Calling it a new era in American trade policy, President Donald Trump stepped up enforcement of U.S. trade laws, renegotiated NAFTA, and applied significant tariffs to aluminum, wood and solar panels. As a result, some of the state’s fastest-growing sectors are being hit by increased costs. The president is using Section 232 of the Trade Expansion Act of 1962 to impose tariffs without congressional approval by initiating an investigation into whether particular imports threaten national security.
As these tariffs have been handed down, trade groups representing NH companies have been speaking up. The Business and Industry Association (BIA), NH’s statewide chamber of commerce, joined more than 245 national, state and local business organizations that signed a letter in July supporting of a proposal to require the president to submit to Congress any proposed trade restrictions under Section 232 for approval within 60 days.
After the measure failed to move forward in Congress, U.S. Senators Jeanne Shaheen, D-NH and Jerry Moran, R-KS, the lead Democrat and Republican on the Senate Commerce, Justice, Science and Related Agencies Appropriations Subcommittee, sent letters to Secretary of Commerce Wilbur Ross and U.S.
Trade Representative Robert Lighthizer requesting additional information about efforts to help small businesses. The letters stated that the tariffs have added new red tape and bureaucratic processes for small businesses to navigate. The letters also expressed concern that the tariffs are targeting longtime U.S. allies such as Canada.
Evan Smith, CEO of Hypertherm in Hanover and a director on the board of the BIA, says the company counts on open and fair access to global markets, but also on rational and predictable long-term trading relationships and terms. “I believe that trade negotiations should be rigorous and even hard-nosed at times, but I also believe that Congress should act on its constitutional powers to ensure that delegated authority is not unilaterally expanded or exercised in unintended ways on a matter of such broad national interest as foreign commerce,” says Smith.
According to Smith, Hypertherm, a manufacturer of industrial cutting systems and software that does business globally, has been hit to varying degrees by the different tariffs. Increases in steel prices and in electronic parts coming from China are cutting into profits and sales of its products are affected by retaliatory measures from China. “You take countermeasures, try to adjust your supply chain, and try to make sure the adjustments being passed on to you by your suppliers are valid because there is a fair amount of price inflation going on now in industrial supply chains,” Smith says. “Then you try to see if you might have other sources from nontariffed countries that you can switch some business to.”
He says Hypertherm has looked at pricing options as well. “We are constantly making adjustments and passing on some of the cost to our customers where it is reasonable and [if] it can be absorbed,” he says. While it hasn’t materially affected hiring, and the company has a no-layoff policy, the effect of tariffs will influence planning for new initiatives and projects in 2019.
Effects on Businesses
There are plenty of other businesses keeping a close eye on tariffs as NH companies imported $1.3 billion and exported $5.1 billion in goods and services in 2017, and the state’s top three trade partners are Canada, China and Mexico, according to the U.S. Census Bureau.
Roxana Wright, professor of management, and Chen Wu, assistant professor of economics at Plymouth State University, looked at the potential effect on NH companies. “Smaller producers could be hurt more significantly by the tariffs than their larger counterparts, because smaller producers cannot easily search for cheaper alternative suppliers all over the world. There are search costs associated with such efforts,” Wright says. “On the other hand, large producers could be hurt by tariffs badly. A number of large producers have adjusted profit estimates and cost forecasts, and some have already laid off workers as a result of additional tariffs, according to reports in the media.”
In announcing his new trade policy, the president listed promoting fair and balanced trade as a goal, but Wu says trade doesn’t always need to be balanced. “The U.S. has been having a trade deficit in goods, but it has been having surplus in services,” he says. “The U.S. has an advantage in services, which is a good thing. An imbalance of trade associated with strong economic fundamentals or growth may also be viewed as a positive sign. For instance, the U.S. may be viewed by companies or investors as a good place to reinvest, increase employment and output, or invest in bonds, stocks, real estate, etc.”
The surplus in services benefits NH, where service-providing workers outnumber product producers by about 6 to 1. In fact, service industries make up the largest part of NH’s economy with 39,428 businesses employing 471,264 workers in the fourth quarter of 2017, according to the NH Economic and Labor Market Information Bureau.
