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Tangling with tariffs: An expert’s perspective


tariffs

While trade conflicts between the United States and China and others continue to escalate, many U.S. businesses are scrambling to cope with the repercussions of new tariffs, including higher material costs, smaller profit margins and disrupted supply chains.

 


Read part 2 – Tangling with tariffs: CEOs share their strategies


 

The Q3 2018 Vistage CEO Confidence Index survey, which captured the opinions of 1,484 CEOs from small and midsize businesses in early September, found that new tariffs are impacting companies in wholesale trade, manufacturing and construction most significantly. More than three-quarters (79%) of respondents from the wholesale trade said that they were “moderately” or “strongly” impacted by tariffs, followed by 76% of respondents from manufacturing and 73% of respondents from construction. Overall, 52% of CEOs from small and midsize business said they were impacted.

Tariff-impact-chart

 

The survey also found a correlation between annual revenues and the severity of the tariffs’ impact. Among CEOs whose businesses had $1-20 million in annual revenue, 42% said they were moderately or strongly impacted by tariffs. By comparison, 64% of CEOs from companies with annual revenues over $20 million said they were moderately or strongly impacted by tariffs.

To gain greater insight into these issues, I reached out to Joe Quinlan, Managing Director and Chief Market Strategist for U.S. Trust, Bank of America Private Wealth Management. Below is an excerpt from our conversation:

Q: What’s the main challenge that small and midsize companies are experiencing as a result of tariffs?

tariff expert recommendations
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A: To me, the challenge is really supply and demand. For small companies across the wholesale, construction and manufacturing sectors, basic material input costs are rising due to shortages and/or higher costs related to imports. Overlay that with the fact that there’s a shrinking pool of labor, both skilled and unskilled. That’s a double whammy.

This also has an opportunity cost: It is distracting companies from what they want to do. It’s hard to quantify that cost, but this issue is taking up a lot of managers’ time because it’s so important.

Q: How are you advising companies in this situation? Can you offer an example?

Companies are going to have to rethink their supply chains — across countries and even across states, because we have pockets of shortages of materials and labor. I just talked to some folks from Denver that make tile flooring. They use a specialty chemical from Europe to make that tile, and they’re anticipating tariffs or shortages in the future. They can’t source the chemical from China, so they’re thinking about whether they should move production to the United States.

What’s important for companies like this to understand is: If you’re going to bring production home, (a) you’ve got to bring the workers with you and (b) it’ll take time. You can’t just build the plant tomorrow and have production coming out the other end in six weeks. It takes much longer.

Q: There’s also the question of whether the tariffs are permanently in place or not.

That’s the issue. It’s a gray area, and I don’t think anyone can really answer that. There’s a lot of uncertainty around companies thinking, “Can we still source it out of Europe, or do we really have to go down this road of making it at home? How do we do that? Who would we do it with?” To bring production home is a huge, costly decision.

Q: And with unemployment now at 3.7%, if you do bring production back, you’re going straight into the headwinds of a talent crisis.

Yes. There are 300,000 manufacturing jobs open right now, as we speak. If you want to ramp up manufacturing — fine, I’m all for that. But, you better bring an army of robots with you or import this labor. There’s a huge disconnect between what companies need, what they require, and what our trade and immigration policies offer. They’re working at polar opposites.

Q: What should a company do if they can’t bring in the labor they need?

My advice is automate, automate, automate. That’s hugely important. Keep your good workers. Don’t let them go out the door. Pay them. Boost productivity. That’s easier said than done, of course. But companies have to take it upon themselves to train the workers that they want and then spend the money to keep them.

Q. What should a CEO do if their company is subjected to both import taxes and export taxes?

You’ve got to be ruthless about cutting your costs, and you have to find new markets. If your primary end market is subject to tariffs, then you’ve got to scale up elsewhere — either at home or some other part of the world. You need both ends. There’s no other choice.

Q. Any suggestions on how to work with customers when you have to pass on tariff costs?

Good question, because you do have to pass on the price. Stay close to your customers and anticipate how to do some cost-burden sharing. I think you’ve also got to find new customers. If the global supply chain is upended, then the glass-half-full perspective says: There are new opportunities out there.

U.S. Trust operates through Bank of America, N.A., and other subsidiaries of BofA Corp. Bank of America, N.A., does not serve in a fiduciary capacity with respect to all products or services. Fiduciary standards or fiduciary duties do not apply, for example, when the Bank is offering or providing credit solutions, banking, custody or brokerage products/services or referrals to other affiliates of the Bank.

Bank of America, N.A., Member FDIC. ARCH4V6H | 10/2018

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