When Duties Call
authors Eliot Sefrin
WASHINGTON, DC — Kitchen and bath design firms, manufacturers, trade associations and others across the nation’s housing landscape are taking a wait-and-see approach to the potential impact of the U.S. decision to impose tariffs on foreign imports – a decision that has sparked both controversy and uncertainty over pricing strategies, profit margins and the fate of global trade relations.
The latest rounds of tariffs, imposed in July and September by the Commerce Dept. and the International Trade Commission, are aimed at billions of dollars of Chinese imports – including cabinet components, appliances, lighting and countertop surfaces – many of which are widely used in kitchen/bath design, residential remodeling and new construction. Those levies came on the heels of duties on imports of steel, aluminum and Canadian softwood lumber. And the situation, already fluid and contentious, can become even more fraught with uncertainty on Jan. 1, when tariffs are scheduled to increase, heightening the ongoing trade war between the U.S. and China.
“We’re all frustrated by the shifting footing we find ourselves in regarding these tariffs,” said Chris Watson, COO of Conestoga Wood Specialties, a company which, like many others, has found itself faced with the dilemma of whether to raise prices, under duress, in an effort to offset raw-material cost increases and declining profit margins.
But aside from simply roiling the market, the Trump Administration’s tariffs on imports have sparked spirited debate among competing economic interests, often along partisan political lines. The issues, sources tell Kitchen & Bath Design News, are clear-cut, even if opinions are widely divergent.
Simply stated, supporters of the tariffs charge that Chinese manufacturers – many of whom are owned wholly or in part by the Chinese government – can offer artificially low pricing aimed at undercutting U.S. competitors, thanks to subsidies, tax rebates and other government assistance. Tariff advocates also point to alleged Chinese trade abuses related to the forced transfer of American technology and the theft of American intellectual property. The tariffs, they contend, will exert economic leverage, forcing China to level the playing field, implement fair trade practices, assure American competitiveness and correct a current trade imbalance.
“[We], along with many members of our industry, welcome the finding that imports of quartz surface products from China are unfairly subsidized and will be subject to countervailing duties,” said Marty Davis, president of Le Sueur, MN-based Cambria Company LLC, which recently joined other natural quartz surface producers in filing anti-dumping and countervailing duty petitions with U.S. trade officials “to fight back against the flooding of unfairly traded imports…that have injured the domestic industry and threaten further damage.”
John Bozek, national commercial sales director at the Chicago-based Vicostone concurred: “The Chinese quartz brands have flooded the market with inferior products for the last several years and have completely impacted everyone into believing that the pricing should be at their prices, which are impossible to compete with. The tariffs will equalize the quartz business for at least one year. I feel that the major brands that manufacture with proper techniques and use proper machinery and use ingredients that are safe and are not falsely labeled will now be able to develop the quartz business better without concern about other companies selling way below cost. This will help grow the quartz business with real quality products.”
Davis and Bozek are far from alone in that point of view. Many domestic suppliers serving the kitchen and bath market have lodged similar complaints for years.
“China has unfairly subsidized quartz surface products to highjack the U.S. market,” Davis charged. “We commend the Commerce Dept. and ITC in imposing anti-dumping and countervailing duties against the Chinese. This is a critical first step toward restoring a level playing field within our industry, fulfilling the obvious axiom: There is no such thing as ‘free trade’ without ‘fair trade.’”
But while the tariffs are being applauded in some quarters, critics sharply disagree with the strategy, contending that the duties will ultimately prove regressive, prolonging – and even escalating – the trade war between the world’s two top economies, while having a painful impact on both consumers and the U.S. supply chain. Critics also argue that the tariffs will make it more expensive to manufacture in the U.S., resulting in the closure of businesses and the loss of American jobs.
Even those who support the goal of addressing China’s alleged trade abuses have expressed concerns that the tariffs may ultimately fail to achieve their objective, and will instead increase consumer costs, erode profit margins and divert corporate resources away from investment and innovation. In the meantime, trade associations and special-interest groups tied to housing, remodeling and the cabinet industry have issued strong opinions on the tariffs, coming down hard on both sides of the issue (see related story).
