“Nobody Wins a Trade War.”

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TRUTH OF THE TARIFFS Conditioned Air’s
President and CEO Tim Dupre sees price
increases for materials used at the company
because of the trade war.

Live purebred breeding horses. Condensed milk. Overcoats. Pantyhose. Cultured pearls. Steel. Aluminum. Hand-held blow torches. Sewing machines. Golf carts. Bagpipes. Ball point pens. These are just a few of the items in an inventory of Chinese
goods to be tariffed, an exhaustive list that includes everything from housewares to machine parts to foodstuffs, the latest step in a tit-for-tat trade war between the United States and China that began in March 2018.

In the last year and a half, the United States has imposed tariffs on more than $360 billion on goods coming out of China. For businesses that depend on those goods—both raw materials and manufactured products—the tariffs have been de-stabilizing. Tim Dupre, president and CEO of Naples-based Conditioned Air, which employs 385 people across Southwest Florida, says his company started feeling the effects of the trade war in the second quarter of 2018.

TRUTH OF THE TARIFFS: Conditioned Air’s President and CEO Tim Dupre sees price increases for materials used at the company because of the trade war.

“We saw price increases coming through anywhere from 5 percent to 25 percent,” Dupre says. “For us as an air conditioning
contractor, it impacted every product we use—insulation material for line sets, fiberglass and galvanized metal, to name a few.”

The increased prices on raw galvanized steel were especially damaging. In one instance, Conditioned Air had signed a contract with a commercial assisted living facility, but before work started it was hit with an $18,000 price increase on the sheet metal needed for the ductwork. Because Conditioned Air had already bid on the project and signed a contract, it had to complete the work at the agreed-upon price. And the $18,000 cost increase?

“That impacted our bottom line,” Dupre says.

Officially, the tariffs imposed by the United States on goods coming out of China have three aims—to reduce the U.S. trade deficit with China, to help retain American jobs from going overseas and to cut down on unfair trade practices in China, which include intellectual property theft, unequal access to markets and forced technology transfers. Yet across the United States, people are asking if a trade war is the right way to go about it.

CAUTION AHEAD: FGCU’s Victor Claar believes no one is a victor in the trade wars.

“Let me be really clear: No,” says Dr. Victor Claar, an associate professor of economics at Florida Gulf Coast University. “Throughout history, free trade has been mutually beneficial for all parties concerned, and it’s lifted billions of people out of poverty.” Claar has a colleague who likes to say, “Nobody wins a trade war.”

“I think he’s on the right track,” Claar says. Claar calls trade wars “wars in which you start off pointing the guns at yourselves.”

The majority of economists share his opinion, he says, yet they’re unable to convince those in power. “One of the ironies in the space where politics meets economics is that the things that economists are most certain about tend to be the issues where they find themselves the least politically persuasive.”

One reason is that politicians like to look as if they’re defending their constituents.

“It might be politically advantageous for somebody like President Trump to claim that he’s saving American steel jobs from unfair competition from China. But the numbers behind that argument really don’t add up. I’ve seen at least one estimate that in the United States we have fewer than 149,000 steel jobs left, yet we have about 6.5 million jobs in the U.S. that depend critically on steel as an input. So, if what we care most about is the plight of our fellow American workers, we might very well be risking millions of jobs in an effort to save thousands.”

The problem with a tit-for-tat trade war is that for every tariff the United States levies on goods coming in from China, China retaliates with tariffs on American goods going across its borders. In Southwest Florida, that can spell trouble for exporters. According to the 2019 State Export Report issued by the U.S.-China Business Council, Florida exported $2.1 billion in goods to China in 2018. The top goods exported to China from the State of Florida were nonferrous metal products, aerospace products and parts, scrap products, pulp and paperboard mill products and navigational and measurement instruments. Florida was the number four state nationally behind California, New York and Texas in a ranking of top U.S. state services exporters to China. These services included travel, education, and freight and port services. In 2017, the last year data was available for the report, Florida exported $3.5 billion in services to China. Between goods and services, the report estimated that exports to China from the State of Florida supported 36,280 U.S. jobs.

Local citrus growers are among those who export to China, and they’ve seen a fallout from tariffs levied against U.S. products.

