The State of Steel and Aluminum Tariffs in 2020

Tariff

The US and China signed a phase-one trade agreement on January 15th to ease the ongoing trade war tensions, paving the way for another stage of trade negotiations. But it is only the start of negotiations to defuse a broader economic standoff between the two sides. The truce lowered rates on a portion of Chinese tariffs but left them on $360 billion worth of Chinese products. Under the phase-one deal, China agreed to purchase more American products and adjust the way its economy is managed. However, the agreement does not appear to affect the 25% tariffs applied to Chinese steel and aluminum early in the conflict.

At first, the tariffs were an instant bonanza for domestic steel producers. With much fanfare, some announced ambitious expansion plans. Today, the steel industry tells a different story. Steelmakers that once supported Trump’s steel tariffs have had a change of heart, and steel production has consecutively declined, resulting in several layoffs and cutbacks. A tariff is a tax, and if you tax an item the price of that item goes up, resulting in purchasers buying less of that item. And that’s
what’s happening to the domestic steel industry today. U.S. manufacturing, which along with the construction sector is the principle consumer of American steel, is currently in recession.

For the HVAC industry, the trade war’s effect depends on which part of the industry is being asked. However, three statements earn broad agreement:

  • Overall, the industry views the tariffs as bad for business and would like to see them disappear.
  • The added cost of the steel and aluminum tariffs most relevant to HVAC pricing is being passed on to the consumer.
  • American consumers, over the last several months, do not seem to be feeling this impact in a way that affects their purchasing decisions.

Air Conditioning Heating & Refrigeration Institute’s (AHRI) member survey indicated that 70 percent of its manufacturers have been affected by the pertinent tariffs. Customers are absorbing the brunt of these tariffs and contractors should mitigate damage to customer relations by communicating with customers about tariff realities, building quotes that reflect current realities, and considering force majeure clauses in contracts.

Residential HVAC

Luckily, the residential HVAC industry and their customers may have some inherent insulation from tariffs: infrequent nature of purchasing heating and/or air conditioning systems. Tariffs may make a new heating system 14 percent more expensive today than it was in 2017. That still might not affect the way a potential customer looks at pricing if they haven’t bought a unit since 2003. People in that situation know that the fix is relatively expensive but rare.

Commercial HVAC

While that may help contractors on the residential side, commercial HVAC contractors and their clients have had no such luck. Commercial work often means more lead time and more of a delay between a successful bid and the work itself. That increases the chances for an interim price hike due to tariff-induced increases in the cost of steel and other materials. The resulting spike in project cost can make for a displeased customer and an uncomfortable conversation.

With no relief from steel or aluminum tariffs visible in the near future, this may be a good time for a quick review of force majeure, which includes events such as acts of God, strikes, war or acts of the government, as something contractors’ contracts should include. Force majeure commonly comes up in relation to natural disasters, but it can represent some protection if the clause is included in a contract before a given tariff. If the problem is an existing tariff, then the best solutions may be pricing the tariff in originally and/or creating windows of pricing with some shared burden in the case of unexpected costs.

USMCA

China isn’t the only international trade and tariff hotspot with HVAC relevance these days. On December 19, 2019, the United States House of Representatives passed the USMCA with bipartisan support by a vote of 385–41. On January 16, 2020, the United States Senate passed the trade agreement by a vote of 89–10. The bill is now awaiting President Trump’s signature. Once Trump signs the USMCA implementation bill it will officially cancel NAFTA but not the 1989 Canada-US Free Trade Agreement, so in case parties fail to extend or renew it in 6 years, FTA would become the law. Once Donald Trump signs the USMCA implementation bill into law, NAFTA is officially cancelled but 1989’s Canada-US FTA would only be ‘suspended’

Conclusion

As details on the ‘Phase 1’ trade deal come rolling in, disappointment from the steel industry is apparent. Scott Paul, president of the Alliance for American Manufacturing, which includes manufacturers and the United Steelworkers union, said in a tweet, “All those ‘forgotten men and women’ in U.S. factories have, once again, been forgotten.” The administration has said it will address some of these changes in Phase 2 of the negotiations and is keeping tariffs in place in part to maintain leverage for the next round of talks. Mr. Trump said he would remove all tariffs if the two sides reach agreement on the next phase. The last chapter of the trade deal states that Washington and Beijing will agree on the timing of new negotiations — although no timeline is given. While fresh trade negotiations are expected to begin soon, Trump has said he would prefer to wait until after the November election to finalize another agreement.

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Impact of Section 301 Tariffs on HVAC Industry

Tariffs and their impact on the HVAC industry have been a hot topic among industry professionals. Many fear the HVACR industry will be negatively impacted by the tariffs, as will the consumers that rely on the products. How has section 301 tariffs impacted the HVAC industry?

There are two types of tariffs. The first tariffs are the Section 232 tariffs that apply to steel and aluminum. They directly affect the basic materials that manufacturers who import those materials would use in constructing their equipment such as boilers, air conditioners, furnaces and water heaters. The second set of tariffs that gets most of the news these days are the Section 301 tariffs with China.

