The first of September has come and gone and with it, a list of new tariffs enacted. List "4A" to be exact (see table below). In fact, The USTR increased the planned September 1st tariff of 10% to 15%. U.S. Customs will also start collecting a 15% tariff on December 15th on the remainder of the $300 billion list (list "4B"). Hey, 10 percent here, 15 percent there - whatever it takes right? During a call made to a Decatur, Illinois farm trade show audience, President Trump, reportedly stated that he could do a "quick deal" with China to boost his 2020 re-election prospects.(Wow!) Is it even possible to find an equitable resolution to this trade war ? much less in time for a 2020 re-election bid? Neither party wants to be the first to blink. Not discounting the egos at play here, is there any confidence these leaders possess the forbearance required to go about disentangling themselves from this circuitous trade war? But who knows? It's been reported today that the US and China will meet in October for another round of trade war talks - or another round of hope for the best but plan for the worst.
Hoping that the light at the end of this tunnel is a train carrying gold bullion
The U.S. and China have been locked in this tit-for-tat trade war since the spring of 2018. To date, Chinese imports have dropped about 12% through June this year and U.S. exports to China have fallen by 19%.The New York Times has reported, "across the income spectrum, the tariffs may cost up to $970 for America's wealthiest households and as low as $340 for its poorest." The hard reality is the US comprises only about 18% of Chinese exports - while a significant percentage, it's not enough to really use as leverage. And while on the subject of dismal numbers, Clive McDonnell of Standard Chartered Private Bank believes the probability of a U.S. recession in the next 12 months has risen from 25% to "as high as 40%." He also recommends in these times of financial uncertainty, putting your money in gold. Sounds good, as long as the American consumer still has money to invest.
Somebody wants to party like it's 1984
This trade war has taken it's toll on our industry, resulting in increased prices and assorted supply chain challenges. With tariffs of 25% on steel and 10% on aluminum, manufacturers of LED fixtures, lamps, and lighting components have already taken a pretty big hit. Together, now with this latest round of list "4A" tariffs impacting lighting ballasts and filament lamps, will it be welcome news or just more head-scratching absurdity that the Trump Administration just announced a roll back on the requirements for energy efficient lamps? The DOE is selling this as giving consumers back their choice between halogen, incandescent, compact fluorescent or LED lighting sources.
If trump is successful in his bid for re-election, and turning back the clock on technology, will this herald the return of the venerable 60 watt incandescent lamp? Can you imagine, if passed, how this ruling would change the lighting industry? How fast can we retool to manufacture these obsolete lamps and can we do it cheaper than China? (Do we still have lamp manufacturers left?) Hopefully, these aren't questions that need answering - just silly, rhetorical musing.... "Alexa, order more thermal paper for the fax machine!"
In the first three rounds of tariff wars our two heavyweights, Beijing and the Trump Administration traded barbs and blows, wreaking havoc on their own economies with no clear victor - or lasting truce in sight. In this latest tit-for-tat, The Trump Administration has recently announced an additional 10% tariff on $300 billion worth of Chinese imports, beginning September 1st. In response, China has devalued the Yuan to an 11-year low: (1 US Dollar now equals 7 Yuan). making the yuan more competitive with foreign currencies.
The Trump Administration seeing this as blatant currency manipulation (systematically tinkering with exchange rates in order to gain an unfair advantage in trade)has labeled China as such - in their obvious attempt to offset the impact of higher tariffs on Chinese imports coming into the US.
Are the Gloves Coming Off?
China warned on Friday that if the United States wanted to fight China on trade "then we will fight". And there's a number of 'weapons' at their disposal: We all know their dominant position in the rare earth supply marketand what would happen should they decide to weaponize this. They're also the American government's biggest creditor: in theory, Beijing could trigger a panic in bond markets by dumping some of the $1.1 trillion in US Treasuries that it owns. But Beijing knows that either move, despite the damage it would cause the US - could have devastating unintended consequences to their own economy.
