Excerpted from The New York Times, May 29, 2019
By Jeanna Smialek
Shane Cusick started his small business, Pello, in 2014 with the goal of making lightweight bikes for children. His experience over the past year is a case study in how a trade war can disrupt a fledgling enterprise.Pello, in Richmond, Va., has met with early success, selling 400 to 500 bright orange two-wheelers a year. The company designs its bikes in the United States but imports them from China because domestic factories are not equipped to churn out tiny bike frames en masse. “I love American-made products,” Mr. Cusick said. “There’s no other choice. It has to be done over there.”But President Trump’s trade war with China has started to change the equation. Pello paid 10 percent in extra tariffs on its last batch of imports, a byproduct of Mr. Trump’s decision to impose a tax on $200 billion worth of Chinese goods. The president has now increased that to 25 percent, and Pello expects its next shipment will be hit with that heftier tariff.
Mr. Cusick and his business partner have so far been reluctant to charge more for their bikes, which cost $200 to $600, over worries that customers would opt for cheaper products. But the latest step-up in import taxes, combined with the prospect of an endless trade war, may leave Pello no choice. The factory that produces the bikes in China has razor-thin margins, so it cannot offer much of a discount.
Mr. Trump says his tariffs will hurt Chinese companies more than American firms, and he insists that they will either force Beijing to change its “unfair” trade practices or prompt companies to shift production away from China. But as the president considers imposing tariffs on another $300 billion worth of Chinese goods, companies like Pello highlight the toll Mr. Trump’s trade fight could have on small, young businesses that are reliant on China and unable to rapidly shift production to other, often more expensive, nations.
The trade war is already costing the economy as a whole. Federal Reserve Bank of New York research estimates that Mr. Trump’s initial rounds of tariffs — the ones that went into effect last year — cost $414 per American household, between added tax burden and lost efficiency. That will jump to $831 per household with Mr. Trump’s most recent tariff hike, the analysis said.Much of the hit is coming as companies shift to more expensive producers, like Taiwan, and pay more for the same products. Supply chain reorientation is exactly what the president is encouraging — Mr. Trump has suggested on Twitter that importers should pivot to countries other than China if they want to dodge the tariffs.
“The Tariffs can be completely avoided if you buy from a non-Tariffed Country, or you buy the product inside the USA (the best idea). That’s Zero Tariffs,” he tweeted on May 13.Pello’s experience details why shifting to non-tariffed nations might be easier said than done for a small company. Mr. Cusick is considering moving production out of China, but such a move would take time and money.While Mr. Cusick would like to manufacture his bikes in the United States, he said there was no facility here that can produce the frames en masse.
China dominates the American bike business: 96 percent of imported bicycles with small wheels come from the country, trade data shows. China also produces a large share of bike accessories, including 80 percent of imported coaster brakes and about 70 percent of bike signaling equipment. Taiwan, Vietnam and China produce virtually all imported rubber tire tubes.The cycling industry’s reliance on China is not unique. China dominates entire import product categories, including clock and watch batteries, women’s clothing items and footwear components. Practically all imported photograph albums come from China, and most toys are made there.Many of those items have yet to be hit with tariffs but are in line if Mr. Trump goes through with his threat to tax nearly all Chinese goods.
The final list is much more consumer facing than the products that have been hit up to this point.“We’re not ready to make a deal,” Trump said, speaking in Japan. “And we’re taking in tens of billions of dollars of tariffs, and that number could go up very, very substantially, very easily.”If companies selling consumer wares face higher tariffs and cannot pivot out of China to avoid the costs, customers could pay the bill. Walmart recently warned that shoppers would see higher prices on furniture, clothing and accessories because of the duties on Chinese imports. Target, Macy’s and Wayfair have also indicated that prices could rise.
If big companies manage to rework their supplier networks and dodge tariffs as their smaller competitors struggle to do so, it could leave the little guys with little ability to raise prices. For Pello, though, the squeeze is already real. So is the disadvantage that comes with being small. The company was due for a shipment in mid-November, but its container was repeatedly bumped from boats as larger businesses with more sway rushed to import their products before January, when tariffs were initially scheduled to increase.
“We’re a pebble in the ocean,” Mr. Cusick said. “We totally missed Christmas, which is our biggest time of the year.”