The Air-Conditioning, Heating, and Refrigeration Institute (AHRI) recently submitted comments to the Office of the United States Trade Representative (USTR) in opposition to a fourth round of Section 301 tariffs on Chinese imports. If imposed, this fourth round would cover an additional $300 billion worth of goods. AHRI wanted to reiterate that Section 301 tariffs limit industry access to a global supply chain for components, while bringing about several harmful economic consequences such as:

  • Increased costs for manufacturers leading to negative cost impacts on consumers.
  • Creating a more challenging environment for the HVACR industry to produce more energy efficient equipment.
  • Obstruction of the industry’s ability to address climate change because of higher than necessary demand on the electric grid due to reduced access to energy efficient equipment.

AHRI President & CEO Stephen Yurek stated, “For many of our members, the uncertainty of the exclusion process combined with the continued threat of tariffs creates a business climate that stymies their ability to continue to create jobs that power the U.S. economy. We will continue to interact on behalf of our negatively affected member companies in hopes that the injurious tariff situation is resolved quickly.”.

AHRI also expressed its frustration with the tariff exclusion process. The 301 tariffs allow the importer to ask for a particular product to be excluded from the tariff. This is a time-consuming process because the forms require a great deal of information to complete and can take anywhere from two hours to 14 hours, depending on the number of lines to fill out. AHRI has also recently discovered that the exclusion rate for the HVACR industry is almost 40 percent lower than the average for all other industries. Surprisingly, only 11 percent of the requested AHRI member products and equipment have thus far been granted an exclusion. Of the 1,877 exclusion requests AHRI members have made to the USTR, 858 are still awaiting a decision.

If the Section 301 tariffs continue, many industry professionals will be adversely impacted, which would then impact consumers via price increases and limited product choice. 

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Tariff Relief on the Horizon?

Tariff reliefThe United States-Mexico-Canada Agreement (USMCA), or as Justin Trudeau calls it CUSMA or the new NAFTA, may have been signed, but steel and aluminum tariffs remain in place. These tariffs have a significant affect on the HVAC and refrigeration industries. So is there tariff relief on the horizon?

Prime Minister Justin Trudeau urged U.S. President Donald Trump to drop his steel and aluminum tariffs on Canadian imports during the signing of the United States-Mexico-Canada Trade Agreement (USMCA) in Argentina.Trudeau said the tariffs remain a major obstacle to U.S. and Canadian prosperity, even under the new USMCA deal that both leaders signed with Mexico President Enrique Pena Nieto.

While at the signing in Buenos Aires, Trudeau stated “We will not rest while those barriers remain. Canada will be as relentless in meeting this challenge as we were in updating NAFTA.”

According to one Canadian company that sells vents, ducts, grills, pipe fittings and studs in both countries and operates manufacturing plants in Missouri and New Brunswick, it’s been a very difficult year. Steve Finlay, VP Canadian Sales for Imperial Manufacturing Group stated “We’ve had two price increases passed along to our customer base this year, which is unprecedented. Our US operation has no choice but to import certain products. And they got hit with the 25% tariff.”

Canada buys more American steel than any other country in the world, accounting for almost 50% of US exports. In 2017, about US $14 billion of steel was traded between Canada and the United States. Canada and the U.S. share a highly integrated aluminum market with combined trade of more than US $11.4 billion annually. About 84% of Canada’s primary aluminum production is exported to the United States, where it is used as an important input for further processing into products for US domestic and export markets.

The tariffs have been driving up the cost of furnaces, air conditioning units, water heaters etc. Buyers are now paying more for raw material, whether they are importing it with the tariff or from local sources. The hope is that now that the USMCA is signed, the parties can find a way to agree to remove the tariffs. It is anticipated that they will be reduced or eliminated, but when this will happen is anybody’s guess.

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How the Tariff Trade War Impacts the Elevator Industry

On June 15, President Donald Trump, along with the Office of the U.S. Trade Representative (USTR), released the administration’s final list of Chinese products subject to tariffs. Included are elevator and escalator parts and components, including sheaves, motors and machines. In imposing tariffs on $34 billion worth of Chinese imports, the Trump administration says it is hoping to strike a blow against long-standing abusive trade practices by the Beijing government. Unfortunately, the tariff trade war has also struck a blow to the elevator industry.

The NEII (National Elevator Industry, Inc.) submitted testimony in May voicing concerns and recommending that several elevator- and escalator-related subsections be excluded from the list, stating that the tariffs would harm supply chains, decrease competitiveness in the industry and force additional costs onto U.S. customers.

Many companies that will feel the tariffs’ impact are not Chinese but US firms that do part of their manufacturing in China. A lot of manufacturing these days relies on vast, interconnected supply chains that may cross borders several times. For example, there are many companies in the United States manufacturing elevators using some low-tech parts that are made in China, which are then brought back into the U.S. for final assembly and sold all over the world.

Consumers know about the mass amounts of goods imported from China into the U.S., such as televisions and clothing, but what consumers are not aware of is that 60 percent of all the trade between the U.S. and China actually takes place through multinational supply chains.

The USTR plans to let companies apply for individual-product exemptions, and NEII said its government-affairs team would work with companies that wish to take part in the process. For now, elevator manufacturers will have no choice but to pass on part of the extra costs to its customers.

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