A few weeks ago, SocGen asked what is arguably the most important question relating to the global trade wars: are tariffs inflationary or deflationary? While there were various nuances, its conclusion was simple: “Inflationary short term, disinflationary medium term.”
It appears that the “short-term” part has now arrived, because after several rounds of tit-for-tat tariffs and retaliations between the US and China, American consumers are about to be hit with sharply higher prices as tariffs on industrial metals put pressure on U.S. manufacturers.
In May, President Trump imposed steel and aluminum tariffs on the EU, Canada, and Mexico to help preserve America’s manufacturing base. The response: steel and aluminum prices have risen 33% and 11% respectively since the beginning of the year, as manufacturers began to price in the tariffs.
Moreover, tariffs on additional imported products from China have added even more costs for producers, which are now being aggressively passed through to the consumer.
“You’re going to see higher prices passed on to consumers…almost immediately” Matt Gold, a former deputy assistant U.S. Trade Representative for North America under former President Barack Obama, told CNBC. “A lot of goods are already warehoused that were imported months ago, so it takes a bit of time to catch up, but prices catch up pretty fast,” he added.
“The way it works is that a U.S. importer pays the taxes to the customs duties or customs tariffs to the U.S. Treasury,” Gold explained. “Of course, that’s going to effect the sale price [and] whatever price at which the exporter sells to the importer is going to lower, because the importer has to pay duties in addition to paying the purchase price.”
Gold added that for American consumers, those soaring costs would be spread “really across the board. With Chinese retaliatory tariffs, we’ve imposed those on $34 billion of different goods coming from China. It’s a very broad array of consumer products, industrial products.”
“So everything from the person who walks into Walmart is going to pay higher prices as well as the manufacturer buying material imports for their manufacturing processes,” the former official added.
To be sure, the latest Markit PMI already warned about the threat of sharply higher prices, noting that “July saw the steepest rise in prices charged for goods and services yet recorded by the surveys as firms passed rising costs on to customers, in turn frequently linked to tariffs.”
And here’s why.
This month, Winnebago Industries warned that the recreational-vehicle boom seen in the last several years could have popped: “We’ve had to go to the market a bit more frequently and a bit more aggressively with some price increases as of late,” said Michael Happe, chief executive of recreational-vehicle manufacturer Winnebago Industries Inc, who spoke with The Wall Street Journal.
Happe did not disclose how much the tariffs would affect prices but said the company had made changes such as altering recreational-vehicle floor plans to decrease costs.
The CEO of the Iowa-based company said that it has benefited from the recent recreational-vehicle boom. However, trade tensions and rising inflation could lead to a gloomy outlook for the company. “Uncertainty is never a great thing for the economy and the more noise there is there’s a risk that consumers will press pause,” he said.
Polaris Industries is another recreational-vehicle company raising prices on its vehicles including boats, motorcycles, snowmobiles to cover $15 million of the $40 million in tariff-related charges to pay for steel, aluminum, and components from China this year. The company is facing severe headwinds from retaliatory tariffs from other countries on products it exports from the U.S., including the Indian-brand motorcycles it ships to Europe.
In a move that is sure to infuriate President Trump, CEO Scott Wine said he could soon move production facilities of road bikes that it sells in Europe to Poland from Iowa to avoid European Union tariffs.
Last month, Harley-Davidson announced similar plans in June to move production to Europe, which drew substantial criticism from labor unions and the wrath of President Trump. Harley’s CEO Matt Levatich said last month that the transition would help keep costs down for its motorcycles in Europe and escape Trump’s tariffs. “We made the best decision given the circumstances,” he said last week.
His decision will soon be copied by dozens of other US manufacturers who face the challenge of keeping profits high amid sharply higher costs.
And while tariff costs for recreational-vehicles are slowly but surely being passed along to the American consumer, at least these are highly discretionary purchases for members of society’s upper-middle and top income class, and as such the hit to their wallet will be manageable.
But what’s worse is that far more Americans are about to suffer rising prices on their purchases of key staples. Last week, Coca-Cola CEO James Quincey said tariffs are going to inflate drink prices. “Clearly it’s disruptive for us. It’s disruptive for our customers,” Quincey said. He believes distributors and retailers will pass along increased prices to consumers in the third quarter.
