(Bloomberg Opinion) -- After leading the U.S. to the brink of an all-out trade war with China, President Donald Trump took to Twitter to assure Americans that “there is absolutely no need to rush” on negotiations that might help the two sides avoid that outcome. Try telling that to the U.S. manufacturers and retailers who will bear the cost of adjusting to this new and quite likely painful reality.
The Trump administration on Friday increased tariffs, as threatened, on $200 billion of Chinese goods to 25% and said it would soon apply similar levies to an additional $325 billion of imports. That would mean virtually everything shipped from China to the U.S. would carry an additional tax, including consumer products that the White House had worked hard to keep out of the fray in an attempt to protect political goodwill. This is the worst-case scenario that many companies had hoped would remain a hypothetical.
Just weeks ago, industrial companies were fielding questions from analysts about how quickly profit margins could rebound and orders could accelerate if a truce was brokered. Things were looking up for agricultural equipment maker Deere & Co.’s fiscal second-quarter earnings report next week after smaller rival AGCO Corp. reported better-than-expected results. Now, with trade negotiations in flux and an deal seemingly further away, the renewed uncertainty looks certain to cast a pall on not only Deere, but wide swaths of the U.S. economy.
Trump’s Twitter proclamations on Friday perfectly encapsulate the confusion and preference for blunt instruments that have characterized his trade strategy. Curiously, Trump seems to have deleted his “no rush” tweet, only to resend it less than an hour later. It remains unclear why the U.S. needs to rush into an escalation of tensions but doesn’t need to rush talks with the Chinese – unless of course the tariffs are the point.
For Trump, talking tough on trade may be more valuable politically right now than an actual deal, but as Bloomberg Opinion’s David Fickling notes, that only works so long as the U.S. economy weathers the pain. In the long run, America’s growth will suffer just as much as China’s. That’s because, despite Trump’s claims to the contrary, tariffs aren’t paid by China to the U.S. Treasury. Instead, it’s companies – many of whom are simply trying to get parts from their own operations stationed in China – that bear the additional cost. And then they pass those higher expenses on to their own customers via price increases.
To date, most price increases have affected corporate customers, but Trump’s support for tariffs on an additional $325 billion of Chinese goods means it will increasingly be consumers that bear the cost of his trade tantrum. A family of four may feel differently than the president about the need for a “rush” in trade negotiations when they can no longer afford the camping gear they were hoping to buy for a Labor Day weekend trip. The specter of higher consumer prices will likely make tariffs the primary topic of interest as major retailers report earnings over the next two weeks, although how much CEOs are actually able and willing to say about this abrupt turn of events is debatable.
Trump had previously planned to raise tariffs on the $200 billion of Chinese goods on Jan. 1, but delayed that because of progress in negotiations. So most companies have already been preparing for this, which should be some measure of comfort to investors. Abercrombie & Fitch Co., for one, told investors in March that it’s actively working to reduce the share of merchandise it sources from China. Last year, 25% of its U.S. goods came from that country; in 2019, it will be under 20%. Some – including Williams-Sonoma Inc. and Dollar Tree Inc. – already conservatively included an acceleration of tariffs to 25% on the $200 billion of China goods in their guidance for the year. And Honeywell International Inc. had even started working to prepare for the possibility that all Chinese imports carry a 25% tariff.
Meanwhile, Procter & Gamble Co. and Kimberly-Clark Corp. had already been raising prices on items such as diapers and toilet paper in effort to cope with higher commodities costs. Industrial companies have generally been successful so far at pushing through price increases, but growth is starting to wobble, particularly in sectors vulnerable to economic swings. Daily sales growth at industrial distributor Fastenal Co. decelerated in April to the weakest level since February 2017. The Institute for Supply Management’s manufacturing gauge slumped in April to the lowest level of Trump’s tenure as new orders weakened and inventory stockpiles grew.
To state the obvious, neither consumers nor manufacturers have endless capacity to absorb higher prices. And these tariffs will bring that into sharp relief.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
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