A Blow Beneath the Belt, Right to Your Wallet
So, what products will be impacted by this 4th round of tariffs? Ready? Here we go: cellphones, laptops, toys, LED lamps, Christmas ornaments, microwaves, ceiling fans and video games (and more). But within these broad categories, there's a number of items directly related to the electrical industry:
HS Code Effective Product Description
8504.10.00 9/1 Ballasts for discharge lamps or tubes
8539.22.40 12/15 Electrical filament Christmas-tree lamps, of a power not exceeding 200W
and for a voltage exceeding 100 V
8539.22.80 12/15 Electrical filament lamps of a power not exceeding 200 W and for a voltage
exceeding 100 V nesoi, excluding ultraviolet and infrared lamps
8539.29.10 12/15 Electrical filament Christmas-tree lamps, designed for a voltage not
exceeding 100 V
8539.29.20 9/1 Electrical filament lamps, voltage not exceeding 100 V, having glass
envelopes n/o 6.35 mm in diameter, suitable in surgical instruments
8539.29.30 9/1 Electrical filament lamps nesoi, designed for a voltage not exceeding 100 V,
excluding ultraviolet and infrared lamps
8539.29.40 9/1 Electrical filament lamps, designed for a voltage exceeding 100 V, of a
power exceeding 200 W
8539.50.00 12/15 Light-emitting diode (LED) lamps
According to the American Lighting Association, "Lighting fixtures and traditional lamps, which have already been impacted by the 25% will not be further impacted." But there's the "all the rest": incandescent, LED lamps and ballasts that will be subject to the new 10% tariffs.
Is Tariff Fatigue a thing? It should be. We've all been hearing and reading about it for the past year ad nauseam. For those with young kids or grandkids, imagine hearing Baby Sharkplaying over and over and over again. Next week, about a dozen manufacturer's tariff-related prices increases go into effect (see table below). Depending on the manufacturer and product class, these increases fall anywhere from 6 to 15%. Barring any further escalation in our trade war with China, hopefully we'll have seen the end of this flurry of price increases for the balance of the year.
Yes, we have Tariffs for you too
But while we've all been focused on China (and recently, Mexico), did you know that we're also engaged with a trade war with India? Citing another "hefty trade deficit", The Trump Administration ended India's "Generalized System of Preferences" status, a program designed to help developing countries sell to U.S. consumers. This happened June 5th. Last week, it was reported that India retaliated with tariffs on US goods as high as 70% affecting agricultural goods, chemicals and finished metal products. "Baby Shark, Do, Do, Do, Do, Do".
And then there's that little drone strike...
What potentially may have a greater impact on us, is the other "trade war" were waging with Iran. Last month, The Trump Administration levied energy sanctions against Iran, effectively cutting off oil exports to the US. Yesterday, we imposed new sanctions on Iran, stepping up a policy of pressuring the nation's leaders and the crippled Iranian economy in retaliation for striking down one of our drones.
Are we playing chess or checkers?
We all know the markets abhor uncertainty and the latest drama and sabre rattling between The Trump Administration and Iran is stressing oil futures. In the oil sector, Iran is a legitimate energy superpower, controlling 10 per cent of the world's proven reserves of oil, and about 15 per cent of proven gas reserves. It wasn't that long ago we witnessed (in the electrical industry) this butterfly effect that the oil market has on manufacturers of PVC conduit and other products produced of plastic resin. It may be premature to make this leap as there are no indications thus far of prices increases in PVC products. I may just be suffering the effects of Chronic Tariff Fatigue and seeing my plastic cup made of resin polymers as half full. Economic sanctions are only as effective as the number of countries participating. Not surprisingly, unlike India, Japan, South Korea and Turkey, China has shown no indication of supporting sanctions against Iran. A chess move possibly setting the stage for a prolonged trade war with China? "Run and hide, Do, Do, Do, Do, Do".
This past week, without surprise, we received more price increase notifications from our manufacturers (see table below). Generally, these have been increases against the product's base price. Whether across-the-board or selective, usually once a price increase is implemented, it's there to stay. So, what happens when a general price increase (due to the increased duties on imported goods) goes into effect July 1st and the trade war or tariffs end later in the year - will manufacturers rescind their price increases? When addressing this type of, albeit very real, cost escalation with a general price increase, we're naturally asking this question, and what percentage of the price increase is above and beyond the actual cost escalation due to tariffs?
