U.S. Economy Expands, but Tariffs Wait in the Wings

With the United States entering into a historic economic expansion period, tariffs and the threat of more tariffs on Chinese imports could be the bump in the road to financial good times.

Retailers and manufacturers already are inching up prices on some merchandise after a 10 percent tariff on $200 billion in Chinese goods went into effect on top of existing tariffs last year. In May, the Trump administration upped that 10 percent tariff to 25 percent, affecting hundreds of imports including textiles, luggage, handbags, toys and chemicals used to dye fabric.

Tariffs threatened on another $300 billion in goods, which would include apparel and footwear, is on the back burner after President Donald Trump and Chinese President Xi Jinping met recently in Japan and agreed to resume trade talks.

But the constant threat of tariffs on apparel has big U.S. clothing manufacturers worried about the economic wallop it could deliver to their companies. That was brought home in June when representatives from Columbia Sportswear Company—with revenues of $2.8 billion in 2018—testified before the office of the U.S. Trade Representative that tariffs would be a burden on the 81-year-old company, headquartered in Portland, Ore.

“The products that we continue to manufacture in China are highly specialized and tied to significant investments that we have made in tooling, machinery and personnel training,” said Katie Tangman, Columbia Sportswear’s director of global customs and trade. “We also own and operate a wholly owned subsidiary in China, which is one of our largest foreign markets with more than 700 retail locations throughout the country. Having local production helps us remain competitive in the local China market, which in turn supports U.S.-based innovation jobs.”

Tangman noted that the cost to move the company’s remaining operations out of China, purchase new machinery and train a new workforce would cost millions and take at least one year.

The threat of additional tariffs, she added, would give the company no choice but to either pass on the additional cost to consumers or curtail investment to cover the additional tariffs on top of current tariffs. “Some of Columbia’s products are subject to import taxes as high as 37.5 percent,” she said. “Adding a tariff of up to 25 percent on goods from China means that our import taxes would be as high as 62.5 percent, an untenable amount.”

Full house

With higher tariffs going into effect last year, and more threatened, importers started bringing in goods before the tariffs went into effect. The result is that warehouses all around the Los Angeles area and the Inland Empire are filled to the gills with merchandise.

“There is less than 1 percent vacancy in the warehouses and logistics spaces located in the area,” said Michael A. Smith, the director of international trade at the World Trade Center Los Angeles. “You have a huge glut in inventory from companies front-loading their imports and holding onto their supply.”

Warehousing merchandise longer means companies’ storage expenses are going up, which is another factor pushing up prices. And, with so many cargo ships to be unloaded at the ports, more containers are sitting on the docks longer, resulting in higher demurrage fees. For some companies, demurrage fees are adding up to $3,000 a container.

“It has been 15 months since this whole trade battle started, and I now feel the consumer more than ever is going to feel the burden of this,” Smith said.

China is very important to the Port of Long Beach and the Port of Los Angeles, which account for receiving nearly half the seaborne trade between the United States and China.

China last year was the Port of Los Angeles’ top trading partner, accounting for $203 billion in business. Way down on the list in second place was Japan, bringing in $49 billion in business.

Eugene Seroka, the Port of Los Angeles’ executive director, said last month he fears “the prolonged presence of tariffs on trade with China may cause American businesses to source materials and goods from other countries, which may result in trade volumes shifting away from the U.S. West Coast and the Los Angeles trade gateway.”

Long economic ride

Despite the constant threat of more tariffs on the horizon, the economy has continued to expand at a steady pace. The U.S. is now in its longest economic expansion, surpassing the previous record of 120 months of economic growth. “We just set the record,” said Robert Kleinhenz, executive director of research at Beacon Economics in Los Angeles. “In general, economic conditions are looking good, whether it is on the national, state or local level.”

The national unemployment rate is at 3.6 percent, which is the lowest it has been since the 1960s. California’s 4.2 percent unemployment rate is also at a near record low.

The Federal Reserve’s recent decision not to raise benchmark rates is pushing down mortgage rates, which have sunk to a 31-month low. As of June 27, 30-year mortgage rates were at 3.84 percent compared to 4.55 percent a year ago.

Despite lower mortgage rates, housing sales in Los Angeles County fell 2.9 percent in May compared to the same period last year.

“Lower interest rates haven’t ignited the housing market, which is puzzling,” said David Shulman, senior economist with the UCLA Anderson Forecast. “In the past, you would have seen a lot of activity. The housing market is still squishy.”

The general consensus among economists is that the Federal Reserve will lower the benchmark interest rate two more times before the end of this year.