Connexion Insider Blog

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.