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Connexion Insider Blog

Friday, May 31 2019

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.

We'll keep you posted...

Posted by: Daniel Dobski AT 11:14 am   |  Permalink   |  0 Comments  |  Email
Wednesday, May 29 2019

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...

Posted by: Daniel Dobski AT 11:12 am   |  Permalink   |  0 Comments  |  Email
Friday, May 24 2019

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.

Posted by: AT 11:10 am   |  Permalink   |  0 Comments  |  Email
Tuesday, May 21 2019

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).

Posted by: Daniel Dobski AT 11:08 am   |  Permalink   |  0 Comments  |  Email
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