Enter the use of 'surcharges'
Surcharges are not new, In our industry, we've all seen fuel surcharges and even surcharges on precious metals (remember the surcharge on the silver in electrical contacts in the '70's?). Since the trade war began last year, several businesses have been deploying surcharges as a way to recover some portion of their tariff-incurred cost escalations. So, why surcharges instead of price increases? The answer may have more to do with a company's core valuesand less to do with an accounting decision.
Six degrees of transparency
In one example, Christopher Mapes, CEO of Lincoln Electric Holdings Inc., stated in a Bloomberg interview"There is still a fair amount of uncertainty regarding the length of duration and extent of surcharge of the tariffs. Treating the tariffs as a surcharge was a more appropriate pricing mechanism than traditional inflationary cost increases."He also went on to say, "Applying a surcharge to products affected by the levies, gives customers a degree of transparency into how much the tariffs are adding to their costs."
Pass the honey please
There are yet other examples of companieswho chose the surcharge path for the sake of transparency. Upon receipt of a letterfrom our newest manufacturer partner, Schneider Electric, I became intrigued by the use of surcharges versus the ubiquitous price increase. While the word 'transparency' isn't found in the letter, its message couldn't be more transparent:"We are using a surcharge mechanism instead of a traditional price increase, as these tariffs are dynamic. If tariffs are removed by the US Government, the surcharges will be removed immediately; if amounts were to be changed in timeline or magnitude, we will adapt accordingly."
This post is not intended as a critique of how any manufacturer chooses to recover their cost escalations. These are unprecedented times for manufacturers requiring equally tough decisions and leaps of faith. The impact to our market, whether you're an end user, contractor or distributor, any manner of price increase, transparency or not, is a tough, bitter pill to swallow. Transparency though, is the honey that goes down with that pill.
Just as we're settling into the 'new normal' in our trade war with China, in another surprise move, the Trump Administration announced Thursday that they will levy a 5% tariff on all goods imported from Mexicobeginning June 10th. With potentially, an additional 5% each month until they hit 25% on October 1st. These tariffs will remain in effect "until Mexico substantially stops the illegal inflow of aliens coming through its territory," the White House stated.
If you're initial reaction is "Yeah, so what?"
Bear this in mind, in 2018 our imports from Mexico were just over $346 billion. We import much more than just beer and avocados. Surprisingly, our top 4 imports, or two-thirds of this $346 billion are all tied to the automotive industry. In fact, every American auto factory depends on Mexican parts to build its cars or trucks. Avocados, dates, figs and pineapples bring up the rear at under $5 billion. In between the cars and the guacamole, are products commonly found in the electrical industry such as: wires and cable, telecommunication equipment, electrical power and distribution boards, electric motors and generators, electrical switches, electrical transformers and more. For what it's worth, we import far more beer (Corona and Modelo Especial are among the best-selling beers in the country) than we do electrical transformers.
If this drags on anything like China has...
We shouldn't be surprised to see price increases from our mainstay electrical manufacturers. There are many electrical manufacturers that have operations in Mexico; Hubbell, Leviton, Eaton, Acuity, and Southwire just to name a few. It's anybody's guess what the fallout will be with this newest tariff skirmish. What makes this particularly worrisome is that it's resolution has been tied directly to immigration - a complex, non-trade issue.
In our May 24th Tariff Update, we speculated whether China would attempt to get the upper hand in the trade war by leveraging their dominance in rare earths. While this was pure speculation on our part, we now see wide spread news coverageregarding recent veiled threats from an official, from the Chinese economic planning agency aimed at the U.S. technology sector.. The Global Times (a Chinese tabloid) also reported Tuesday that China is "seriously considering" limiting rare earth exports to the United States.
