HOW ARE TARIFFS & TRADE BARRIERS IMPACTING THE FURNITURE BUSINESS?
Threats of new trade tariffs have the potential to change the furniture industry, even at a company such as Formaspace that manufacture 100% of its furniture products here in the USA. We take a look at the effect of tariffs on the furniture import/export business as well as their impact on the availability of raw materials used in the furniture making industry.
Are we in a trade war?
That’s the billion dollar question that the stock market investors, businesses, and consumers are asking.
The stakes are high as the administration turns to the threat of tariffs as part of its ongoing negotiating strategy to sign new international trade agreements, which they believe are more favorable to American manufacturing and that safeguard American intellectual property (IP).
Actions threatened by Washington against one particular company, the Chinese multi-national electronics and communications giant Huawei, seem to have grabbed all the headlines in recent days — understandably so given the enormous consequences for tech companies, from Apple to Qualcomm, who are facing up to the prospect of having to unwind a truly global supply chain for computer chips and telecommunication components.
U.S. Trade Deficits In The Durable Manufactured Goods
But despite the importance of the electronics industry, it’s not the entire economy, at least not yet.
Given the seriousness of the current and proposed tariffs, we think it’s important to take a look at the balance of trade in durable manufactured goods, then drill down into the effects that tariffs will have on our corner the market: the furniture business.
Where do we stand at the moment with current U.S. trade deficits?
For durable manufactured goods, the picture is not great. Federal agencies report that in 2018, the US imported around $605 billion more durable manufactured goods than we exported. The trend has worsened over the last 5 years: the U.S. net trade deficit in durable manufactured goods has grown by 144% since 2014.
As you can see from the economic data shown in the chart above, we are currently running an account surplus in durable manufactured goods with Canada, Hong Kong, the Netherlands, Australia, and the United Arab Emirates, as well as many other countries shown in green on the map above.
At the other end of the scale are five countries — South Korea, Germany, Japan, Mexico, and China — with whom we have the largest net trading deficits in durable manufactured goods.
Imbalanced trade with China in durable manufactured goods poses a big problem for the US: In 2018, we bought $338 billion more durable manufactured goods from China than we were able to sell to back them — creating a trade deficit that is nearly 10 times the net surplus we have with our best customer, Canada.
The Threat Of Raising Section 301 Tariffs On Chinese Goods From 10% To 25%
The administration in Washington responded to the overseas trade deficit with China by instituting a 10% tariff on many Chinese imports under Section 301 of the Trade Act of 1974. (This was in addition to a tariff on steel and aluminum products, more on that later.)
Then on May 10, 2019, the office of the U.S. Trade Representative announced: “Earlier today, at the direction of the President, the United States increased the level of tariffs from 10 percent to 25 percent on approximately $200 billion worth of Chinese imports. The President also ordered us to begin the process of raising tariffs on essentially all remaining imports from China, which are valued at approximately $300 billion.”
How will this affect our corner of the market, the furniture business?
Fortunately for Formaspace, the direct effects will be minimal. As you probably know, we manufacture all our furniture here in the USA at our Austin, Texas factory headquarters — using locally-supplied raw materials, including domestic steel and wood products.
As a result, Formaspace won’t be directly affected by the new tariffs on imported goods and materials (with the exception of some hardware items, which do come from overseas); however, there may be some indirect effects from these tariffs over the coming months, such as the possibility of increased prices for domestic steel.
But what about other companies that import Chinese furniture products or depend on Chinese raw materials? They could be hit pretty hard.
How hard? Let’s first take a look at the trade balance for imports and exports of U.S. furniture products.
According to Federal trade statistics, the United States is currently running a nearly $40 billion deficit in the overall furniture and fixtures market. Once again, China is racking up the biggest trade deficit, it sold nearly $26 billion more furniture and fixtures to the US in 2018 than we sold back to them. The Chinese imbalance in furniture trade is relatively large compared to that of our other trading partners: e.g. China’s furniture trading deficit is five times larger than that of the next country on the list, Vietnam.
Long-term South African Expat Vlogger Serpentza Provides his Perspective on US-Chinese Trade Relations
What Are The Consequences Of Raising Section 301 Tariffs On Chinese Imported Furniture From 10% To 25%?
Will Chinese exporters be able to survive in a world with 25% U.S. tariffs?
It could be grim for many Chinese companies which have been operating on razor-thin margins for years.
Indeed, few of the nearly 1,000 Chinese export companies investigated by Bloomberg Economics could expect to survive the new 25% U.S. tariffs over the long haul, researchers say. Take, for example, Yang’s Sunrise Furniture Company based in Dongguan in southern China. The company’s owner, Ben Yang, tells Bloomberg reporters, “We (will) probably have to switch to making something else or shut down altogether.”
Meanwhile, the mood was undeniably “sour” at the Canton Fair in Guangzhou China, the three-week-long trade fair, which attracts buyers from around the world. The South China Morning Post reports from the show that US Q1 imports of Chinese-made furniture by retail companies, such as Home Depot, Ikea, Target, and Rooms-to-Go, fell 13.5% while imports from countries not facing sanctions, Vietnam and Taiwan, rose 37.2% and 19.3% respectively.
Indeed, this is what economists predict will happen in the coming months: if there is no US-China trade agreement, more of the Chinese furniture manufacturing industry will shift its production to Vietnam, Taiwan, and other Southeast Asian countries to avoid U.S. tariffs.
Possible Retaliatory Trade Actions By The Chinese Government
By its very nature, trade is a two-way street: the Chinese government may choose to retaliate in response to US tariffs. But how?
We’ve already mentioned the likelihood of Chinese export manufacturers moving their supply chains to other countries, but what other options could the Chinese government pursue?
One possibility is that China could continue to pump up its economy in order to withstand an assault on its export trade. Economists believe that the Chinese government has up to $3.65 trillion set aside in a rainy day fund. They could also weaken their currency somewhat, to lessen the impact of tariffs.
There has also been concern raised about the Chinese government slowing down their purchases of US treasuries, which fund the US federal government’s budget deficit.
Retaliation might also come in the form of trade restrictions as well. China is the world’s leading producer of rare earth minerals, an essential ingredient in the production of today’s electric car motors, LED lights, and other high-tech products. Export restrictions of rare earth minerals could constrain manufacturing outside of China significantly.
Tensions are rising in China as a result of the trade war threats. One retired official, Mr. Zhao, wrote an anti-U.S. trade war anthem that has become a viral sensation in China.