IMPACT ON HOUSING & REMODELING
Aside from whatever impact the tariffs may have on specific companies, the duties could wind up resulting in a massive “tax increase” on residential construction and remodeling, “at a time when builders are already grappling with rising construction costs,” according to the National Association of Home Builders.
“The decision to impose 10% tariffs on $200 billion worth of Chinese imports – including $10 billion of products used by the home-building industry – could have major ramifications for housing,” said NAHB Chairman Randy Noel, who urged U.S. trade officials “to change course and work to resolve trade disputes in a manner that won’t harm American businesses and consumers.”
To exacerbate matters, the Chinese tariffs were imposed on the heels of previous levies on Canadian softwood lumber – tariffs which, by themselves, are making housing less affordable, the NAHB said.
Rising lumber prices have increased the price of an average single-family home by nearly $9,000 since January 2017, effectively pricing out more than a million U.S. households from the housing market, according to the NAHB, which reported that housing affordability in the U.S. declined to a 10-year low in the second quarter of 2018.
“With America facing a housing affordability crisis, it’s counterproductive to enact policies that will needlessly drive up the cost of housing,” Noel argued. “If this continues, the slow-but-steady recovery of the housing market could be derailed [and] homeowners looking at high-ticket purchases may hold off on pursuing lumber-intensive home renovations, which has the potential to negatively impact contractors and manufacturers of products like cabinets.”
“Rising material costs…do not help builders to be excited about business,” commented Lawrence Yun, chief economist for the National Association of Realtors. The lumber tariff, Yun said, “is a pure, unforced policy error that raises costs and limits job creation and more home building.”
Similar warnings are being sounded by the American Institute of Architects (AIA), which recently opined that steel and aluminum tariffs will inevitably translate into higher costs for home builders and residential architects by “drastically increasing” the price of many building materials, including structural metal beams, window frames, mechanical systems and exterior cladding.
Tariffs on steel and aluminum imports “will have far-reaching implications on building materials, construction costs and economic growth,” AIA President Carl Elefante said, adding that, “the potential for a trade war risks other building materials and products.
“Any move that increases building costs will jeopardize domestic design and the construction industry,” Elefante said.
Similarly aligned against the tariffs is the Plumbing Manufacturers International (PMI), which said that imposing tariffs “unnecessarily penalize plumbing fixture and fittings manufacturers, their employees and the American consumer.”
“Ultimately, the American consumer will pay the price of new tariffs, which will hurt job creation in the residential construction, retailing and home-improvement industry,” said Kerry Stackpole, CEO/executive director of the PMI, which represents manufacturers of toilets, urinals, faucets, showerheads and other plumbing products.
“The duties on plumbing fixtures, fittings and related plumbing components will result in higher costs for consumers, significant supply chain disruptions and a negative impact on growth and jobs,” Stackpole warned.
According to the Association of Home Appliance Manufacturers, newly enacted tariffs impact dozens of components used to manufacture major home appliances, including refrigerator-freezers, ovens, ventilation hoods, microwave oven parts and wine chillers.
Since most kitchen appliances contain large amounts of steel and aluminum, the tariffs on those products have the potential to literally “upend” the appliance market, according to The Freedonia Group, a Cleveland, OH-based business research firm.
“Should these tariffs result in price increases for kitchen appliances, sales could slump,” Freedonia said.
Freedonia analysts pointed out that not all appliance manufacturers are likely to be affected by the tariffs in the same way. The impact on a company will depend on several factors, Freedonia said, including where manufacturing operations are located, whether supply chains cross U.S. borders and from which countries companies source raw materials. Several nations have also been granted exemptions from the steel and aluminum tariffs.
The tariffs, nevertheless, will “have a direct impact” on home appliance manufacturers, increasing operating costs while proving likely, in many cases, to increase prices for consumers,” according to AHAM.
“As an industry, AHAM’s members have been successful global traders for decades, and support free and fair trade that allows for unfettered competition that drives innovation and operational efficiencies in the marketplace,” said Jennifer Cleary, AHAM’s v.p./Regulatory Affairs.
