventory on hand, but he has to cope with freight rates that have increased by a third and containers full of parts that will hit the Long Beach port in two weeks.
“I would love it if Trump just woke up and said the tariffs are gone,” he said. “That would save me $50,000 in the next 30 days.”
Tom Neppl, president and CEO of Springs Fabrication, has had to cut back employees’ hours but hasn’t furloughed anyone yet.
The company produces engineered metal products for energy, mining, government and military clients — and has been somewhat insulated by its business in those government and military areas.
But Neppl said the company is operating at a lower level of efficiency than before COVID-19 hit.
“We’ve put a significant amount of effort into workspace safety, with hand sanitizing stations and protocols on how many people can be together in a group,” Neppl said. “We’ve got probably a fourth of our staff working from home, and then we’ve separated ourselves. Just keeping distance from people makes things less efficient. Our sales people are sequestered to home, so they’re not as efficient if they’re not out visiting customers.”
Neppl said the tariffs impacted his company but weren’t devastating, although some industries — agriculture and equipment manufacturers that serve it, for example — got hit harder.
“They were sort of a one-time hit for us,” he said. “They raised prices of commodities pretty much across the board, but they have stabilized and come back to the new normal now. We’ve all sort of adapted to that; it hasn’t really prevented us from doing business. … In our case, we just passed the price increases through. We did not get a lot of resistance because everybody was in the same boat.”
Neppl said he’s been concerned about competition from China for 20 years — “the impact they’ve had on our industries and the number of jobs that have gone to China in the 2000s. The manufacturing industry was decimated by the mass exodus of jobs and factories.”
But in the past several years, the industry has started coming back, he said, “and if, in my opinion, the tariffs helped build American industry strong again, like the steel producers and those types of industries, we’re better off for that, as we shouldn’t be so dependent on foreign suppliers for everything we do.”
Neppl said he currently has several people researching the stimulus bill and how the company might capitalize on programs like payments on wages.
The company isn’t in a position to help relieve the shortage of medical equipment, he said, “but if I can keep people working, I feel like I do my part here.”
RESPONDING TO DEMAND
Qualtek Manufacturing is one local company that has ramped up its production of medical equipment, but owner Chris Fagnant doesn’t know if that will make up for an expected drop in orders in the aerospace sector of the business.
The company makes component parts for larger assemblies, including aerospace and medical devices.
“A big part of our business is medical devices, and those medical devices are specifically respiratory,” he said. “The two parts [the company makes] go into the two most in-demand things there are right now on the planet. So we’re actually hiring people in the middle of this crisis.”
Fagnant said he lost one customer after the tariffs were imposed “because our pricing was too high.”
But “at least for us, the initial 30 percent increases we were seeing on aluminum and steel have, for the most part, returned to 2017 levels,” he said.
“Right now, the only thing we’re really asking our material suppliers is are they open for business? And can they ship us material? If you can answer those two questions, well, I’m almost less concerned about price.”
The tariffs, however, make themselves felt in other ways.
When Fagnant makes a new hire to work on medical device orders, he has to buy a high-end computer that can process large work files.
“Getting that computer is really hard right now,” he said, “because there’s a delay on stuff coming out of China — not just from COVID but before that, from the tariffs on Chinese goods.”
Fagnant’s view on the tariffs is that “fundamentally, they’re using a big, blunt object to address a problem that’s been going on for decades. We know China has not played by the rules, and from [the administration’s] perspective, the only way to get their attention is to do something big and impactful to their economy.
“And that might be true, but I think there’s probably also better ways to do it.”
Fagnant said all of Qualtek’s customers are considered essential businesses during the pandemic and are buying parts while they can.
“So we’ve had a lot of demand, and at least right now, most of that is continuing,” he said. “We’re still making deliveries at or above levels before the COVID crisis. … But we had a lot of aerospace work, and we expect that to drop off significantly because airplanes aren’t flying.”
And Fagnant knows that if the COVID-19 shutdown requires further closures or becomes an extended crisis, “it could all stop.
“Right now at Qualtek, the concern is less on tariffs and more on just staying open and keeping our people healthy and safe,” he said.