Tariffs Update 2019

Infographic

It has been 18 months since the first Trump administration tariffs were imposed on solar panels and washing machines in January 2018. Since then, a continued escalation of U.S. tariffs have been levied on imports of everything from steel and lumber to wine and soybeans. Retaliatory tariffs on U.S goods soon followed from China, Canada, the European Union, and others. In June 2019, while proposed tariffs on imports from Mexico remain on hold, tariffs on $250 billion in goods from China, our largest total trading partner in 2018 (followed by Canada and Mexico), are currently in effect under a Section 301 trade action implemented by the Trump administration in 2018. Adding to the pressure, the Office of the U.S. Trade Representative is holding public hearings this week on a proposal to impose additional tariffs on $300 billion in Chinese imports that are not already subject to higher tariffs under the Section 301 action. The proposed additional tariffs would impact a wide range of consumer and other goods, including apparel, footwear, home textiles, toys and games, as well as numerous electrical components and consumer electronic, among others. If implemented, the tariff increase could take effect any time after July 2, 2019 in any amount up to 25 percent on top of the regular rate of duty.
 

Despite a decline in the May 2019 Purchasing Manager’s Index (PMI) of 0.7 points to 52.1 percent from 52.8 percent in April, economic activity in the manufacturing sector expanded in May, and the overall economy grew. Nevertheless, Institute for Supply Management Manufacturing Business Survey committee respondents “expressed concern with the escalation in the U.S.-China trade standoff” although, the overall sentiment remained predominantly positive.
 

The combined tariff list is extensive; however, pharmaceuticals remain one of the few products that have not been impacted to some extent by tariffs in the U.S./China trade war. The current list under review excludes Chinese-made pharmaceuticals as well as inputs for pharmaceuticals and select medical products. To the extent that future tariffs touch this category, the U.S. could be facing higher prices and/or potential shortages of these critical products and inputs.

 

 
Tariff Update June 2019

 
 

CHANGE

IMPACT

IMPLICATIONS

Increase in import tariff from 10% to 25% on $200 billion in Chinese goods

Largest category impacted is electronics:
tablets, internet modems, routers and other data transmission devices, printers, batteries, laptops, cellphones, printed circuit boards, and burglar and fire alarms

Other major categories impacted:
aircraft parts, liquefied natural gas, microwave ovens, vacuum cleaners, lighting, fabric and clothing, shoes, handbags, backpacks, pencil sharpeners, books, bedsheets, lawn mowers, fresh produce, meat, dairy products, coffee, wine, and various live animals

Near term: higher margins for domestic producers and importers from countries exempt from current tariffs

  • Potential for increased cash for CAPEX, R&D, debt repayment or distributions

Theoretical economic advantage for domestic production protected by tariffs

  • Increase in domestic production using existing capacity; steel capacity utilization up from early 2018 levels (79.5% in March 2019 versus 74.8% in June 2018), overall Manufacturing Capacity Utilization up to 76.7% (TTM ended January 2019) versus 75.5% (TTM ended January 2018)
  • Positive impacts related to pricing have been limited to base steel and aluminum tariffs (Mexico and Canada recently exempted), and as domestic demand has slipped and multiple exemption allowed, the price of steel is now lower than it was prior to the tariff announcement
  • Current ISM Purchasing Managers’ Index, which measures factory activity expectations has dropped to 52.1 in May of 2019 from 60.0 in June 2018, indicating a more pessimistic outlook by factory managers

Ripple effect of higher input prices on downstream products

  • Consumer Price Index (excluding food and energy) has been steady over TTM (2.1% in June of 2018 versus 1.9% in April of 2019)
  • Producer Price Index (excluding food and energy) has been slightly higher than the CPI (2.3% annually in April 2019 versus 2.1% annually in June for 2018) indicating impacts of producer price inflation have not been fully passed on to customers for downstream products
  • This indicates that longer term impact of tariffs are having a negative impact on the manufacturing and distribution sectors and a neutral impact on consumers (so far)
  • Long term implications would include reduced cash available for CAPEX, R&D, debt repayment or distributions
  • Expect it to take six months for new tariffs to work through industries and be fully included in most inventories’ cost basis
  • Retailers including JCPenney and Macy's have spoken to the difficulty in shifting supply chains away from Chinese manufacturers, especially in categories like footwear, where only 2% of product sold in the U.S. is manufactured domestically
  • Retailers have ramped up imports ahead of the latest round of tariffs, but many prominent retailers including Walmart have signaled that price increases on consumers are inevitable

U.S. agriculture and other resource producers will suffer as exports decline further (soybeans, lobster, etc.)

  • Drop in demand for U.S. agricultural products
  • Difficult to bring domestic export business back when customers have sourced elsewhere
  • Expect more taxpayer-funded subsidies to shore up farm industry

Retaliatory tariffs hitting thousands of industrial and consumer products

  • New Chinese tariffs took effect on June 1, 2019 on $60B in U.S goods
  • Additional U.S. tariffs proposed to take place June 30, 2019
  • Creates further additional uncertainty following 2018 tariffs
  • Higher risk for future Fed interest rate increase to combat inflationary impacts of tariffs
  • Will have a negative impact on GDP
  • Total cost per average U.S. household for the latest round of tariffs is estimated to be $767 per family or 0.4% higher consumer prices