As the next round of tariffs approaches, companies continue to look for ways to mitigate the increased cost of raw materials and manage supply chain disruption amid a sea of global uncertainty.
While the Dec. 15 tariff list is largely expected to affect clothing, footwear and electronics, earlier rounds of tariffs are already creating supply chain issues and stifling expansion, according to Brian Gottlob, principal of PolEcon in Dover and director of the NH Economic and Labor Market Information Bureau.
“With business confidence beginning to decline, manufacturers are holding back on investment decisions and on hiring until they see a change in direction,” he says. “The trade frictions created by the tariff wars have disrupted a lot of the manufacturing sector throughout the world. It has decreased output and created a great deal of uncertainty that makes investment in manufacturing activity really questionable.”
Gottlob says such uncertainty speeds the decline in manufacturing investment, which hurts NH as the bulk of what the state produces is capital goods (products that are used by other companies in their manufacturing process).
Even if a company were to search for a supplier in the United States to avoid the Chinese tariffs, it may not find one. Gottlob says U.S. manufacturers are unlikely to expand operations to capture that business when the tariffs could just as easily go away, which is why tariffs seldom achieve the desired result of increased production and job growth at home.
James Hasselbeck, director of operations at ReVision Energy in Brentwood, agrees. He says the Chinese solar panel manufacturers targeted by the tariffs have already set up facilities in South Korea and Singapore to move their manufacturing to a non-tariff country.
“In general, solar panel manufacturing is a highly automated process. If the intent of tariffs is to spur job growth, the target is misguided, as the majority of jobs in industry are not in manufacturing but in engineering, procurement and construction,” Hasselbeck says. “Our frustration with this approach is that government forces are actually making our job growth more difficult. U.S. solar jobs are actually being negatively impacted because [of the increased cost] and it is also slowing the adoption of solar.”
In China and India, the demand for solar is booming and along with improvements in manufacturing has driven down the cost per panel. Hasselbeck says the lower cost takes some of the sting out of the tariffs. “However, the reduction would have been greater if not for tariffs and we would be able to pass additional savings onto customers,” he says.
Gottlob’s contention that U.S. companies aren’t going to pick up that overseas business is evident in the solar industry. “No major U.S. solar panel manufacturing firm has changed anything; if the intent was job growth, it didn’t happen,” says Hasselbeck.
NH Weathers the Storm
Nationally, manufacturing is already showing signs of struggle and declining employment and is likely in recession, says Gottlob. But the good news is NH’s manufacturing sector doesn’t appear to be in recession yet. “We’re competitive worldwide and we are the most competitive in the region,” he says.
Another reason NH may not see job losses at the same rate as other parts of the country is because more than a quarter of NH’s manufacturing workers are over age 50 and may retire in the next decade. Gottlob says as the industry slows, NH companies will still have openings even in a downturn.
Foreign Trade Zones
One way businesses can minimize the effect of tariffs is by taking advantage of the Foreign Trade Zones (FTZ) program, through the U.S. Department of Commerce, which is intended to help level the playing field for U.S. businesses competing against foreign alternatives.
As Geno Marconi, director of the Pease Development Authority, Division of Ports and Harbors, explains, the federal government allows products to enter the U.S. and be incorporated into a manufacturing process duty free.
In January, the state’s federal application to expand Foreign Trade Zone #81 was approved. The state’s original zones, located at Pease International Tradeport; Manchester-Boston Regional Airport; Market Street Marine Terminal in Portsmouth; and Portsmouth Industrial Park, are now reorganized under the alternative site framework to include all or parts of nine of the state’s 10 counties, allowing businesses to take advantage of the FTZ program nearly statewide.
Marconi says for the purpose of assigning duty, items in the zone are deemed not to have entered the U.S., which can eliminate or reduce the duty.
“For as long as the imported material remains in the zone, the company has the use of the funds they would have paid in duty or tariffs,” Marconi says. “If foreign merchandise is held for a long time and there are changes to classification while it is in the zone, it may also reduce or eliminate the duty altogether. For merchandise that is re-exported, it never enters; so no duty is paid.”
Marconi says additional savings can be realized from salvage, as any portion of the material that is scrapped does not count toward duty. “MilliporeSigma imports filtration fabric from Scotland, stamps out little circles and the leftover is deemed scrap and has no duty,” he cites as an example.
According to Marconi, interest in these zones has increased amid the trade war. He says Massachusetts-based Rochester Electronics recently purchased space at the Tradeport to take advantage of the program and Textile Coatings International in Manchester, which makes film for windows from resins sourced outside the U.S., is also using the FTZ program.
Marconi continues to get inquiries on a regular basis and is working with several other NH manufacturers interested in the program.
Insuring Against Uncertainty
Another way for businesses to mitigate the risk posed by a trade war or any international conflict is to purchase trade disruption insurance, which can protect the company’s income if the supply chain is affected by tariffs, embargoes or other government actions (foreign or domestic).
Mark Berube, president of Eaton & Berube Insurance Agency in Nashua and Milford, says “If there is a risk that a business will not be able to get the supplies or stock, they need their insurance coverage to be enhanced to cover this type of loss.”
This type of coverage is rare but, he notes, it is one more tool that a business could consider.
At press time, the U.S. and China were continuing talks to stave off planned tariff increases. If discussions fail to produce results by Dec. 15, more than $500 billion in Chinese imports could be affected and tariffs likely would be applied to nearly all U.S. goods imported into China.
“Our connection to world markets is critical, but when we shrink our opportunities, it hurts all businesses,” says Gottlob.