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Tariffs’ toll: As trade dispute continues, costs and uncertainty trouble manufacturers

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PHOTO/AMERICAN KEG CO.
An employee handles a steel keg inside the manufacturing facility at American Keg Co. in Potttsown. The company said it is the only U.S. keg maker using American steel.
PHOTO/AMERICAN KEG CO. An employee handles a steel keg inside the manufacturing facility at American Keg Co. in Potttsown. The company said it is the only U.S. keg maker using American steel.

With more tariffs imposed by the U.S. on a growing number of products and materials, manufacturers find themselves grappling with the uncertainties of how an emerging trade conflict could affect their business

For American Keg Co. in Pottstown, the tariffs are increasing the costs of domestic steel, the only material the company uses to make its kegs.

“We use American steel, all made here in Pottstown,” said Paul Czachor, the company CEO. He said American Keg is the only company in the nation to make its kegs out of American steel.

From the beginning of the fourth quarter last year, prices for domestic steel have been more than 20 percent higher than prices for imported steel, Czachor said.

“Most people would certainly want to buy American made; however, there is a limit,” Czachor said. “We are just asking for a level playing field.”

The tariffs are driving up costs for many regional manufacturers that export products to China as well as for companies that buy products from China because of the quality of the material or lack of domestic suppliers. As costs rise, many manufacturers fear passing the cost on to consumers could cost them business.

The uncertainty of how many products will be included in the tariffs or how much they will increase also creates conflicts for manufacturers looking to run their business.

With Canada included in recent U.S.-imposed tariffs, pressure is also falling on regional manufacturers that export products to that nation.

According to the U.S. Chamber of Commerce, Pennsylvania’s top export markets are Canada, Mexico, China and the United Kingdom, all nations hit by U.S.-imposed tariffs.

In response to the tariffs, China, the European Union, Mexico and Canada have already retaliated or made plans to strike back with billions of dollars on American-made products, according to the chamber.

The chamber said an emerging trade war threatens $1.7 billion in Pennsylvania exports and the state’s hardest hit products are coffee, iron/non-alloy steel coated/plated with zinc and baked goods exported to Canada.

Czachor has testified twice before the office of the U.S. Trade Representative to advocate for adding kegs to a list of China-imported products targeted for tariffs. Though kegs are proposed to join the list, officials have not yet finalized it.

For Czachor, the uncertainty makes it difficult to determine how the impact of tariffs will affect his business.

“I think, long-term, it’s in jeopardy because we can’t sustain this. The price difference is so high.”

Czachor said there have been well-known cases of China subsidizing its steel industry, a practice that many in the U.S. say creates an unfair playing field.

“They have to fix some of these practices, and they are cheating,” Czachor said.

REGIONAL MANUFACTURERS FEEL THE IMPACT

One Schuylkill County manufacturer has found itself at a competitive disadvantage directly related to the tariffs, according to the company’s leader.

Lisa Scheller, president and chairperson of Silberline Manufacturing, a global manufacturer of aluminum pigments for paints and coatings based in Hometown, Schuylkill County, testified before the office of the U.S. Trade Representative in August.

“About 40 percent of our U.S. production is exported to more than 35 countries,” she said in her testimony. “Much goes to China and the rest to Asia.”

Among items critical to the company is spherical atomized powder, a raw material that it imports from China but which has been hit by tariffs

She listed several reasons why the U.S. should exempt the product from tariffs. Silberline used to buy powder almost exclusively from Alcoa’s now-closed Texas atomizer, she said, but today, there are no domestic suppliers producing the powder in the quality or quantity that Silberline needs.

“Silberline chose China as its source for spherical powder not because of the price but because of its quality and technology,” Scheller said. “The tariff would significantly disadvantage Silberline against its competitors since Silberline is the only entirely American-owned company in this business.”

The company already pays a 5 percent tariff on metal it buys from China, she said. “Any additional tariff would result in significant financial strain on our U.S.-based business, threaten jobs and call into question future investment,” she added.

These tariffs will have the perverse effect of harming the American jobs and businesses they are trying to protect without affecting China, she said.

“Our Chinese suppliers are leading producers of a quality product with no shortage of potential customers,” Scheller said. “They do not depend on our business. They can and they will sell to our foreign customers.”