What brought about this new focus on rare earths? Supposedly, after the Trump Administration blacklisted Chinese tech company Huawei, and threatened similar actions with other Chinese tech companies, China started talking about playing their rare earth trump card. As a reminder, China is the global leader of rare earths, accounting for 90 per cent of the world's rare earths production of minerals that are vital to the manufacture of lighting components, smartphones, electric cars and military weapons. China's dominance in this area is due in part, to their access to cheap labor and nearly non-existent environmental regulations. If China does 'weaponize' rare earths, it will be similar to them owning Park Place and Boardwalk in a game of Monopoly. You can still win, but depending more on a lucky roll of the dice.
Recently, a bill was introduced in the Senate with the objective of providing federal funding to spur development of rare earth mining/refining technologies. There are 2 companies, Blue Line and Lynas Corp. looking to start up mining operations in Texas. Overcoming opposition to the environmentally dangerous (at times radioactive) mining and refining activities though will be a major hurtle - and some may question the late timing of this bill.
Is the sky falling? No, but hopefully lighting manufacturers learned some valuable lessons from the rare earth shortagesthat rocked our industry during 2011-12. This supply crisis spurred the subsequent research into rare earth alternativesand renewed electronics recycling initiatives. But like a drowning man watching a YouTube video about how to work a life vest, let's hope we won't need to battle-test our rare earth shortage readiness plans any time soon...
Retailers are speaking out and warning of higher prices:
As this trade war drags on, :the retail sector of our economy has been weighing in;Kohl's, J.C. Penney, Home Depot, among others have been applying whatever influence they can muster with the Trump administration in seeking a quick resolution. Illustrating the scope of the impact on the retail sector, more than 170 shoe retailers, including Nike, Under Armour, Adidas, Foot Locker are also petitioning for a halt in raising tariffs on footwear imported from China. Not much of an appetite for this food for thought?
Can China leverage its dominance of rare earth minerals in the ongoing trade dispute?
The Mountain Pass mine in California was the only US producer of rare earths - but it closed in 2015 and sold to China-backed Shenghe Resources Holding two years later. Of the $155 million we import of rare earths annually, a staggering 59 percent is imported from China. While rare earths, a somewhat misnomer, aren't really rare at all - just the appetite for building the mining infrastructure is. If we learned anything during the "rare earth shortages" of 2012 (more an issue of China tightening exports than an actual shortage),there are a countless number of technologies that are dependent on rare earths; electric cars to wind turbines, smartphones to missiles. In the electrical industry, we saw this shortage affect the availability of lighting products from ballasts and lamps to occupancy sensors. Hope for the best, prepare for the worst...
Yet in the muddled fog we saw a beacon of thought leadership:
We have seen a number of price increases from the electrical and lighting manufacturing community being attributed to the US-China trade war (shown in the table below). Not to minimize the impact of these tariffs on the supply chain, some of these price increase notifications we've seen have a more pro forma feel to their messaging (as expected), and less a preponderance of thought leadership. That is until the notification we just received from Satco Products, Inc."While Satco may be forced to implement a pricing policy to address the additional 15% tariff that became effective May 10, 2019, we have decided to take a deep breath and acknowledge that the US and China are in a trade war, and one tweet at any time could announce a resolution to this conflict." States Satco Products President Bill Gildin in his notification letter. We don't expect the price increase notifications to end any time soon, but hopefully Mr. Gildin's letter will trend towards more forethought and less mechanical responses.
The Good News:The United States agreed last Friday to lift its tariffs on industrial metals (aluminum and steel) from Mexico and Canada, clearing a major obstacle to congressional passage of President Trump's new North American trade deal. The agreement calls for Mexico and Canada to implement stringent new monitoring and enforcement measures to prevent subsidized Chinese steel from being shipped to the United States via their territories. It's unlikely our industry will reap any immediate benefit from this resolution - but it's a positive move for our country none-the-less.
The Bad News:Not much has changed regarding our trade dispute with China. In fact, Curtis Chin, an Asia fellow at the Milken (think tank) Institute recently stated: :"It's going to get worse before it gets better."Most major lighting manufacturers have already implemented their price increases (avg. of 15%), and we've recently seen a non-lighting manufacturer push through an 11%, tariff-related increase (see table below).
