Trump's tariffs have U.S. companies cutting their forecasts
Although President Donald Trump is hinting at a possible trade deal with China, for now the dispute is seeping into companies' earnings reports and financial forecasts.
Tariffs already imposed and threatened by the White House are heightening inflation worries as companies across industries raise prices on everything from new homes and drills to handbags and autos as they cope with higher costs.
A 10 percent tariff on $200 billion in Chinese goods took effect in September -- that tranche of tariffs is slated to more than double, to 25 percent, in January. Mr. Trump has renewed threats to tax every good coming in from China.
Global stocks rose after Mr. Trump's tweet on Thursday saying he had had a "very good conversation" with President Xi Jingping of China regarding trade issues. A Bloomberg report that the president has directed Cabinet officials to draft a potential trade agreement with Beijing also seemed to cheer investors, with U.S. stocks edging up in early trade.
Analysts sounded note of caution on the prospects for a deal. "President Trump's reported request for his cabinet to draw up the outline of a 'deal' with China is likely an attempt to support a market rally heading into the midterm elections on November 6 rather than a sign of an imminent breakthrough," Height Capital's Clayton Allen said in a note Friday.
"It all gets passed on to the consumer"
For now, that leaves corporations to deal with the effects of heightened U.S. protectionism on their business.
The impact of rising costs is unmistakable and broad. GM is offering 18,000 U.S. employees a buyout as part of its overall efforts to slash expenses. And Ford earlier in the fall pointed to $1 billion in possible new costs from the metal tariffs. Heavy manufacturers are also raising prices, including United Technologies, which makes Pratt & Whitney jet engines, Otis elevators and Carrier air conditioners.
"I would expect pricing will also have to increase next year if these tariffs remain in place," United Technologies CEO Greg Hayes told investors on the company's third-quarter conference call. "Ultimately these tariffs -- it all gets passed onto the consumer in one form or another."
Even the U.S. metal producers, which were supposed to benefit the most from steel and aluminum tariffs imposed in June, watched their stocks fall this year amid concern the economy will slow because of trade friction worldwide, Bloomberg reported. U.S. manufacturers are paying about 8 percent more for aluminum and 38 percent more for steel than a year ago as the metal tariffs take hold, according to The Wall Street Journal.
"Items carrying a tariff at this point represent approximately two-thirds of our imports from China," Donald Allan Jr., CFO of Stanley Black & Decker told investors on the company's third-quarter conference call. "About 90 percent of this impact is composed of finished goods. Some key categories include mechanics' tools, power tool accessories, vacuums and some hand tools."
The latest tranche of China tariffs could cost $200 million more next year on top of 2018's price increases, the company said. Stanley Black & Decker will pass on those costs to customers, he said.
"No easy solution to this challenge"
For consumers, the big hit may come next year if the Trump administration holds to its promise of hiking tariffs on Chinese goods to 25 percent.
"We will be raising selling prices in 2019," Steven Madden CEO Ed Rosenfeld told analysts on the company's third-quarter call. Because Steve Madden acts mostly as a wholesaler, negotiations are underway with retailers. While there's "no easy solution to this challenge," Rosenfeld said he thinks his company can temper most of the cost jump.
That includes "aggressively" moving production out of China as fast as possible. Steve Madden raised its goal of moving production for some products, including handbags, to at least 40 percent and as high as 50 percent. Just three months earlier, that forecast was 30 percent, Rosenfeld said on the call.
Markets may yet get more jittery as Mr. Trump recently revived his threat to impose tariffs on all Chinese goods if the U.S. and China can't reach an agreement on trade. That means costs will keep going up, perhaps threatening the U.S. economy's robust pace of growth.
Larry Kudlow, a chief economic adviser to Mr. Trump, recently said there may be "a little thaw" ahead of Mr. Trump's meeting with China's Xi Jinping at a G-20 meeting in Argentina later this month, hinting that China tariffs could be put on hold.
"You won't be able to call off the exodus"
Yet for consumer-goods makers, once the decision to use a supplier or factory in another country is made, there's no turning back, said Rick Helfenbein, CEO of the American Apparel and Footwear Association. The AAFA says it represents more than 1,000 brands.
"The thing that's really bad about this -- that most people don't get -- is that after the election next Tuesday, on Wednesday if Trump gets up and says 'I call off this with China,' you won't be able to call off the exodus," said Helfenbein, who just returned from a trip to Asia to check out the situation for his members.
Companies spent the past several decades setting up their supply system in China as factories there perfected low-cost productivity and have simple shipping routes to the U.S. West Coast. Footwear and clothing retailers, in particular, still require humans to put together goods, Helfenbein said.
As production shifts, finding substitute capacity for factories in other countries while keeping costs low is difficult and could can take years or even decades. For consumers, that means higher prices.
Mr. Trump "has now baked inflation right into the system. Therefore, prices will go up no matter what," Helfenbein said. "There's no going back at this point. We can't suddenly call off the dogs. This is going to affect us for the next 10 or 20 years."