By Ian McCue, senior associate content manager at NetSuite
⏰ 5-minute read
Changes to federal trade laws have affected U.S. business operations for hundreds of years. Current tariff negotiations between the U.S. and China are just the latest manifestation of a common phenomenon.
Case studies of two U.S. businesses provide real-life insight into how companies are reacting to current tariff increases.
Common responses to changes in trade laws include consulting with your suppliers, auditing your supply chain and, as a last resort, raising prices.
Federal trade laws can change and take effect quickly, sending business owners scrambling to find solutions for their companies.
Take the new federal tariffs on all goods imported to the U.S. from China, for example. The tariffs started in July when the government applied a 25 percent tax to $34 billion worth of goods, then to another $16 billion in August. In late September, another $200 billion worth of imports became subject to a 10 percent tax. That tariff was initially slated to climb to 25 percent on Jan. 1, 2019, but on December 1 the two countries agreed to an extension that delays the hike until March 1.
Fast-changing government regulation like these tariffs creates substantial challenges for many businesses. In this case, the regulation affects companies who manufacture most of their products in China. It’s especially hard-hitting in categories like agricultural equipment, electronics, medical devices, aircraft and car parts and others.
Let’s take a look at some real-world examples of how this plays out.
Case Study #1
MotoAlliance is a manufacturer of powersports accessories that sells plows, farm implements, winches and more for ATVs and side-by-sides. It manufactures roughly 85 percent of its products in China.
The company started paying 25 percent tariffs on its farm implements in June, and that same tax hit its winches in September. MotoAlliance found some relief after re-negotiating prices with its suppliers, aided by the fact that the U.S. dollar became stronger relative to the Chinese renminbi (RMB) over the summer. MotoAlliance is also working to lower rates with its shipping provider.
However, MotoAlliance recently raised its prices on certain items by up to 15 percent to offset the rising cost of goods. It notified the 300-plus dealers it works with of the price increases and received no negative response, presumably because competitors are doing the same thing. All parties realize that price hikes are an unavoidable result of the new regulation.
Minnesota-based MotoAlliance manufactures powersports accessories. (credit: Facebook/MotoAlliance)
While the tariffs are significant, MotoAlliance President Peter Kapsner said they would need to more than triple from the projected 25 percent in order to justify moving his company’s manufacturing to the U.S.
“From a pricing standpoint, in order for us to fundamentally change the arc of our business from what it is now to more of an American manufacturing business or something along those lines, you have to get tariffs upward of 80 percent,” Kapsner said.
Case Study #2
The government gave just a few weeks’ notice before the tariffs went into effect, making it especially challenging for businesses to adjust. Regina Andrew Design, a lighting and home décor company in Detroit, already had products subject to the tax on container ships headed for the U.S. at that point.
Much like MotoAlliance, Regina Andrew manufactures 85-90 percent of its inventory in China. The brand likewise leveraged the favorable exchange rate to get better prices from its suppliers in the spring and lowered transportation and freight-forwarding costs as much as possible to help make up for the new duties.
Regina Andrew Design has seven U.S. showrooms, including its Detroit flagship. (credit: Facebook/ReginaAndrewDetroit)
In addition, Regina Andrew ordered more inventory in the second quarter of 2018 in anticipation of tariffs that started affecting its goods in September. The company wanted to avoid the 25 percent tariff that was supposed to come on the first day of the new year. But as we know, that timeline has since changed. The scenario speaks to what Regina Andrew COO Jim Bonomo sees as the biggest problem with shifting government rules: uncertainty.
“Business uncertainty is not good for business,” he said. “Businesses need to know what the rules and regulations are.
“I don’t think [the current] tariff is any different than any other uncertainty and any other tax. If the government would sit there and say, ‘Hey, this is the tax,’ you would know this is happening next year, then this in two years, that in three years, and then you can adjust your business to it.”
Regina Andrew has not yet raised prices, as its leadership is waiting to see how this standoff plays out, but Bonomo said it will be forced to do so if the tariffs climb to 25 percent. Even so, he theorizes that some other businesses would not offload costs to buyers in that scenario. Instead, he thinks they’d choose to lose money temporarily in hopes of driving out competition and enjoying long-term success once the storm passes.
A brief history of tariffs
Tariffs have existed for several hundred years--the first U.S. tariff dates back to 1789--and they’re not going away. Tariffs from the recent past were much narrower in scope than the current ones with China, but U.S. businesses used similar strategies to deal with them.
In 1963, the government imposed tariffs on imported light trucks (targeting Volkswagen), brandy, potato starch and dextrin in response to Germany and France levying taxes on cheap American chicken. And during the early ‘80s, the U.S. began limiting the number of Japanese cars that could be imported every year, in order to support American brands like Ford, General Motors and Chrysler. In 1987, the government slapped a 100 percent tariff on Japanese computers, TVs and power tools after Japan broke a trade treaty involving semiconductors. And about 15 years ago, it put an additional 8-30 percent tax on steel imports in an effort to rejuvenate the industry in the U.S.
Businesses responded to each of these regulation changes in a different way. For example, the steel tariffs created an estimated 3,500 U.S. jobs in the industry, but some auto parts manufacturers moved abroad and then shipped the finished goods into the U.S. to avoid the high price of steel. Consumers paid more for goods as a result of both the steel tariffs and taxes on Japanese electronics.
The only certainty is uncertainty.
Kapsner, who is also a theology professor at Bethel University and University of Northwestern in Minnesota, believes global trade agreements will gradually disappear as new political leaders come into power and public sentiment changes in regions like the U.S., Western Europe and South America.
Either way, what should your company do when sudden government regulation affects your business, especially on short notice?
Start by working with your suppliers, who will know about the changes and likely be willing to work with you, given growing competition. Of course, the more business you do with a supplier, the more leverage you will have when re-negotiating prices with them. It’s also worth auditing your supply chain to find creative ways to lower costs, whether it’s a new warehousing strategy, more efficient fulfillment methods or using a different courier with cheaper rates.
If that is not sufficient, it may be time to increase prices--and most competitors will probably do the same, leveling the playing field. Only in the most extreme cases would it make sense to move manufacturing options to another country.
🌱 The bottom line
All businesses must deal with the shifting nature of trade between countries and the countless factors that affect changes in government regulations. The current tariffs involving the U.S. and China aren’t the first example of this, nor will they be the last. Smart business leaders will study successful adaptation methods now to prepare for when changing tides affect their companies.
👀 Like what you see? Follow Grow Wire on Twitter for more.