WIDER IMPACT

The tariffs have a significant impact on Hydro-Extrusion North America, which has a more than 1 million square foot plant in Cressona, Schuylkill County, where it produces soft alloy aluminum extrusions.

Mike Hammer, plant manager for Hydro, said the company has hundreds of plants worldwide and employs about 1,100 at its Cressona plant. The company’s primary market is its distribution markets, followed by the transportation/truck trailer industry and the automotive market, its strongest and more emerging market. Hydro’s products are in virtually every vehicle, he added.

“We believe in fair trade and open markets,” Hammer said. “We are not really supportive of [these tariffs] because it distorts the supply chain. We’ve lost business and it’s primarily with our Canadian customers.”

Because the economy is growing, the tariffs have not affected Hydro too much but Hammer said the company hates to lose customers. And he is concerned about the future.

“The primary thing that drives me, that motivates me is setting this up for the next generation,” Hammer said. “That doubt, that uncertainty limits our growth opportunities.”

The company can absorb some costs but eventually, those costs would be passed onto the customer, he said.

“We do use a lot of steel and that 25 percent tariff has been impacting us as well because we use steel in the extrusion process. The tariffs have really driven our tooling costs up.”

Retaliatory tariffs imposed by other countries on U.S. exports, meanwhile, will make American goods more expensive, resulting in lost sales and jobs in the U.S., according to the chamber. Half of all U.S. manufacturing jobs depend on exports.

UNFAIR PRACTICES

The main source of the problem facing American manufacturers is China’s unfair trade practices, according to the leader of a statewide manufacturing organization.

The government in China subsidizes the domestic production of steel and aluminum by giving Chinese manufacturers free land, free energy and bank loans that never need to be repaid, said David Taylor, president of the Pennsylvania Manufacturers’ Association.

Companies in China sell metals into global markets at a price that is less than the cost of production, suppressing production in other nations. U.S. manufacturers often report bids from Chinese competitors that offer a finished good – shipped from the other side of the world – at a price less than the cost of American companies’ raw materials, Taylor said.

“That is not mathematically possible unless the Chinese firms are cheating,” Taylor said. “In a situation like this, it is appropriate for our government to intervene to defend a critical domestic industry from the predatory practices of a hostile foreign government.”

The amount of steel made in China that is in excess of China’s domestic steel consumption is greater than total steel production in the U.S. It’s an illegal, mercantilist trade practice and not the acts of a trading partner that could be trusted, he said.

The U.S. is not making as much steel as it might because of subsidized foreign competition, Taylor added.

“We need to get to a place where domestic steel production is healthy,” Taylor said.

EXEMPT CANADA?

The U.S. has imposed tariffs on other nations, including Canada, which Taylor described as a mistake.

“Canada is our close ally and trading partner,” Taylor said. “This is why you hear reports of manufacturers having problems with supply chain.”

Taylor said Canada has not been involved with any of the unfair trading practices at issue and therefore should not be been subjected to U.S. tariffs. The overwhelming majority of problems experienced by Pennsylvania manufacturers is with their Canadian supply chains.

“We shouldn’t treat our Canadian friends that way,” Taylor said.

COMPOUNDING EFFECTS

The U.S. Chamber has been hearing from many companies concerned about the uncertainty surrounding tariffs.

“What are the impacts going to be? It’s not just the tariffs on China; there’s a compounding effect, tariffs with aluminum and steel, higher input costs,” said Kris Denzel, senior director for international policy at the U.S. Chamber, based in Washington, D.C.

Even before tariffs went into effect, domestic steel and aluminum prices were rising. The intermediate inputs will also see increased costs, he said.

“One alternative would be working with our allies to adjust China’s policies,” Denzel said. “We want to get back to positive trade … opening up new markets but also preserving their current markets.”

Denzel sees talks with the European Union and the North American Free Trade Agreement negotiations as part of the solution to addressing China’s practices.

“It’s been a long-standing challenge that we recognize,” Denzel said. “I think certainly our administration’s strategy with respect to China is a longer-term strategy. If there is a good agreement reached on NAFTA with Canada and Mexico that could bring an unlocking affect that allows us to move the ball forward with respect to China.”

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