Businesses take action in escalating tariff tit-for-tat

An escalating tariff tit-for-tat between the US, Canada, China, the EU, and Mexico is producing its first fallout, and companies are responding to the increased costs of goods.

On 22 June, the EU enacted a 25% increase in new tariffs on about 180 US-manufactured products, from rice to motorcycles to bourbon. The move came in retaliation to the new 25% tariff on steel imports and 10% tariff on aluminium imports from the EU, Mexico, and Canada that the US imposed on 1 June.

Now companies are scrambling to react and “you’re already seeing a lot of pain,” said Alexander Koff, a partner with US law firm Venable who specialises in international trade issues.

Harley-Davidson is a prime example. EU tariffs on the company’s motorcycles exported from the US to the EU increased from 6% to 31%, or an incremental cost of about $2,200 per motorcycle, on average, according to filings with the US Securities and Exchange Commission.

That will cost Harley-Davidson a projected $30 million to $45 million for the remainder of this year, and about $90 million to $100 million over 12 months.

Last week, the Wisconsin-based company said it would not pass the cost increase on to its dealers or customers. Instead, to avoid the increased production cost, the company says it will send US-based production of goods sold in the EU to international plants. Harley-Davidson has manufacturing plants in Brazil, India, and Australia.

In 2017, the company sold 40,000 motorcycles in Europe. And EU countries bring the company more revenue than any other region outside the US. “Increasing international production to alleviate the EU tariff burden is not the company’s preference, but represents the only sustainable option to make its motorcycles accessible to customers in the EU and maintain a viable business in Europe,” the company said in its filing to the SEC.

Other US-manufactured products are affected by increases in tariffs. Beverage can manufacturers, for instance, are now paying more to import raw materials. On 1 June, new US tariffs on aluminium imports added 10% in costs.

Uncertainty raises businesses’ concerns

The tariff talk has been ratcheting up for months. Its reach includes the negotiations to update the North American Free Trade Agreement (NAFTA) between the US, Canada, and Mexico.

Finance professionals have watched the rising tensions with concern. In May, before the new US tariffs on aluminium and steel went into effect against the EU, Mexico, and Canada, more than one-third (38%) of US finance decision-makers expressed significant or moderate concern about a trade conflict. Forty per cent of the more than 800 respondents surveyed by the Association of International Certified Professional Accountants said they would be impacted by a trade conflict with the EU or China.

While some companies are grappling with actual tariff increases, others are dealing with the uncertainty surrounding the possibility of more increases. “We’re in that stage where a lot of businesses are trying to figure out how they should proceed,” said Michael Walden, an economist at North Carolina State University.

Companies affected by the tariffs and tariff threats have few options, he said. They can look for other suppliers or shift production to get out from under the tariffs, they can absorb the additional cost and lower earnings, or they can pass the cost on to customers.

Brown-Forman, a US-based maker of distilled spirits, for instance, is raising the price of Jack Daniel’s whiskey sold in parts of the EU to counter the EU tariff on US bourbon, according to statements a Brown-Forman spokesman made to media outlets, including Reuters.

Other companies may simply be hoping for the best, Walden said. “The question is, will this end in a negotiated settlement, or lead to more tariffs being added,” he said. He hopes the countries can resolve the trade disputes within the next few months.

Automakers threatened

Tariffs threatened by the US and China could affect the auto industry in the US, Japan, and Germany, according to Moody’s research.

On 20 June, German-based automaker Daimler issued a warning of lower-than-expected earnings should China follow through with its threat to raise the import tariff on US-made vehicles by 25%. Daimler exports to China Mercedes-Benz SUVs and sedans manufactured at its US plant in Alabama.

A 25% tariff on auto imports the US Commerce Department is reviewing would be costly for European automakers, especially those without US plants. Japanese carmakers Toyota and Nissan would have to significantly increase production at their US plants to avoid the tariffs, according to Moody’s. US automakers Ford and GM would also be forced to consider shifting production. Of the vehicles and parts Ford and GM sell in the US, Ford produces 20% and GM 30% in Mexico and Canada.

On Friday, GM warned that the US import tariffs on aluminium and steel combined with the automotive tariffs considered by the US and China could force the US automaker to cut jobs in the US and abroad. The warning was part of comments GM filed with the US Department of Commerce.

“The overbroad and steep application of import tariffs on our trading partners risks isolating US businesses like GM from the global market that helps to preserve and grow our strength here at home,” GM warned in its comments. “GM suggests prioritising work with our adjacent trading partners to strengthen US manufacturing and advance implementation of modernised NAFTA and KORUS [US-Korea Free Trade Agreement] agreements.”

In the US, GM operates 72 automotive and service parts plants and employs about 110,000. The automaker said it invested more than $22 billion in US operations in the past decade.

Automakers willing to shift production to the US to avoid US import tariffs “would also likely need to subsidise sales to offset the tariffs during the near term and could eventually pass on the higher costs to consumers,” Bruce Clark, Moody’s senior vice-president, said in a press release.

Research by the Peterson Institute of International Economics suggests that the threatened auto tariffs would impact $200 billion in US imports and, over the next one to three years or longer, 195,000 US jobs.

— Sabine Vollmer (Sabine.Vollmer@aicpa-cima.com) is an FM magazine senior editor.