weekly feature | Jun 5, 2019 |
The trade war is coming to a design center near you

Though news of tariffs and trade summits can often fade into the background din of political noise, now’s a good time to start paying attention—things are coming to a boil. In the same week that a long-delayed 25 percent tax will finally be added to a broad range of Chinese imports, the Trump administration announced that it will pursue escalating tariffs on Mexican goods in an effort to pressure our southern neighbors to curb border crossings. A new round of tariffs is also being levied on India.

We took a look at how the Trump administration’s trade policies are impacting the design industry.

Tariffs 101
Tariffs are an import tax on foreign goods, charged to the buyer. Say an American company wants to purchase a sofa made in China that would normally cost $500. If the sofa has a 10 percent tariff, the American buyer would have to pay $50 to the U.S. government for the privilege of buying it.

Tariffs ostensibly de-incentivize imports and act as a kind of punishment against the foreign nation: The idea is to encourage American companies to shop local instead of paying the international import tax. In practice, often companies continue to buy abroad, and are simply forced to raise their prices, which is why the tariff bill is ultimately often footed by consumers.

The backstory
The U.S. and China have been engaged in a game of chicken for the past year, each slapping (relatively) small tariffs on each other’s exports. Currently, the U.S. has a 10 percent tariff on a broad range of Chinese goods. At that markup, most wholesale buyers and sellers have agreed to swallow the cost, and consumer prices haven’t changed much. However, a scheduled hike to 25 percent tariffs on $200 billion of products, already delayed several times, is scheduled to go into widespread effect this month. At that markup, the first domino will topple in the supply chain, triggering a slow-motion wave of change.

“Most vendors who import in China have sent us notices saying the 10 percent tariffs would be absorbed by them or their manufacturing partners,” says Mac Hoak, CEO of specialty retailer Mecox Gardens. “At 25 percent, vendors who import in China and their manufacturing partners would both have to increase prices and look for alternatives for production in other countries—which, of course, takes time.”

Tariffs will begin to affect even made-in-America goods soon.
Brownlee Currey, president of Currey & Company

Another reason why prices haven’t changed yet: hoarding. Because trade tensions have been percolating for well over a year, many companies have had time to build up a cushion of inventory—like stockpiling supplies for a long winter. Furnishings manufacturer Currey & Company is a case in point: Though the company relies on China for roughly a quarter of its manufacturing, it hasn’t yet had to raise prices. “Our very strong inventory position will ensure that there are no pricing impacts to our customers in the immediate future,” says Bob Ulrich, Currey’s SVP of sales and marketing. “We have been very intentional in the growth of our inventory.”

However, if the tariffs continue, even the most well-stocked larders will run dry, and companies will be forced to either import from China at a markup or manufacture elsewhere.

Behind the scenes
With a 25 percent markup and no clear end in sight, many manufacturers are scrambling to get out of China, or at least develop a backup plan. In recent years, Southeast Asia (Vietnam especially) has grown exponentially as a manufacturing base, and many companies large and small are looking to go there.

“The tariff situation with China has been a major strategic focus in our planning for 2019 and beyond,” says Austin Painter, CEO of designer Amanda Lindroth’s product business. Painter and Lindroth manufactured much of their early pieces in China, and are currently assessing their manufacturing options as their company grows. “Every penny of our margin matters, and a 25 percent hike in landed cost is felt across all lines of the business. … We need to continue to source product elsewhere. While our current materials and construction techniques are replicable throughout Southeast Asia, future product development efforts will be hedged by flexibility in production locations.”

For most designers, the biggest effect of the trade conflict may not be a delayed custom sofa, but the hesitation of a client whose stock portfolio is hurting.

Ironically, some companies, predicting a trade conflict in China, had begun to move production to Mexico (in February, Ethan Allen CEO Farooq Kathwari told Forbes that part of the appeal of the company’s 600,000-foot facility in Mexico was the shelter from tariffs). And many manufacturers south of the border had begun working on compliance with the updated NAFTA treaty—an agreement jeopardized by the threatened tariffs.

