Small businesses grapple with Section 301 tariff impacts

Section 301 tariffs on goods from China are hurting some U.S. businesses downstream in the industrial supply chain, after the U.S. started imposing the measures last summer to generate changes in China’s business practices.

Small businesses grapple with Section 301 tariff impacts

Section 301 tariffs on goods from China are hurting some U.S. businesses downstream in the industrial supply chain, after the U.S. started imposing the measures last summer to generate changes in China’s business practices.

Small businesses grapple with Section 301 tariff impacts

Section 301 tariffs on goods from China are hurting some U.S. businesses downstream in the industrial supply chain, after the U.S. started imposing the measures last summer to generate changes in China’s business practices.

 

   Section 301 tariffs have caused a “big sticker shock” for customers of an Appleton, Wis.-based welding equipment distributor and are threatening to end 13 straight years of growth for the 11-person company as its sales stagnate.
    “The biggest impact on us, initially, was cash flow, because of the money we had to pay in tariffs,” said David Anderson, owner of Metal Man Work Gear Co. “We get it reimbursed to us, but that’s only if you can get your customers to take a price increase.”
    After the tariffs were launched July 6, some customers “pushed back, so we ate” some of the increased costs, he said. The company has been unable to collect reimbursements for about 10 percent of costs added by the tariffs because of language in its contracts and customer pushback, Anderson said.
    The company also is keeping tariffed items in inventory for longer than anticipated due to slowed sales, he said.