Wright says it should be noted that companies of all sizes may see only modest or negligible negative effects or may benefit from tariffs, depending on the industries and supply chain activities. Some U.S. companies are likely to benefit from an increase in domestic demand and additional investments in the affected industries—most notably U.S. Steel, which has announced plans to expand some foundry operations.
“Companies may boost prices to offset negative effects of tariffs. But tariffs don’t always have to get passed on to consumers. Companies may adjust supply chain to mitigate effects, shift production to lower-cost locations around the globe, exit some businesses and cut jobs, or lower revenue/profit expectation without taking further action,” Wright says.
Trouble Brewing for Beer
Since the 10 percent tariff on primary aluminum imports went into effect, the cost brewers pay for aluminum cans skyrocketed, according to Jim McGreevy (pictured), president and CEO of The Beer Institute in Washington, D.C. The impact could trickle down to one of the state’s fastest-growing sectors.
“We estimated this tariff is a $347 million tax on America’s brewers, and there is the potential of losing up to 20,000 jobs,” McGreevy says. “There are 6,000 breweries in the United States, and those are 6,000 individual businesses having to raise prices, [while] not making planned hires and improvements to factories. This has put a damper on the ability to plan. American brewing is the crown jewel of American manufacturing, and in New Hampshire there are 88 breweries that account for an estimated 13,500 jobs.”
According to McGreevy, the aluminum smelting industry—which the tariff is intended to help—left the U.S. for various reasons over the past 40 years, including the high cost of energy, which hasn’t changed.
Beer cans have been subject to the aluminum tariff. Courtesy of The Beer Institute.
“We understand the president’s desire to address this problem of U.S. manufacturing jobs going abroad,” McGreevy says. “We just don’t think the solution—the tariffs—is a good one for the end user.” He says even if the tariffs bring back jobs, those gains may be negated by the jobs lost in brewing.
A Premium Problem
There are two phases to setting the base price of aluminum. The initial price is first set daily on the London metals exchange, using a method McGreevy says is transparent, with the input of many stakeholders in the industry. Then the Midwest Transaction Premium is added, which he says is essentially a shipping and handling fee so the producer can cover the costs of getting the aluminum to the end user, can maker, soda bottler or beer brewer.
“That Midwest Premium is set by one company, S&P Global Platts, largely in secret, with the disproportionate input of aluminum traders and aluminum producers. The London metals price has gone up roughly 14 percent since the tariffs were announced. The Midwest Premium, since January, has gone up 135 percent,” McGreevy says.
S&P Global Platts, on its website, states the aluminum Midwest Transaction Premium is assessed “using a consistently applied and transparent methodology.” However, McGreevy says the Trump administration and Congress should look into the Midwest Premium. “Why did it go up so much in such a short amount of time?”
Several members of Congress, including U.S. Rep. Annie Kuster, D-NH, signed a letter asking for an investigation. According to a statement from Kuster’s office, “the DOJ’s Antitrust Division has not pursued or undertaken any investigation against the aluminum industry with regard to illegal coordination or monopolization. The July response from the DOJ indicated that the Antitrust Division is aware of the issues raised in the letter, and it will take enforcement actions if evidence is found of wrongdoing.”
While companies wait and hope for a change in policy, one avenue open to brewers and other end users is to purchase scrap aluminum already here in the U.S. so it is not subject to tariffs. But McGreevy says that is a small amount. “Forty-one percent of primary aluminum comes from Canada. Last time I looked, Canada was not a security threat.” McGreevy says. “The whole point of the provision 232 investigation was to determine if importation was a national security threat. Canada is one of our closest allies, literally and figuratively. We don’t understand why Canada is included.”
Can makers, soda bottlers, beer brewers and other industries are working together to demonstrate the effect on the end user to the administration and members of Congress, McGreevy says. “For the U.S. beer industry, this is particularly serious. Last year, America’s brewers purchased more than 36 billion aluminum cans; soda probably accounts for another 56 billion. Beer is big business and an essential driver of the American economy.”