Citrus association executive Steve Smith is watching carefully at potential effects of tariffs on his industry.

“Most of the impact has been to California’s fresh fruit sales,” says Steve Smith, executive vice president of the Gulf Citrus Growers Association. “There’s a secondary impact in our area because the lack of sales to China from California has caused the fruit to saturate this market, and that’s backed up inventory and depressed prices.”

Smith says it’s currently a fresh fruit issue that hasn’t impacted the local juice business yet. Still, with an industry that generates roughly 45,000 jobs, a hit to Florida citrus can send the state’s economy reeling.

Matt Dreckman, a senior global trade consultant with Allyn International, an international logistics firm headquartered in Fort Myers, works with companies on logistical strategies in the global marketplace. According to Dreckman, the biggest losers so far in the trade war have been U.S. grain exporters and soy bean producers. Soon, though, he says, more American consumers might start to feel the effects.

The United States had intended to launch a new round of tariffs in December that would affect everything from sneakers to mobile phones. At the beginning of October, following talks between Washington and Beijing, those increased tariffs were temporarily put on hold, contingent on a plan for China to purchase $50 billion in U.S. agricultural products. If the initial plan for the December tariffs does go through, however, effectively all Chinese goods imported to the United States will be subject to a price increase.

The tariffs were initially broken into four lists. The first half of the fourth list, 4A, went active Sept. 1, 2019, and 4B was scheduled to go active in the middle of December. Lists 1, 2, 3 and 4A contained goods destined for manufacturers like boilers, condensers, lubricating oils, polymers and resins, plus foodstuffs like fish, grains, legumes and tobacco. List 4B, “encompasses everything that the American consumer actually uses,” Dreckman says. This includes wearables like clothing, accessories and footwear, plus electronics.

Matt Dreckman, Senior Global Trade Consultant with Allyn International in Ft. Myers, Florida.

“We get half our shoes from China, and those are all dutiable right in the time when people are going to be buying shoes because it’s peak season for the holidays,” Dreckman says. “When list 4B comes along, that’s when you’re going to see electronic devices, laptops, phones—that’s really going to hit the consumer hard.”

The problem with tariffs, Dreckman says, is who ends up paying for them.

“The costs are going to go up, and either the subcontractors who are making this stuff in China take the hit, the American tech sector who is sending this stuff to China is going to take the hit, or American house holds are going to take the hit. Somebody’s got to take the hit, and at the end of the day, it’s probably the American consumer.”

As for Dreckman’s clients, many of them Fortune 500 companies, they’re reaching out to him with a very specific question— what’s the next best alternative to China?

“Vietnam,” Dreckman says without hesitation. “If I was opening a factory overseas right now, I would 100 percent open in Vietnam. They have the infrastructure, and the supply chain is good. They’re going to do really well if people keep leaving China.” Yet Doug Barry from the U.S.-China Business Council says it’s more complicated than a simple pivot to new production centers.

Both economies are intertwined, according to Doug Barry of the U.S.-China Business Council.

“China became the world’s factory for a reason. They had the land, they had the resources, but they also had the people— both in numbers and skills. The Chinese have become very good at making complicated things. It’s one of the reasons Apple has most of its iPhones assembled in China. That won’t be easily replicated in other places.”

As China has transformed its economy over the last 70 years from an agrarian society to a modern exporting nation, its economy has become enmeshed with the economies of other nations around the world, making situations like the current trade war especially complicated.

“It’s not a simple matter of are you for trade or are you against trade? Are you for China or are you against China?” Barry says. “Our economies are very much intertwined in ways that most people don’t understand or appreciate.”

Still, for those experiencing the fallout from the tariffs, this most recent trade war may end up having unexpected upsides. “For us as a business, it encourages us to look at how we operate and look for ways to leverage how we do jobs to improve efficiency and offset those price increases,” says Conditioned Air’s Dupre. “It’s helped us be more strategic about how we operate on a daily basis.”

In a trade war, as in any war, it’s ultimately the fittest who survive.

*IT’S COMPLICATED: Matt Dreckman of Allyn International says his company answers his customers’ many questions about navigating the current trade obstacles.

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