   Metal Man Work Gear is one of several U.S. small businesses trying to remain competitive while suffering fallout from Section 301 tariffs on goods from China.
    As the U.S. and China work toward a deal to resolve trade tensions, other tariff effects on small companies have included lower profits, scrapped plans to expand to larger facilities and lost customers, according to interviews with executives of impacted firms.
    Citing unfair Chinese commercial practices including intellectual property theft and forced technology transfer, the Trump administration on July 6 launched a first round of Section 301 tariffs, assessed at a rate of 25 percent across $34 billion worth of goods from China in annual import value.
    Thus far, the Office of the U.S. Trade Representative (USTR) has granted exclusions for goods across 10 different 10-digit Harmonized Tariff Schedule (HTS) subheadings and 54 product descriptions pertaining to that initial list, which comprises a total of 818 HTS subheadings.
    The agency has not granted any exclusions from 25 percent tariffs across another $16 billion worth of goods in yearly import value, activated Aug. 23. Moreover, USTR has not established an exclusion process for a third list of tariffs, imposed Sept. 24, assessed at a rate of 10 percent across $200 billion worth of goods in annual import value.
   USTR’s stated objectives for the Section 301 tariffs focus on changing China’s behavior, but President Donald Trump has consistently cited tariffs, in a more general sense, as a means to promote U.S. manufacturing.
    While the precise correlation between tariffs and manufacturing jobs is uncertain, the U.S. manufacturing sector has added 466,000 jobs during the first full 25 months of Trump’s tenure, compared with 76,000 manufacturing jobs created in the preceding 25 months, according to Bureau of Labor Statistics data.
    But some companies downstream in the industrial goods supply chain have suffered due to Section 301 tariffs, as some small firms have been forced to employ new strategies to stay afloat, such as investing more in sales operations and scrapping plans to expand to larger facilities.
    Austin Davis, owner of Magnolia, Texas-based Warp Speed Web, which sells gearboxes for excavating equipment, said he expects some of his company’s biggest customers to start buying directly from Japan after the firm adjusted its pricing amid the tariffs.
    The four-person company had expected to import $200,000 worth of hydraulic power engines per month during 2019’s busier months, but now that’s “kind of up in the air,” considering the current business environment, Davis said.
   USTR denied a request by Warp Speed Web for exclusion from tariffs on HTS 8412.29.8045 (hydraulic power engines, unlimited rotary acting, axial piston type), which is on the $34 billion list.
    The company imported 1,900 units of the product in 2017, combining for a total value of $1.5 million, according to the firm’s exclusion request.
    In a July 11 Federal Register notice setting forth the exclusion request process for the first round of tariffs, USTR said it would evaluate requests on a case-by-case basis, taking into account factors including availability of a product outside China, whether duties on a particular product would cause severe economic harm and whether the product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.
    USTR did not reply to American Shipper questions about the Section 301 exclusion process.
    Hydraulic motors similar to the ones that Warp Speed Web imports from China can be bought in other countries like South Korea and Japan, but it could take as long as a year for the company to find a new, non-Chinese operation capable of manufacturing to the firm’s proprietary specifications, a transition that would require redevelopment of molds needed to produce the engines, Davis said.
   “When you have a proprietary version, you know, what are my options — to not be proprietary anymore?” Davis said. “To sell what everybody else sells? Or go to another country and start all over again? It took me four years to find the right manufacturers in China that had the material and the machine and the know-how to do what we wanted them to do.”
    Warp Speed Web’s revenue is growing, but profit has decreased “quite a bit” since imposition of the tariffs, Davis said.
    In some cases, Lenexa, Kan.-based Meico Lamp Parts Co. has been able to pass some or all tariff costs to customers, “but other times we just have to eat it,” said Van Elliott, a senior administrator for the company.
    USTR denied two Meico exclusion requests for products classified under HTS 8544.49.3080 (insulated electric conductors of copper, for a voltage not exceeding 600 volts), a code on the $34 billion list.
    Meico imported 10,717 units of that product in 2017, combining for a total value of $95,131, according to one of the company’s exclusion requests.
   Meico also imports several products on the $200 billion tariff list, Elliott said.
    Section 301 tariffs affect between 80 percent and 90 percent of the company’s imports, and imports account for most of the firm’s business, Elliott said.
    This has translated to costs for the vast majority of Meico’s products rising by 10 percent or 25 percent, and Meico has subsequently seen customers reduce purchases and start importing directly from China, he said.
    “They’re still going to have to pay those charges, but at least that cuts out whatever profit we were getting,” Elliott said. “It’s a battle for everybody.”
    Sourcing from overseas has helped Meico accommodate customers’ unique requests, such as customized parts and large-volume purchases of parts like sockets, wiring and tables, he said.
    But Elliott and his colleagues speculate that the tariffs could spur more customers to cut ties with Meico, he said.
   “We’re little by little speaking with other customers we haven’t heard from, wondering if orders are coming,” Elliott said.
    Tariff impacts for Meico have expanded beyond the covered HTS subheadings to the company’s entire product line, and the firm may be forced to totally stop selling some or all of its products subject to the tariffs, Elliott wrote in the exclusion request.
    “It’s been a disaster,” Elliott said of the tariffs’ impact.
    For Altera Polymers, which has facilities in Easley, S.C., and Jefferson, Ohio, the tariff rollout was “confusing and penalizing,” company President Barry Rhodes said in an email.
    The company issued an order to a supplier for a long-lead-time item well before tariff implementation, but still ended up paying the tariff, he said.
   “The rules did not care when we ordered the item,” Rhodes said..
    USTR rejected Altera’s request for an exclusion from tariffs on HTS 8477.20.0015 (extruders, other than single screw, of a type used for processing rubber or other thermosetting materials), a machine used for compounding thermoplastic resins.