Beverage inflation is not just coming to soda, executives at Sam Adams brewer Boston Beer warned their prices could move up 2 percent this year.
“At some point, increased commodity costs have to be passed through to some extent,” Chief Executive Jim Koch said in a recent earnings call.
And it appears that that time is now.
Industrial manufacturer Lennox International has also dramatically increased prices of its heating, ventilation, air conditioning, and refrigeration products because of the tariffs. The company has raised prices twice this year to cover an additional $50 million on steel. Lennox said it expects to pay $20 million more for freight and $5 million for tariffs on components from China this year.
“We haven’t seen any pushback on the price,” Lennox CEO Todd Bluedorn said on an investor call last week, although he probably should have added the word ‘yet.’ Bluedorn noted that he was not alone and all of his competitors have announced similar price increases.
The list goes on.
Office furniture producer Steelcase also raised prices in June for the second time this year as base metal prices accelerated. “It’s been a long time, if ever, that we’ve done two price increases back to back as quickly as we did,” Chief Executive James P. Keane said.
Meanwhile, the agriculture industry and farmers, especially of soybeans, have been crushed by retaliatory tariffs. Last week, the USDA issued a proposed $12 billion bailout for U.S. farmers: the farmer subsidy would include direct payments to soybean, corn, wheat, cotton, dairy, and pork producers impacted by tariff retaliation.
So with the 2018 Midterm Elections in sight, President Trump’s trade wars are hurting potential republican voters right where it hurts the most: in the wallet, and the higher prices are spreading to increasingly more goods and services. As a result, consumers are forced to dip into their savings and spend on credit to survive as the prices of goods soar.
The lingering question ahead of the elections is whether Americans will vote with their empty wallets or continue the status quo. One answer came last week from Iowa farmers, who criticized President Donald Trump’s $12 billion farm aid package and worried about trade wars impacting their business, yet many still turned out to support him on Thursday during a visit to the top corn-producing state.
Trump may be taking on fights with too many trading partners at once, said Bob Weber, a corn farmer in nearby Bellevue, Iowa. But Weber still turned out to watch Trump, for whom he voted, land on Air Force One.
“What he’s doing is right but he might be doing too much at the same time,” Weber said.
Meanwhile, others suffering farmers continue to give Trump the benefit of the doubt:
BJ Reeg, a farmer in nearby Bellevue, worries that trade tensions have hurt prices for the soybeans he grows and meat he produces from cattle.
“This trade war thing, it has to be done,” Reeg said as he leaned on his silver pickup truck. “In the long run, it’s gonna be good, if a guy can hang on.”
Come November, the answer to how much longer “a guy can hang on” could mean all the difference for Trump and the GOP, especially now that billionaire industrialist and prominent Republican donor, Charles Koch, announced that he himself can barely “hang on” for much longer, and warned that the greater the level of trade restrictions, the greater the risk of severe economic fallout: “Every nation that’s prospered is one that didn’t engage in trade wars,” he said. Just how Koch plans on making his policy displeasure known to Trump remains to be seen.
But hey! MAGA! Careful what you ask for. You might just get it.
What’s your answer? We should trade at a disadvantage? Higher tariffs on the US and less on those who import to us? I dont get it.
My answer? Buy American made. But Ameicans will not do that.
Tariffs will cause Americans to buy more American products. Yes or no?
Maybe. But I think not. Many products will still be imported, but at a higher price to the consumer. It is uncertain if or when those products will ever be produced in the US, and or at what cost. The reality is if you increase the price of something, less of it will be sold. So investing in the manufacture of something that will be sold at higher prices than current is risky.
It is also very uncertain if people will invest capital so as to make products based on tariff protections that can disappear instantly. I would certainly be hesitant to do it.
Plus, you do not just snap your fingers and start making products. It takes time, and a lot of money.
Trump says he is for free trade. He says he does not want tariffs. So if others drop theirs he will drop his. In that case, it is a very risky to invest in mfg if the tariffs can just disappear.
My bet is it simply drives up prices and no major replacement of overseas purchases occurs. Next most likely is that overseas purchases drop, but are not replaced, or are replaced very slowly. People will simply do without, which may be a good thing if it does not crater the economy. Third most likely is that it is replaced. But consider how long it will take to build up electronics mfg, or build new steel mills, etc.
