East Tennessee Companies Wary of Tariffs, But Not Hurting Much Yet

Oct 11, 2018

East Tennessee businesses are still adjusting to steel and aluminum tariffs – even as the Trump Administration gears up to tax more foreign imports.

Many local companies say the 25 percent tax on imported steel has driven up their own costs by 7 to 15 percent. But so far, those pressures have been offset by the thriving economy. Sometimes, the tariffs have even provided new opportunities.

“Right now we've not had a negative impact because of the tariffs,” said Kevin Barth, vice president of sales for Superior Steel in Knoxville. “I would say that if it continued to rise beyond where we are today, that it could have a negative impact.”

The company employs about 250 people to fabricate and erect buildings. It has big contracts for the next year to build the new federal courthouse in Nashville and the convention center in Lexington, Kentucky.

Still, manufacturers are wary that good market conditions may not last.

“I'm for free trade,” said Wes Stowers, president of Stowers Machinery in Knoxville, the Caterpillar construction equipment dealer for East Tennessee. “Historically tariffs have generally backfired when they've gone overboard.”

While supporting negotiations for fair trade agreements, Stowers said, “Typically that's done quietly, diplomatically behind the scenes. I think with this president, part of his style is to bluff... I'm for negotiations with knowledgeable people rather than the sledgehammer approach.”

President Donald Trump has focused on tariffs as a way to protect American industries, like steel-makers, from foreign competition. This allows American producers to raise their prices. But their customers are often American companies that must take a financial hit – or pass the higher prices on to consumers.

That's what most East Tennessee companies are doing, including Stowers Machinery, which employs 374 people. Soon after the steel tariff began in June, Caterpillar announced it would raise prices because it expects to lose as much as $200 million through steel cost increases.

Whirlpool, which has a Knoxville call and service center that employs close to 300 people, supported this year's new tariff on imported washing machines. But the steel tariffs that followed led the company to raise prices, causing sales to slow. The Coca-Cola Co., which has a Knoxville plant, announced in July that it would raise soda prices because of increased aluminum prices after a 10 percent tariff was enacted this summer.

Some of East Tennessee's biggest employers – like Clayton Homes, Arconic, and Aisin Automotive Casting Tennessee -- create products that use a lot of steel and aluminum. Many did not respond to inquiries about local impacts, or declined to speak on the record.

DENSO Manufacturing Tennessee, which makes car systems and components, expanded this year to about 4,200 employees at its Maryville factory. “Recent actions on trade and tariffs by the Trump administration will have a significant impact on our business,” according to a statement released by the Japan-based company. “These tariffs will raise material and component costs, stifle job growth and slow innovation, which ultimately hurt the U.S. automotive industry, and American citizens.”

Republican Sen. Lamar Alexander has said Tennessee would be harmed more than any other state by a proposed tariff of 25 percent on imported cars and auto parts: A third of Tennessee manufacturing is for the auto industry.

The tariffs have become a key campaign issue in the contest to replace Tennessee Senator Bob Corker in November. Democrat Phil Bredesen, a former state governor, has called the tariffs “a tax on Tennessee” that will cost jobs. Even his Republican opponent, Congresswoman Marsha Blackburn, has said the tariffs should be reconsidered.

Instead, the Trump Administration is piling them on. In September, it announced new tariffs on $200 billion in Chinese goods. A decision is expected at any time about auto tariffs. According to The Washington Post, that proposal would more than double the total value of imports Trump has already taxed, so about 27 percent of all foreign imports would face a tariff. 

China, Canada and the European Union have retaliated with their own taxes on American products. The impact is expected to be tough on Tennessee farmers, cheese makers, meat packers, and whiskey distillers like Jack Daniels, many of whom have expressed their opposition to legislators and the Trump Administration.

The U.S. Chamber of Commerce estimates that $1.6 billion in Tennessee exports are threatened by the emerging trade war.

The accuracy of these predictions remain to be seen. Four months of steel and aluminum tariffs have had less influence on profits than the strong economy, some local employers say.

“We're actually having a record year,” Stowers said. “I'm very positive about some of the things the Trump Administration has done in terms of encouraging business, reducing regulations. For the first time since the recession we're really hitting on all cylinders.”

In fact, the tariffs may hit Caterpillar's rivals harder, because they make fewer products stateside. But if the tariffs last long enough, the higher prices will likely dampen sales and could drive Caterpillar to move some of its manufacturing overseas, Stowers said.

“It could reduce the number of machines we sell, and it will reduce the buying power of the average American,” he said. “If it favors us temporarily, again that won't work forever, so we like to have a stability.”

Superior Steel and Yamaha Jet Boat Manufacturing in Vonore are feeling a squeeze from the rising cost of not only materials but labor.

Dean Burnett, president of Yamaha Watercraft Group, said demand for jet boats has been so strong that Yamaha is completing the largest-ever expansion at its Vonore plant. (Because leisure boats are a luxury item, the company's sales track closely with a prosperous economy, he said.)

The factory upgrade will allow Yamaha to shift among products more quickly and make more extras, like wiring harnesses, in-house. The company employs about 500 workers; the 10 percent increase in job openings has left it searching for more.

Meanwhile, Yamaha is paying 7 percent more for the steel and aluminum in its boat trailers, Burnett said, and suppliers have indicated prices may continue to rise. Yamaha has increased its own prices as a result, but is trying to offset that by including more perks in base models, as well as a longer warranty.

“We're all for fair trade, and we think we should all maintain very strong favorable trade agreements with whatever country we're doing business with, simply so we don't see any downstream adverse effect on the entire industry,” Burnett said. “Because if that gets out of control, then those prices and increases will have to be passed onto consumers, and it hurts all of us.”

James Lewis, president of Axis Fabrication & Machine Co. in Rockford, estimates the tariffs have driven up his company's raw materials costs by about 10 percent. The custom fabricating company makes products like tools and conveyor belts, which are used by manufacturers like Denso and Kawasaki in Morristown.

Lewis said Axis's rising costs are passed along to those companies, but it hasn't lost customers. In fact, the tariffs gave the company a crack at a big job for a new customer.

“Their parts were being made outside country and they were looking for a U.S. source” because of the increased import costs, Lewis said. Although Axis wasn't quite big enough to handle the job, “I don't think I would have even had that opportunity had it not been for the tariffs.”

But Lewis, like many local employers, was hesitant to say tariffs wouldn't become a problem if they last long.

“When it's not a free market on both sides, it doesn't work. So I don't have a problem with tariffs as a short term thing to fix a problem,” Lewis said. “I don't think that, long-term, they're a solution.”