WESTFIELD — To understand how a trade war is playing out beyond stock market gyrations and European economies, take the Mass. Pike west to a part of the state where manufacturing remains a way of life for many people.
“I don’t know a single manufacturer this has not affected,” said Kristin Carlson, CEO of Peerless Precision, which makes parts for the aerospace and defense industries. “The buzzword is China, but the tariffs go beyond China. . . . It’s a whole fistfight right now.”
President Trump’s extraordinary tariff war, which began in the spring of 2018, has had a ripple effect on the global supply chain, driving up the price of imported raw materials like steel and aluminum and imported goods like washers. In recent weeks, Trump has made clear the United States is digging in with tariffs that will be slapped on a broader array of Chinese imports in September. They’ll affect goods ranging from sneakers to cellphones (though some surcharges will now be delayed until mid-December).
For manufacturers like Carlson, it has been a high-wire act, as they weigh whether to pass costs on to customers or eat the added expenses. A workaround has been hard to find — the United States imposed tariffs on steel and aluminum from most of the world, not just China. The uncertainty of the situation is the worst part, business owners say, with some holding off on hiring and expansion because they’re not sure how the dispute will play out. No wonder there are fears that the trade war may trigger a recession.
“I don’t think it’s going away in a hurry because of the rhetoric between [China President] Xi Jinping and Trump,” said Jim Knott, CEO of Riverdale Mills in Northbridge, which makes wire mesh that can be found in products such as lobster traps and fences.
For Knott, the tariff war has been an exercise in frustration. The 25 percent tariffs on imported steel that went into effect last year amount to taxes that Riverdale is required to pay to US Customs.
Some customers assumed Riverdale would pass the added cost on by raising prices on its products, so they ordered from competitors in other countries. But Riverdale didn’t do that. Those jittery customers have since come back, while Riverdale continues to absorb the higher cost of raw materials.
Companies can apply for exemptions to the tariffs, if they can show that the United States does not produce that particular raw material. Riverdale has received some exemptions from the Commerce Department, but the fate of the program is now — like so much else with the economy — under the shadow of uncertainty.
With so much up in the air, Knott held off on capital investments and put a hiring freeze into effect. Since January 2018, the company has been reducing its workforce through attrition from 200 to 150. When the United States lifted its tariffs in May on steel from Mexico and Canada, Riverdale was able to resume hiring and contemplate a significant investment in the company.
Ask if trade reform is necessary, and Knott, like other business owners, will agree that something had to be done to level the playing field with China, which last year bought only $120.1 billion worth of goods from the United States, while the United States made about $539.7 billion in purchases from China. He’s less sure if Trump is going about it the right way.
“I don’t know if using steel and aluminum as a pawn in the chess game makes sense,” said Knott, who notes that China accounts for only 2 percent of US steel imports.
Trump has the authority to use tariffs as a bargaining chip. But US strategy since the 1930s has been to use protectionist measures sparingly.
“This is at odds with the entire thrust of our policies over the post-war period,” said Robert Lawrence, professor of international trade and investment at the Harvard Kennedy School and a former member of President Bill Clinton’s Council of Economic Advisers. “We’re acting unilaterally. We’re bullying the Chinese by putting these tariffs on them.”
The Trump administration has taken aim at China for a variety of economic reasons, ranging from the trade imbalance to accusations that its companies, and by extension, the Chinese government, steal intellectual property from American companies.
Lawrence said much of what Trump wants to accomplish could have been done within the existing world trade rules and in conjunction with US allies. But now that the United States is on a solitary path, Lawrence does not see the country turning back any time soon, no matter which party controls the White House.
“This could go on for a long time,” he said.
Not all manufacturers are putting their plans on hold while the two governments play their high-stakes game of economic chess. Pilot Precision Products, which makes industrial cutting tools, in May went ahead with an expansion that includes new machinery and a new factory space in South Deerfield.
Sitting in his office last week, CEO Eric Hagopian said the price of “tool steel” — the kind he buys — has gone up about 43 percent between January 2018 and now. He has passed some costs onto his customers, but business has been good in part because the United States has imposed tariffs on products from Pilot Precision’s Chinese competitors. Hagopian’s products still cost more — he attributes that to their higher quality — but the price differential is now smaller. As a result, some companies are upgrading to the American product.
“It actually helps our business,” Hagopian said of the tariffs. “Frankly, it’s the purpose of what the United States is doing.”
Hagopian knows not everyone agrees with Trump’s tactics, but he has confidence in the US economy and the productivity of American workers.
“It’s a bitter pill. We have to take this medicine to get better,” said Hagopian. “This has been a problem for decades.”
At Peerless Precision in Westfield, nearly two hours from Boston, a group of workers last week was assembling components for night vision goggles and thermal imaging cameras. Much of the work is done by hand because the metal needs to be ground within a millionth of an inch.
Carlson, the CEO, co-owns Peerless with her mother, Debbie Maier. She became CEO in 2012 when her father died. Carlson said she has “grown up in the shop,” which remains very much a family business. Her husband is a machinist, and her brother works with their mother on managing finances.
The company of 32 employees is generating strong revenue, Carlson said, but profits are being squeezed. As a defense contractor, Peerless can’t buy steel from China. Tariffs, however, drove up not only the cost of imports but also prices for American steel and aluminum because the domestic supply couldn’t keep up with demand. Peerless isn’t making customers absorb the difference.
Peerless also has had trouble getting raw materials in a timely and predictable manner — before the trade war, it would take a few days; now it can take several weeks. Lead times have been improving, but domestic mills continue to struggle to fill orders.
Regardless, Carlson needs to make her delivery deadlines or risk losing future work as a defense contractor, so she pays overtime for a temporary second shift, or work on weekends. That cuts into profit margins, which ideally should be in the 30 to 40 percent range because she wants to reinvest in the company.
“We’ve seen too many 20 percent quarters,” said Carlson, who is also the president of the Western Massachusetts chapter of the National Tooling and Machining Association, which has about 60 members.
Carlson wants to double the size of her factory, buy machinery, and hire more people. If only she could predict when the US-China squabbling will end.
“They have a start date, and they leave the end date open-ended,” she said. “That’s nerve-racking.”