Tariffs are a horrible thing for an economy.
That’s why Europe, Japan, China, Mexico, etc. -all the countries we run trade deficits with- have them on our goods.
Hey, maybe this pain will wake-people up to just how artificially low prices have been on this cheap Chicom junk. Way past time to move our manufacturing back home, and stop giving away our trade secrets to what WILL be our #1 economic & military opponent in the next century (oh wait, they already are… isnt globalist orthodoxy great??)
So free trade is when everybody has tariffs on US goods and it’s not reciprocated?
Just askin……
If given a choice between “MAGA” and “United States for Sale” I’ll take MAGA, thank you very much.
You know, if you don’t buy Chinese shit then inflation shouldn’t be a problem. Meat and agriculture products will drop in price- where else are they going to sell it? Whiskey- cheaper and better selection. Wood products- cheaper especially for the quality stuff. I tried to buy some furniture grade lumber awhile back and the local mill wouldn’t sell me less than $1100; the cocksucker who ran the place bragged that the slopes were buying all his shit all the time and he didn’t give a fuck about what I thought about his minimum purchase. Yes, the American furniture industry collapsed in the late ’90s and it was because of the imports. Of course, the beer brewers are saying their going to raise prices because they have to pay more for their fucking Chinese aluminum cans. I like to brew my own and it’s bottled in recycled bottles, and better than that swill they sell. Then there are the car companies- Jap and American companies claiming they’ll raise prices by about $6000. Well, most are one business cycle from total collapse and that is good- none of them have made a decent car since about 2011 and have been THE main problem in dumping U.S. suppliers and importing shit car parts.
These “business” men have been a main problem with all of these imports in their attempt to grub out that last penny; had they not sourced it out we wouldn’t have all of these problems with shuttered factories and mills. If they fail then their “business model” of relying upon cheap import components is a bad model. I say fuck them all!
Coal,as a general carpenter do not yet have fine woodworking skills on furniture level beyond basics and thus the maple/oak ect. I want easily available.I personally would hope mill goes under but then of course a lot of probably just decent folks working there out of a gig,that said,would never do business with them again personally.
While not sure what I would have done with it saw on a customers property a tree cut down into firewood lengths and already being split,I almost cried as was black walnut!
It’s hard to find quality lumber at a decent price. Some furniture specific hardware is real expensive as well. I love to work on antique furniture and need small quantities to fix those inevitable age problems. Veneers are fairly easy to order via the internet. It’s a shame that there is big mill across the river with everything, and I would buy maybe $300 worth, but not $1200. It costs a FORTUNE to make anything new thus I restore the old so it may be around at least a few more decades. The lifetime for a restoration is usually around 75 years. Right now is the time to buy antique furniture for it is off 3/4ths compared to what is was around 2005. Anyone can furnish their home with beautiful old stuff for a fraction of what the new costs, which will split, warp, and fall apart in a few years anyhow.
James, since you’re a carpenter you can do furniture restoration. Few do it anymore. You need a planer, some chisels, and all kinds of clamps from short to 4′ long. The chemical end of it is about the only complicated thing about it, and old books are replete with ” how to do” tips.
I pay higher prices for American goods whenever I can already. For some things, especially electronics that gets pretty damn difficult. Ultimately I want more American businesses and jobs to help pay taxes both local and federal. Clearly offshoring jobs to Asia has not helped the US deficit, wages, nor jobs. We have a huge underclass dependent on handouts and we have a large number of chronically underemployed people as well. But clearly the US give-aways to other countries who tariff our shit has helped the Banker/skimmers as the ultra rich get richer and richer. Tariffs are a blunt instrument and clearly there is unintended consequences to tariffs. The tariffs will hurt some domestic businesses since they depend on alot on certain raw materials from foreign vendors. The libs want “fair trade” coffee, I think some amount of fair trade in general would be a good thing. Clearly the goal would be no tariffs, but that only works if its reciprical. I’ll buck up more money if in the long run that means more folks having jobs, b/c this nanny state welfarism crap isn’t good for the country nor is it good psychologically–which seems pretty obvious.
The big question is how long does a “trade war” go on for? And like many things in life there will still be some losers domestically, but the cheap chinese shit clearly hasn’t helped our economy unless you are part of the owner class that skim the banking/stocks.
