Downstream Effects of Upstream Tariffs

For manufacturers, studies show that the damage caused by tariffs far outweighs the benefits
Author:
Publish date:
The ongoing trade war with China has had a massive impact on companies that manufacture overseas.

The ongoing trade war with China has had a massive impact on companies that manufacture overseas.

While coronavirus dominated headlines in March, marine companies in most sectors were still feeling the effects of tariffs. In the parts and accessories world, the impact of tariffs varies widely from company to company, but it seems to ripple to most everyone. “It cost us gross margins last year,” says Mike Keller with Keller Marine. “It’s a big deal.”

A study from the Federal Reserve in December showed that tariffs were hurting manufacturing, and that the damage far outweighed any benefits, according to The Wall Street Journal’s editorial board. American industries have in some cases suffered more than their counterparts abroad depending upon how the tariffs are applied. For example, U.S.-based speaker manufacturers such as Clarion are tariffed for sourcing magnets in China — there are no such suppliers in the United States — but speakers assembled entirely overseas and shipped to America remain tariff-free.

Life Industries has not been affected much by tariffs, says company president Grace Schmidt, because it has always sourced in the United States when possible. It takes its commitment so seriously that it has discontinued certain products that have seen production move abroad, and this came decades prior to tariffs.

Raul G. Pla says Florida-based antenna manufacturer
AirWave is getting off easier than its competitors that manufacture antennas overseas, which are facing a 25 percent tariff. “We’re much more competitive, and that’s why we’ve been able to raise prices,” Pla says. “We’re only passing along 15 percent, when we know our competition is bringing in completely finished products. And when they bring in the finished product, they get taxed 25 percent.”

Pla adds: “We do the entire final assembly in America, but all the raw materials are sourced from overseas, and some components are from China,” he says. “That definitely has been affecting us; we’re absorbing what we can but, depending on the situation, passing it along to our customer.”

AirWave has brought more parts of the operation in-house and changed to a U.S. ratchet manufacturer versus one from abroad, Pla says. Costs have run about 15 percent higher than before the tariffs, but that was easy to build into the price because the company had launched a new product line. “We were able to kind of mask the tariffs because we were providing a product that has a lot more features, and hit customers with one new price,” Pla says.

The tit-for-tat nature of the tariffs, and changes in whether they will or won’t be implemented, results in confusion and sometimes additional price increases, says Keith Wansley, president of Seawide Distribution. “We’ve seen manufacturers say, ‘This is what we’re hit with now, and we could be hit with a second tariff in eight months.’ So instead of doing two price increases in one year, they’ve just said, ‘OK, worst-case scenario is a 25 percent increase total, so we’re just going to do a 25 percent increase now to be safe,’” Wansley says. “That has affected quite a bit of these manufacturers.”

Some U.S. companies have turned to domestic suppliers to avoid paying tariffs.

Some U.S. companies have turned to domestic suppliers to avoid paying tariffs.

Price increases without any discernible benefit to the consumer can be problematic. Natural price adjustments in the marketplace are easier for businesses to withstand; unnatural price adjustments that come from tariffs are difficult for companies to take in stride because they come so fast, rather than over time like more natural price adjustments, Keller says.

“The crazy thing is, you have to do it,” he says. “The product’s not better because of it, and I would love the idea of putting more Americans to work. I endorse that. Where I have the problem is, we already don’t have enough Americans to work. I’m all for it; tell me where I’m going to hire the people, because I would hire them if I could. But I don’t seem to have anything coming out of China that’s not tariffed.”

Those increases are seen at various layers of the process, sometimes in several, Keller says. “We just couldn’t mark it up fast enough because it’s not a natural pricing increase that’s pushing it up 25 percent,” he says. “When you have unnatural things in economics, they don’t follow economic rules.”

Tariffs create ripple effects that hae caused companies to get creative. “I think what dealers didn’t understand and what did cause ripple effects is when the raw materials changed by 25 percent, and then the product price changed by 25 percent,” Keller says. “You can’t just raise the price of a boat 25 percent just because it’s aluminum and blame it on raw materials. Some people moved to raise pricing probably a little more than they should’ve. And prices won’t come down as fast as they went up, and theoretically they should. When these fluctuations are natural, that’s what should happen.”

The fast nature of increases also gave Amazon yet another competitive edge, Wansley says. “Amazon’s got power and money to buy lots of stock,” he says. “They can buy at a lower price in bulk, and that takes a lot of people out of the game. You don’t see them change prices until they run low on inventory or until they have to accept price increases. We work these boat shows with dealers, and we hear people say, ‘We just looked and we can get this on Amazon for way less,’ and the guy’s got to match it. It’s tough to match those prices.”

3_AdobeStock_320670095

The China tariffs are impacting the fishing industry, particularly companies that import certain artificial lures, hooks and reels, says Mike Leonard, who heads up government relations for the American Sportfishing Association. “The Phase One deal, which reduced tariffs on those products from 15 percent to 7.5 percent and eliminated other proposed tariffs, was welcome,” Leonard says. “But no one wants to see a 7.5 percent increase in the cost of their product, and it hurts those companies’ bottom line. Impacts to production in China related to the coronavirus outbreak has created even more challenges recently.”

Even companies that are based in the United States have advocated for the end of tariffs, says Jesse Simpkins, an ASA board member and marketing director for St. Croix Rods. “This is something we have been cognizant about as an industry,” Simpkins says. “We don’t manufacture outside the U.S., so the effect has been minimal, but we want to make sure we are staying on top of it. We need to make sure we have people on the Hill every day. We are a significant player, and we need to make sure we’re doing everything to make the industry stronger.” 

This article originally appeared in the April 2020 issue.

Related