    After the rejection, the firm reached out to lawmakers, who responded with form letters to the company, but took no actions to intervene or call USTR on Altera’s behalf, Rhodes said.
    The company then had two options: Cancel its order and lose the deposit or pay the tariff. The small company needed the machine, so Rhodes paid the “very costly” tariff expense of $50,000, which came directly out of his pocket, as he is a sole proprietor, he said.
    “Mr. Trump has lost my vote for 2020,” Rhodes said. “Make sure they know it.”
Company responses to the tariffs. Meico, which has fewer than 25 employees, hasn’t acted to cut staff since the tariffs started, but is “on the verge of something with the losses we’ve taken,” Elliott said. “It may not be a direct cut. … We have a person who’s trying to be retired anyway, so that kind of thing may happen. Attrition may happen.”
   While Meico won’t “take significant cuts,” it will be paying staff to do much less amid an ongoing ebb in imports, he said.
    The company also is investing more in its sales operation to replace lost revenue, Elliott said.
    Conversely, Warp Speed Web is entertaining clients less frequently, and the company has canceled plans to expand into a larger warehouse this year, Davis said.
    The firm isn’t hiring, but won’t lay off anyone either, and has cut costs on incidentals, he said.
    Another firm, Elizabeth, N.J.-based Metrofuser, which re-manufactures and distributes printer parts, avoided absorbing tariff costs after its suppliers discovered that HTS code 8443.99.2050 (parts and accessories of certain printer units [unofficial, abbreviated HTS description]), could be more precisely classified under a different code, according to Chief Operating Officer Will DeMuth.
   USTR had denied Metrofuser’s July exclusion request for that code, which is on the $34 billion list.
    When tariffs were announced, “operationally, it was a firestorm and hundreds of hours were spent,” DeMuth said. “Productive time was spent on navigating and deciphering.”
    Metrofuser would have eventually absorbed some tariff costs if the HTS code remained the same, but upstream firms faced the prospect of strained customer relationships and opted to temporarily pay the tariffs for a few months until the HTS code was updated, DeMuth said.
    The tariffs have had little to no impact on product costs for Metrofuser, DeMuth said, which purchased 40,000 units of the China-origin goods previously classified under HTS 8443.99.2050 in 2017, combining for a total value of $500,000.
    Though Metal Man Work Gear's prices have increased, the company isn’t listing the tariff as a separate item on its customer invoices, he said.
   “They don’t want to see it that way. We’ve found that,” Anderson said. “They basically see it as a cost of goods, and what they do with it, that’s up to them. We just tell them that we’re passing on the amount.”
    USTR denied two separate requests by Metal Man Work Gear for exclusion from 25 percent tariffs applying to goods classified under HTS 8515.39.0040 (arc welding machines, non-rotating type, others).
    The company imported 2,236 units of the good in 2017, combining for a total value of $716,606, according to one of the company’s exclusion requests.
Status of U.S.-China talks. U.S. Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin, Deputy U.S. Trade Representative Jeffrey Gerrish and other senior Trump administration officials this week visited Beijing to continue talks with Chinese officials to resolve trade tensions.
    “The two parties continued to make progress during candid and constructive discussions on the negotiations and important next steps,” the White House said in a statement Friday.
    A Chinese delegation led by Chinese Vice Premier Liu He is expected to arrive in Washington, D.C., for more meetings starting Wednesday.
   Officials hope to reach a final deal as early as the end of April, but have indicated that talks could extend for several months.
    “We keep hearing, oh, a couple times a month, ‘Hey, this is going to come to an end, because this is happening and that is happening politically.’ And it never does,” Elliott said. “So we’re like, ‘OK, maybe next month.’”
    Further complicating issues, Trump earlier this month told reporters he could leave Section 301 tariffs in place for an extended period after reaching a trade deal with China, but added that talks are “coming along nicely.”
    During a Senate Finance Committee hearing earlier this month, Lighthizer said he is sympathetic to people who have to deal with the real-world consequences of tariffs in addition to the “thousands of Americans who have lost their jobs because of unfair trade practices by China.”
    But the ongoing bilateral negotiation isn’t “going to be any more transparent than it is,” he said. “It’s just the nature of a negotiation. It’s not something you can negotiate with another country in public. … I’m not going to make public statements about where we are, and specifically talk about terms and put text out, because I think it’ll make it more difficult.”
   Lighthizer added that he hopes the U.S. is in the final weeks of reaching an agreement, “but I’m not predicting one. There still are major, major issues that have to be resolved, and if those issues are not resolved in a way that’s beneficial to the United States, we will not have an agreement.”
    Though tariff effects have been minimal for Metrofuser, DeMuth is concerned that the 60-person company could eventually find itself in the crosshairs of the trade war, he said.
    He pays significantly more attention to trade developments than he did before the tariffs, and he generally agrees with the Trump administration’s tariff strategy for dealing with China, he said.
    “I think it needs to be done,” DeMuth said. “I think it’s important, but there’s a lot of pain in the process, and it kind of made us get involved. We had to.”

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The FBX, a global container freight index measuring spot rates on major global trades, had an overall reading of $1,342 per FEU as of June 14, down 1.5% from a week prior, but up 3.4% from a year prior.

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Small businesses grapple with Section 301 tariff impacts

Section 301 tariffs on goods from China are hurting some U.S. businesses downstream in the industrial supply chain, after the U.S. started imposing the measures last summer to generate changes in China’s business practices.

Mar 28, 2019 on Dec 27, 2018AmericanShipper.com

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Small businesses grapple with Section 301 tariff impacts

Section 301 tariffs on goods from China are hurting some U.S. businesses downstream in the industrial supply chain, after the U.S. started imposing the measures last summer to generate changes in China’s business practices.

Mar 28, 2019 on Dec 27, 2018AmericanShipper.com