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Contractormag 11334 Tariffs

Tariffs and Your Business

July 17, 2018
When you are in an industry that uses a lot of product that is just one or two steps above raw material you would be wise to try and get a feel for what these new trade deals mean to your bottom line

Much is being made of late about the president’s tariff and trade policies. The talking heads and economic “experts” all weigh in, pro or con, on the effect that these negotiations and/or re-negotiations are going to have on our economy at large. Some say for the good. Some say for the bad. Some, the honest ones at least, say it might go either way. The scare headlines of “Trade War” are rampant.  

When you are in an industry that uses a lot of product that is just one or two steps above raw material (steel pipe, cast iron, copper tube, etc.), such as the plumbing and HVAC industries, you would be wise to, at the very least, try and get a feel for what these new trade deals mean to your bottom line and what you might need to do to hedge your bets moving forward.

A little history

Before 1913, the United States derived a good deal of revenue from tariffs (a tax by another name) placed on imported products. Then the Underwood Tariff Act of 1913 reduced many trade tariffs in both directions, lowering the cost to import as well as export goods to and from the United States. The end results would have been to lessen the government’s revenue stream.  Not so fast, friends and neighbors...the passage of the Underwood Tariff Act also presaged the passage of the 16th amendment to the U.S. Constitution. For those of you who don’t have a pocket Constitution on hand, what was the 16th amendment you may well ask? It was...wait for it...INCOME TAXES! Shocking! I know! But you can see by this historical side note that no matter what happens vis a vis international trade, the government(s) gets theirs!

What’s yours is theirs...too

Another interesting thing to note; the marketplace, like nature, abhors a vacuum. When the United States was cranking out steel like ants on speed immediately after World War II, companies such as Bethlehem Steel and U.S. Steel were the big kids on the block. They were exporting products around the globe and pretty much had most of the world market to themselves due to the devastation in the aftermath of the war. Prices in the U.S. were stable and relatively cheap. Some 20 years after the end of WWII and the Korean War, the great steel giants were still relatively unchallenged. One main reason for the dominance at that time was the factories and foundries had already been paid for. The big expenses had already been made, and the costs recouped. Then South Korea negotiated a trade/tariff deal to import their steel at significantly lower prices than the U.S. manufacturers. 

It seems clear that no matter where you get your products, you are going to pay what the market will bear, regardless of which country or manufacturer provides them.

I can remember the hoopla that came about as the U.S. companies did everything in their considerable power to stop American companies from specifying anything but U.S. manufactured steel products. Architects were pressured to spec steel made in America and engineers were likewise asked to specify only U.S. made steel. The UA jumped on board as well and the protectionist polka went into full swing.

For a while it worked. For a while government contracts specified American made steel. For a while. Slowly at first, then gradually picking up steam, more and more projects were being built with Korean steel. The great U.S. steel manufacturers, unable to compete with the lower costs of manufacture, labor, and unable to stop the import of more and more foreign steel, slowly downsized to take advantage of their built-in market or eventually either moved operations to those lower cost countries or went the way of the steam locomotives they help create... chugging into the sunset.

The interesting thing here is that as their U.S. competition waned, the foreign steel manufacturers slowly raised their prices although their manufacturing costs either remained the same or shrunk, due to amortization of their original factory investments. The vacuum began filling back up. Today, there is very little difference in cost between foreign steel pipe and American made steel pipe. When tariffs are imposed, and shut out foreign markets, local companies raise their prices too, without fear of competition! Tariffs or still pay the going rate for the product no matter where it is made.

You’ve got a business to run

Given all that history can show us on the matter of tariffs and economics, it seems clear that no matter where you get your products, you are going to pay what the market will bear, regardless of which country or manufacturer provides them. What you, as a businessman in dawn of the twenty first century, need to keep your eye on isn’t who has to pay what tariff or tax on their product to get it to you. Rather, you need to understand that no matter what, you’re going to pay the freight, passing the costs on to your customers or end users.

Part of being an astute businessman is keeping ahead of the trends and cost increases so that you can incorporate them into your project bids or service bills seamlessly. Yes, you can do things like anticipating price increases in products you use and stocking more of them, purchased at a lower price or negotiating for alternative, less costly, products in lieu of those specified (ie-using Pex in lieu of specified copper tube where permitted), but trying to “outsmart” the market is a fool’s errand for most of us. Applying sound business practices along with a healthy dose of caution is a good way to keep your company in the black and moving ahead. Worrying about global economic changes that you cannot control is a waste of time. Reacting to those changes at a local level will keep you a bit ahead of the curve while still running a profitable business.

The Brooklyn, N.Y.-born author is a third-generation master plumber. He founded Sunflower Plumbing & Heating in Shirley, N.Y., in 1975 and A Professional Commercial Plumbing Inc. in Phoenix in 1980. He holds residential, commercial, industrial and solar plumbing licenses and is certified in welding, clean rooms, polypropylene gas fusion and medical gas piping. He can be reached at [email protected].

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