Lumber and Steel Tariffs Hit Construction
Canada is by far NH’s largest trading partner, and there is much at stake in preserving the relationship.
As the president renegotiated the North American Free Trade Agreement (NAFTA), he struck a deal with Mexico first, and at one point threatened to leave Canada out altogether. The new United States-Mexico-Canada Agreement (USMCA) is, according to the administration, “a mutually beneficial win for North American workers.” Despite the new agreement, tariffs on many Canadian products remain in place.
In the construction industry, already hit by labor and material shortages, homebuilders are really feeling the bite. David Logan (pictured), economist for the National Association of Home Builders (NAHB), says the biggest issue for the association, which has a chapter in NH, is Canadian lumber tariffs. “As far as organizational priorities go for NAHB, this is number one because of how integral framing lumber is to home construction.”
Logan says in the past there was a recognition that supply chain in the Northeast and Canadian Maritimes was unique, leaving no equitable way to impose tariffs without affecting your own workers.
The region was exempt from other lumber tariffs, but that argument did not hold sway in this most recent negotiation.
Again, it is likely to be the small business taking the biggest hit. Logan says that there are five or 10 “ginormous lumber producers in the U.S. and Canada,” but in the Northeast there are several smaller mom-and-pop operations. He says the ability for larger companies to absorb hits is easier. “The big ones have mills on both sides of the border and can put a strategy in place to move product between countries, but small firms don’t have a diversified product line,” Logan says.
He says NAHB would like to see exports reduced to increase domestic supply, similar to an executive order issued by President George H.W. Bush in the 90s to cap exports of timber logs, so there is precedent. However, Logan says the likelihood of the Trump administration following suit is slim. Logan says end users of raw materials have no say in the tariff conversation.
“Trickle-down misery is a function of how our trade law works in the U.S.,” Logan says. “It is pretty unique on a global scale.” He says businesses that buy the raw materials cannot bring complaints to the Department of Commerce export panel. Only domestic manufacturers who are competing against the supply of imports have standing.
Logan says lumber producers supporting the tariffs talked about how it would be a boon to capital investment, increasing output and allowing them to hire more people, but he says the data don’t show that and employment at saw mills is flat. “At the end of the day, all it does is push home prices higher and reduce affordability, and this is probably the last moment anyone would pick to exacerbate those problems.”
One early effect of steel tariffs is the cost of garage doors. Logan says quotes were going up by 20 percent. “It is a very tangible effect,” Logan says. “What we are seeing all over the country from suppliers of various commodities, including lumber, is that price quotes were often only good for a matter of days—purely a result of the uncertain economic environment brought on by the bevy of tariffs.”
He says costs can go up in the middle of a project. “A homebuilder starts a home, promised at a certain price, and then the project is no longer feasible,” Logan says. On top of lumber tariffs, retaliation by China has driven up costs of other materials as well.
Solar Feels the Heat
One of the very first tariffs imposed by the administration was on solar panels. James Hasselbeck, director of operations at ReVision Energy in Brentwood, one of the state’s largest solar companies, says tariffs have increased the cost of the panels, but contrary to popular belief, the price has never been lower.
ReVision Energy workers installing solar panels, which have also been subject to tariffs. Courtesy photo.
“The solar panel tariff raised prices, but shortly after, China made significant changes to its domestic policies. They stopped significant domestic subsidies to do solar projects in China. So while the tariffs drove the prices up, shrinking demand pushed costs back down. This all happened in a couple of weeks, so the prices dropped even with the tariffs,” he says.
Hasselbeck says the tariffs are unlikely to produce industry jobs and may actually cost jobs. He says solar jobs are in engineering, procurement and construction, but manufacturing is done by robots in automated factories. “You just can’t create many jobs in that part of the industry. If you want to create job growth, focus on allowing companies like us to hire people to do the engineering, sales, design and [installation] work, not increasing the cost of the products,” he says.