“[But] this latest round of tariffs pulls consumers’ homes into the middle of an international trade dispute,” Cleary said. “These tariffs, in addition to the tariffs on imported steel and aluminum, are taxes – and higher prices for consumers are the likely result of increased costs to import appliances and the parts and materials needed to make and service them.
“American manufacturing jobs could also be lost,” she added.
PRICING STRATEGIES VARY
As the reality surrounding the tariffs sifts into the marketplace, companies on all levels of the product supply chain are being forced to ponder a range of tactical responses to the duties, even as they confront uncertainties over the short- and long-term economic impact of the levies.
Some manufacturers, importers and other suppliers have announced they have no choice but to pass the added cost of the tariffs along to retail customers, and ultimately to consumers. Others say they’re holding the line on prices for now, even though their profit margins may temporarily be pinched. Still others are simply waiting to see how the current trade war shakes out.
The Bronx, NY-based Summit Appliance Division of Felix Storch, for example, announced it has delayed passing cost increases for many of its appliance lines on to customers, but the tariff on some icemakers “is beyond what we can absorb,” and new purchase orders must reflect an added cost.
In a slightly different approach, MaxLite, a Caldwell, NJ-based supplier of lighting products, said it will hold prices through Dec. 31, while continuing to mitigate the effects of tariffs on prices of Chinese imports and closely monitoring the situation.
Other companies are seemingly in the same boat.
For instance, according to Nemo Tile + Stone, Chinese imports of porcelain, stone and ceramic and glass tile that arrive prior to Jan. 1 will face no price change, according to Matthew Coburger, director of product merchandising. However, if a product arrives after Jan.1, when threatened new tariffs are implemented, the company “must re-quote projects,” Coburger said.
Products manufactured in Europe, the U.S. and elsewhere in Asia will not be affected, Coburger noted, adding that Nemo Tile + Stone is reviewing all manufacturing options, and seeking “alternative product solutions to mitigate the impact of this tariff on customers.”
Ultimately, the precise impact of the tariffs on kitchen and bath consumers is likely to vary from company to company – and even project to project – because some manufacturers, retailers and importers may opt to absorb the costs of the tariffs in order to maintain competitive market share, while others may not.
According to Conestoga, a leading supplier of cabinet doors, drawer fronts, drawer boxes and other components, “every cabinet manufacturer in the U.S. is, or will be, affected by plywood cost increases,” including cabinet brands sold through kitchen/bath dealerships and home centers.
“This is a huge issue for every cabinet manufacturer,” said COO Chris Watson, noting that recent tariffs on Chinese plywood imports have driven up prices across the board, since demand has now shifted to domestic suppliers who’ve raised their own prices.
Early this fall, Conestoga informed customers that it had “absorbed” plywood cost increases for months, refusing to pass along price hikes as it worked diligently to establish new sources of plywood, both domestically and in countries such as Malaysia, Indonesia and Vietnam.
The East Earl, PA-based Conestoga said, however, that it was “finally forced to react” in September, raising prices in order to offset raw-material cost increases and declining profit margins which – like for most cabinet/component suppliers – are thin to begin with.
Consumers, said Conestoga, will ultimately feel the impact of the tariffs in the form of rising costs.
While it’s “impossible” to determine the price impact on every project, Conestoga noted, its sample kitchen pricing “seems to indicate that an increase of 4-6% is to be expected.”
“Some jobs may see little to no increase, while others may see a much bigger increase,” the company said. Price increases, Conestoga added, may depend upon how much of the affected plywood is being used and how complex the project is. Factors such as finishes or door designs may also play a role.
According to Conestoga, current tariffs apply only to sheet goods laid up in Chinese mills, but do not affect flat-packed cabinetry manufactured and shipped from China, even though those RTA cabinets utilize the very same plywood.
As a result, Watson said, suppliers can claim their cabinets are “made in the U.S.” even though, in reality, they are only assembled in the U.S., using cabinet parts machined in China and shipped as flat-packed kits, thereby skirting tariffs.
“Obviously, this is very frustrating to anyone building cabinets in the U.S.,” said Watson, noting that U.S. manufacturers are “trying to address this loophole and are hoping for a change.”
“Countless other industries have also been affected by the tariff issue,” Watson said. “We’re simply being forced to respond to market changes.” ▪