Minnesota manufacturers scramble as trade war with China escalates

U.S. manufacturers, including several in Minnesota, are scrambling to cancel ocean shipments, renegotiate sales contracts or find new suppliers as the trade war with China escalates with higher tariffs.

Shortly after President Donald Trump tweeted that he would hike tariffs from 10 to 25% on $200 billion worth of goods, customs and logistics company C.H. Robinson got a surge of phone calls and e-mails seeking to both understand what their new situation was or to change shipments.

Ben Bidwell, director of U.S. corporate customs for Robinson, said nearly 10 customers canceled previously booked ocean shipments until they could figure out what to do. "This is not something we had seen in the past," said Bidwell, who is based in Eden Prairie. "Part of that was that this [tariff] change was announced and implemented so quickly."

Robinson's customs experts could do nothing to quell some manufacturers' worries, explaining that the higher tariffs would indeed apply to any product aboard a cargo ship that left China after May 10 and arrived in the U.S. after June 1. While the Trump administration eased tariffs with Canada and Mexico on Friday and postponed auto tariffs set for other allies, there are no signs of a quick agreement with China.

The phones have also been ringing at Minnesota Twist Drill in Chisholm. On the line were "potential customers who never bought from us before," said company President Scott Allison.

"They said, 'If I'm now going to pay the same price, I might as well buy the made-in-the USA brand,' " over the once cheaper Chinese imports, he said. "For us, what happened last week may not be such a bad thing."

While mining companies on Minnesota's Iron Range and select other companies that have been hurt by Chinese business policies applauded the U.S. tariffs, many more are stuck with the prospect of higher bills.

Some manufacturers and retailers anticipated the newest tariffs and for several months have been preordering imports and bolstering inventory as they braced for possible soaring supply costs and shipping disruptions.

"But unfortunately not everyone had the money or opportunity to do that," Bidwell said.

This month's levy increase, which was delayed after it was originally set to take effect Jan. 1, has kept C.H. Robinson's clients hopping.

Some customers increased their U.S. inventory. Others shifted Chinese production to Vietnam, Indonesia, Mexico or other countries, Bidwell said.

In December, camera maker GoPro announced it was moving all manufacturing of its U.S.-bound goods from China to Mexico.

This month, CEO Scott Wine of Medina-based Polaris Industries said Trump's newest tariffs on Chinese-made components could be "catastrophic," increasing the company's costs by $200 million a year. He said the company might need to move some manufacturing of its outdoor vehicles from the U.S. to Mexico in order to avoid tariffs on components imported from China.

The Plymouth-based sensor manufacturer Banner Engineering — with plants in Plymouth, Mexico and China — said the new U.S. tariffs on Chinese parts have cost it millions.

In response, Banner switched some suppliers from China to other low-cost countries, slowed hiring and "took other immediate and ongoing action," said Chief Operating Officer Brad Kautzer.

C.H. Robinson's Bidwell said he expects more industrial companies to also move suppliers out of China in the coming months.

"We've certainly heard from a number of customers that are actively doing this, and I would guess that there are a large number of customers that are doing this too [we] that may not be hearing about," he said.

Moody's research analysts warned investors in a note Thursday that China is retaliating against Trump's new tax hike by implementing new 25% tariffs on another $60 billion worth of U.S. made products headed for China.

"U.S. industries most vulnerable to China's retaliatory tariffs are the manufacturing sector, specifically computer and electronics, as well as the liquefied natural gas (LNG) sector, ports and agriculture," said Elena Duggar, chairwoman of the Macroeconomics Board at Moody's Investor Service. "China's hike in tariffs reinforces our view that rising U.S.-China trade tensions will continue for a prolonged period."

Kautzer said it has been forced to raise product prices because it also exports products to China. "So we get hit both ways," he said.

Other companies say they have few options. They are in such competitive industries they might need to absorb the tariff costs because they cannot raise prices.

"As the pressure builds, you're going to have small firms scale back, lay off workers or go out of business," Lee Branstetter, an economics professor at Carnegie Mellon University's Heinz College, told the Associated Press.

C.H. Robinson learned several of its U.S. importing customers privately made deals with Chinese factories to split the new tariff costs. Others hired customs experts, petitioned the U.S. trade office for tariff exemptions (including Polaris) and filed for tariff refunds.

"We submitted hundreds of requests for refunds," Bidwell said. "I expect that will continue to grow into the thousands."

Exceptions aren't guaranteed. And even if they are, refunds can take months. Most large manufacturers said the uncertainty has disrupted their supply chains and sent raw material costs soaring, be it for steel, aluminum or shoes.

Maplewood-based 3M Co. expects trade tariffs to raise its costs by $90 million this year. NVent Electric, with its U.S. headquarters in St. Louis Park, said its costs will jump $9 million this year.

Donaldson Co. — the $2.7 billion Bloomington-based maker of filtration systems for power, construction, factory and agricultural operations — warned investors that it faces $30 million in costs this year from increased material, freight and tariff costs.

Separately, there is another cost.

"Trade wars create uncertainty. That is where the risk comes in for us," said Donaldson investor relations director Brad Pogalz.

He said a prolonged trade war may make some Donaldson customers hesitant about capital expenditure decisions on large factory and air filtration upgrades.

Trade costs are some "of the things that drive a capital expenditure or machinery investment decision in a plant or large ag, construction or mining [operation]. That could affect our business," Pogalz said.

Allison at Minnesota Twist Drill said the different stages of levies on Chinese imports affected not only his shop, but competitors, too. The first round of tariffs on Chinese goods started a year ago, but only on raw steel and aluminum, not finished goods.

That meant the cost of the durable steel-alloy "blanks" that Twist Drill's U.S. suppliers bought from China shot up 15 to 20% because of the U.S. tariffs on raw metal imports. So the China-made bits were cheaper, not facing that tariff.

Minnesota Twist Drill survived last year with a hiring freeze at the 125-worker shop and by renegotiating with suppliers of nonsteel goods. "It has been a tough road," said Allison. "It should have been the Chinese finished drill bit that was tariffed from the get-go."

Although he has hope for the new tariffs that now affect both raw and finished steel products, he's not celebrating yet.

There is uncertainty on many levels, including possible U.S. tariffs on another $325 billion worth of Chinese imports by the Trump administration.

"If that next $300 billion falls in place in the coming weeks, that will tell the true tale about Chinese products in the United States," Allison said. "It's going to be interesting everywhere."

Dee DePass • 612-673-7725