Others are attempting to bring elements of their production into the U.S. Though this is precisely what the Trump administration had hoped for, it’s not without complication. “I think it is worth understanding that the tariff piece will begin to affect made-in-America goods soon, because most parts, at least for lighting, are all affected,” says Brownlee Currey, president of Currey & Company. “So even if a company is doing U.S. metalwork, the price of the steel has gone up and the price for many other materials, such as glass, wires, and hardware will all increase.”

And though U.S. manufacturers are no doubt grateful for the new business, some have been overwhelmed by demand. “We know one of the largest high-end retailers began moving some upholstery manufacturing from China—they have already contracted out orders to one of the [U.S.-based] upholstery makers we use,” says Hoak. “This resulted in major new orders for them, but delays and quality-control issues for us, as this new volume has overwhelmed their capacity.”

Put simply: It’s a bit of a mess.

What kinds of products are most affected?
Because tariffs on steel and certain electronic components have already been in place, products that rely on those materials—lighting, for example—are more vulnerable. However, in a highly integrated global economy, a 25 percent increase on materials will have far-ranging consequences.

The situation with China is more mercurial—the uncertainty itself has become its own problem.

“Mainstream furniture will be the most impacted by the situation in China. Even as quickly as U.S. companies are relocating production out of China and into countries like Vietnam, the country remains the single largest source for furniture,” says Warren Shoulberg, a longtime industry watcher and retail expert. “The Mexico situation will impact the glassware and decorative accessories segments more than any others.”

What happens next?
The inner workings of 1600 Pennsylvania Avenue lie well beyond the purview of Business of Home. Many analysts predict that diplomacy will prevail and the tariffs on Mexico will not go into effect on their scheduled start date of June 10. The situation with China is more mercurial—the uncertainty itself has become its own problem.

If the conflict with Mexico dies down, and the trade war with China fizzles out, then the overall impact will be minimized. Andy Counts, CEO of the trade group American Home Furnishings Alliance, strikes an optimistic note: “The imposition of a new 25 percent tariff on products from China has created uncertainty in the U.S. furniture industry, but no consistent impacts to date,” he says. “While consumers are likely to eventually see some modest price increases, ... they also are likely to see a greater selection of U.S.-made goods.”

In a more dramatic scenario, the 25 percent tariff on Chinese goods will continue unabated, and the tariffs on Mexico will increase to 25 percent by October. Such a development would have ramifications throughout the economy in ways that are difficult to predict.

What designers need to know
No matter what happens on the political front, the tariffs have already had an impact. Prices for a range of goods have risen, and will likely continue to go up throughout 2019. For interior designers who primarily earn from markup on product, higher prices might not seem like the end of the world. However, it’s likely that disruptions to the global supply chain will lead to delays and backlogs—even for goods not manufactured in China.

More broadly, trade conflicts lead to economic uncertainty, and that’s bad for business. For most designers, the biggest effect of the trade conflict may not be pricey chandeliers or a delayed custom sofa, but the hesitation of a client whose stock portfolio is hurting.

“The overall impact of these tariffs creates a level of uncertainty that makes everyone uncomfortable,” says Ulrich. “This uncertainty can impact business and our perception about the health of our economy in a negative way.”

What to do about it
There’s not much that designers can do about large-scale economic uncertainty or geopolitical tension. The best plan is simply to follow the news and be prepared. Two things to keep in mind:

Across the board, prices are likely to go up at least a little in the second half of 2019. In general, clients are likely to get more for their money today than they will in five months.

Now would also be a good time to double-check the availability of product—especially items that are integral to long-term projects. Confirm lead times, and try to lock in prices now. Don’t assume that because something is available for a certain price today, it will be in stock at the same price in three months.

Homepage photo: Shutterstock.com

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