The US trade deficit is $500 milion. If it were zero, that would mean 1 to 2 milion more US mfg jobs, which would disappear to automation in 4 to 8 years. By the time the potential benefits, if any, kick in, perhaps another million jobs will disappear in manufacturing.
Mfg as a major employer is dead. Nothing, and I mean nothing, will change that.
I have some questions for you- if there is nothing but low paying jobs or not even those, how is anyone going to buy anything? Is automation going to drop the price of that proverbial $50,000 pickup truck down to a point where it is affordable to a radically low wage public while it makes a profit for the manufacturer who spent a fortune on the automation and still has to buy the commodities to make the parts? Will there be a flurry of automation where you have very many competing factories each populated by a small number of people that add up to a large number of people doing skilled work?
Last, if there’s automation production going on overseas why isn’t being done here?
Believe that the middle class in the US is unsustainable. And that their wages will continue to fall until they reach a competitive balance with global competition. Whether or not they can buy anything at the wage they can earn is Neither here nor there. You have to earn what you get, end of story, and at the moment that is not happening. The middle class has long lived beyond its means and that is coming to an end.
Your last question is ignorant beyond belief. US mfg is HIGHLY automated, and gets more so every day. The US is a mighty manufacturing country, second by size in the world, but uses only around 8% of its workforce in manufacturing. In the fifties around half the workforce was in mfg. And mfg as a percent of GDP remains relatively unchanged over that time. So to make the same widget it only takes 20% as much labor as it used to. That 80% drop was due to automation.
As an example, auto companies now generate sales of around half a million per employee, and that includes OH staff as well, who produce nothing at all. So each direct mfg employee may generate as much as a million dollars per year in product. That is HIGHLY automated. To survive in mfg at any decent scale you need to be automated. Or you go broke. And you need to get around 2.5% more efficient each year – you need to make a widget with 2.5% less labor each year in order to survive. Which is why manufacturing as a jobs creator is doomed. Same way agriculture went from half the workforce to 1.5%, so will manufacturing go from half the workforce to 1.5%. I actually think it will bottom around 4%, owing to niche products not being easily automated. But nonetheless half the current mfg jobs will disappear in the next 15 years or so.
Wanting a middle class lifestyle and earning one are two separate things. And the US middle class is not earning one at the moment. And for sure, mfg is not going to be the salvation.
Tax the robots!!
Yup, being a Luddite will work. That will make mfg more expensive, and less competitive. That is a great idea.
Tariffs will not cost American’s a cent more than they’re already used to paying. This news is all just scare tactics to get people to turn on Trump. Companies are in the business of making money. If they could get an extra $6k for a vehicle they’d be doing it already, tariff or not. Same goes for everything else. Remember high school economics and a thing called price elasticity? Nothing I’ve heard of yet is anything I can’t live without. These price rises are all smoke and mirrors.
The tariffs will hurt the profitability of the companies and in turn their share price. Jobs were exported not to give American’s cheap goods, they were exported to line the pockets of big business with more money off the backs of 3rd world slave labor.
The 1% will suffer – if you can even call it that. You the consumer will not. I do not give two shits if bonuses aren’t as good for the CEO’s and hedge fund mangers.
Aqua – that is enormously stupid. I can assure you that prices are already climbing. And businesses are beginning to fail.
llpoh,
how do these tariffs affect scrap metal?
i have a couple of buddies who run shops that have a lot of waste metal & i do thescrapping–
when i started a couple of years ago the price for steel was in the .04/pound range–
since trump assumed office it steadily climbed until it was in the .08/pound range–
the last time i went to the yard a couple of weeks ago it was back down in the 6’s but it was already slowly sliding b4 the tariffs kicked in–
Tampa – I am no expert on scrap, but I would think there is a process cost gap between scrap price and new price – scrap price plus process price = price of virgin steel. As an example say the process price is 20 cents a pound, and new price is 25 cents, then scrap would be viable at 5 cents. If virgin steel price goes to 50 cents, then scrap could go to 30 cents and still be viable.
That being the case I would think/ wildly guess scrap prices could really jump. Good luck.
The truth is when the boomers die everything will fail. There are no boomer replacements.
There are always replacements.