It has been nearly a month since the U.S. Administration began imposing tariffs of 25 percent on nearly $34 billion worth of goods imported from China. The retaliation from China was expected, and President Trump’s threat to tax all $500 billion of imports to the U.S. was not seen as a surprise.
What may be somewhat of a surprise is the reaction to the tariffs. Ranging from Congress to the blue-collar importer/exporter, all the way to names you recognize in the lighting industry.
First, the most recent news out of Washington. Two measures related to Chinese trade are moving through Congress. According to Reuters, the House passed a $716B defense authorization bill aimed to rein in China’s investments in the U.S. and strengthen the Committee on Foreign Investment in the United States (CFIUS). The Senate has also unanimously passed legislation that would lower tariffs on roughly 1,660 items made in China, including toasters and chemicals, to protect industries that no longer exist in the U.S. And, last week the Trump Administration announced a $12 billion dollar incentive for U.S. farmers impacted by the tariffs.
This all sounds like steps in the right direction but, again, what does this do to the lighting industry?
“We are already seeing the effects of tariffs in the lighting industry,” says Matt McCarron, VP of Industrial Commercial Channel, LEDVANCE. “The tariffs that went into effect in the beginning of July had an initial impact, but the additional pending tariffs set for September could be much more significant on the entire lighting industry. This includes distributors, manufacturers and U.S. factory workers.
“According to the administration, these tariffs are intended to support U.S. manufacturing but, for lighting, as currently constituted they will actually do the opposite. We believe there are unintended consequences to applying tariffs to lighting components coming into the U.S. for production here. These could encourage the purchasing of final lamps from China instead of making them here with U.S. and global parts.”
“If we don’t react to this, we are actually going to start taking a loss against our product,” states Mike Williams, Logistics Manager in charge of imports/exports and trade compliance at Tacony Coporation. Tacony imports light kits for their Regency Ceiling Fans division. That is just one product Williams oversees that will be touched by the tariffs. “With a 10% increase imposed tariff, the product is going to land at a higher value and our reaction is going to have to be to increase the costs to our customers,” Williams elaborates. “What that’s going to do is create a competition for some of the suppliers that we currently have and our customers, as well with suppliers in Taiwan. Those products are not going to be affected at all, but coming out of China, that’s where our problem is going to be with our light kits and lighting fixtures.”
The thing about the imposed tariffs is, they won’t show favorites. It will impact the entire lighting industry, not just the big players, or the smaller organizations.
“It’s going to impact us in a major way because we are going to have to find other industries to fulfill the losses we are going to take,” continues Williams. He used the steel and aluminum tariffs from June as an example. “Granite City Steel is going back to work, right? That’s great it’s putting so many workers back to work. But, what that does is, from the importing infrastructure, any time you are taking something away from the import side, you are affecting the operations of how the U.S. ticks. For example, there’s transportation companies involved, airlines involved, logistics companies, trade attorneys, trade and compliance directors, customs workers – it just impacts so many different values of our nation by imposing these taxes where we have to find other ways to utilize materials from within the U.S.
“You don’t make money trading within the United States. You and I can trade that dollar back and forth until the music stops to see who is richer – who has that extra dollar. You have to be able to spend those monies and buy products from other countries to be able to increase your gross national product.
“There’s no planning for it. To turn the light switch on and off is not going to be beneficial to anyone. We have to get better at this – our import process affects everything because we don’t have the infrastructure in the United States to do everything. From the labor standpoint and a cost standpoint. We just don’t. It is too late to reach out to other countries because they too don’t have the infrastructure or labor either.”
We need China just as much as China needs us
“We just have some headstrong people in office in both countries that are trying to display who is the meanest, who is the baddest and who is the biggest,” continues Williams. “We also have good working relationships in the private sector. That sector is what really creates stability in the United States.
“I’m hoping this is a temporary thing. I’m hoping this is something that is levied upon and we come upon an amicable agreement on certain policy to throw these impulse tariffs out on both sides. But, it is going to take someone big to step forward to do it. As of right now, I don’t see it happening because the program is so young, but I say moving into the last quarter of the year after peak season is done, I think that is when we are going to see something happen. For sure hopefully before Chinese New Year next year.”
That seems to be the general consensus for market experts.
“I believe it is in the best interest of both the U.S. and China to solve the trade disputes,” states Andrew Hecht, an options expert, analyst and sought-after commodity trader who contributes to Seeking Alpha. “I think this will occur in September or October and will be accomplished via an economic summit between President’s Xi and Trump where both will agree to compromise on trade which will give both leaders a victory. A win-win situation is in the interest of both parties.
“The winners will be President’s Xi and Trump as the former will prevail and come across to the Chinese as a great international leader and forward thinking force,” continues Hecht. “President Trump will carry a victory that improves the trade environment for the U.S. into the mid-term elections in support of his party and fulfilling his campaign pledge. A resolution will set the stage and provide a prototype for other trade relationships around the world with both Trump and Xi the authors. A solution will spark economic growth and a rally in commodities markets.
“I am optimistic that the potential for a trade war will become a memory by the end of 2018,” concludes Hecht.
What does the future look like?
Since no one has a crystal ball to know exactly what will happen, some companies are finding ways to be creative until the dust settles on the tariff tiff.
Major stakeholders across all industries are moving product out of China on feeder vessels, to the mother ships and they are going to other countries like Vietnam, for example. They have someone in Vietnam “fix” these documents to state the product is from Vietnam. Who is watching that? The United States really can’t. It’s not in their territory. Now we’re back to the point of having the official negligent documentation and not understanding where our product and commodities are coming from, and that’s a concern.
“We’ve already seen a reduction in steamship lines in imports to the United States,” Williams notes. “The steamship lines are actually canceling sailings to the U.S. because they are not having full vessels. What they are doing is, they are rescheduling these vessels to other countries or they are idling the vessels altogether. There are a lot of Chinese flagships out there. They are trying to compete now with these vessels carrying flags from other countries and different lanes than they have been in, so that’s going to get ugly there as well. Trade is huge, and trade is needed.”
In terms of Chinese New Year, the shipping volume is low during the week-long break. Factories close and the United States is pumping POs out early months in advance trying to get as much as they can shipped out of China. “If the tariffs continue, the sales pattern is going to drop,” deduces Williams. “Therefore, the POs going to the Chinese government are going to drop, and once these workers go home for Chinese New Year, they are not coming back to work. They are not going to have anywhere to go to, they are not going to have work.”
According to McCarron, LEDVANCE is taking measures to combat the tariff situation.
“In an attempt to avoid these issues in the lighting industry, we are taking the following measures:
- Pursuing an exemption under the first set of tariffs,
- Testifying at the upcoming USTR hearing,
- Working with NEMA in support of their testimony at the USTR hearing and communications with administration officials on behalf of the lighting industry,
- Working hard to find alternative options to minimize the financial impact to our customers, and
- Engaging elected and administration officials in Washington D.C.
“We encourage our distributor partners to reach out to their own elected officials regarding the significant burden these tariffs would impose on the entire lighting market,” McCarron suggests. “Bottom line – as always, we will continue to support our distributor partners.”
As for lightED’s bottom line, we will keep an eye on the trade situation with China and keep you updated right here.