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Target, consumers could be closer to feeling pain from tariffs

September 19, 2018

Washington Targets tariff troubles just got real.

With his latest protective tariffs on Chinese imports, President Donald Trump hit dozens of products in the Minneapolis-based retailers inventory. Whether it is furniture, carpets, handbags, belts, sports gear, luggage or a host of other items Target buys in China, the price is about to go up 10 percent Sept. 24 with an additional 15 percent increase on Jan. 1, 2019.

Target is hardly alone. Prospects for peace in a trade war between the worlds two biggest economies seem to diminish each time Trump imposes protective tariffs and the Chinese respond with economic sanctions against the United States. Any Minnesota company importing raw materials, parts or finished products from China or selling them to the Chinese is moving closer to critical cost increases or revenue decreases.

Firms will pass along those cost increases to consumers when they think they are permanent, said Tim Kehoe, an international trade specialist at the University of Minnesota.

Without a breakthrough in trade negotiations, Kehoe said, We could easily see prices go up next month.

Trump says the tariffs are necessary. China is engaged in numerous unfair policies and practices relating to United States technology and intellectual property such as forcing United States companies to transfer technology to Chinese counterparts, a White House statement issued Monday said. These practices plainly constitute a grave threat to the long-term health and prosperity of the United States economy.

The American Chamber of Commerce in China, which includes subsidiaries of a broad cross section of large Minnesota companies, counters that nearly half its members think they will be seriously hurt by the latest round of protective tariffs.

U.S. tariffs now apply to $250 billion worth of imports from China. The Chinese have retaliated, placing tariffs on $110 billion worth of imports from the U.S., including an announcement Tuesday of new tariffs on $60 billion worth of U.S. products.

In the trade war tit-for-tat, the new Chinese tariffs have the Trump administration readying tariffs on an additional $267 billion worth of imports from China.

Were concerned about tariffs because they would increase prices on everyday products for American families, Target CEO Brian Cornell told analysts last month. In addition, a prolonged deterioration in global trade relationships could damage economic growth and vitality in the United States.

The company and others successfully lobbied to keep child car seats and high chairs off the $200 billion tariff list. But Targets Securities and Exchange Commission filings caution that a large portion of the companys merchandise comes from outside the United States, with China as our single largest source. Tariffs could adversely affect our business, the company said.

Grinding trade war

The American Chamber says the continuing punches and counterpunches show that descent into a grinding trade war now seems certain to materialize. Contrary to views in Washington, China can and will dig its heels in, the American Chamber predicted in a statement Tuesday.

This could hurt Minnesota-based companies and companies with strong ties to the state that have operations or offices in China. The list, according to the American Chamber membership roll, includes such parent companies as Medtronic, Cargill, Ecolab, 3M, Mosaic, Abbott, Faegre Baker Daniels and UnitedHealthcare. Some have deep roots in China.

Ecolab, for example, established a plant in Shanghai in 1987. The company now employs 3,000 people in its Chinese operations. Ecolab did not comment on the latest exchange in the U.S.-China trade fight.

3M said its Chinese imports were immaterial to 3M overall. The company has said tariffs might indirectly affect the company through its suppliers.

A Medtronic spokesman repeated an earlier stance on tariffs, saying, We are focused on improving access to medical therapies, both in China and around the world, and hope these issues can be resolved.

An anonymous American Chamber tariff survey taken from Aug. 29 to Sept. 5 found three-quarters of 430 responding companies expecting strong negative impact from the tariffs on $250 billion worth of Chinese imports that Trump has now put in place.

An Ecolab spokesman could not say if the company participated, and a 3M spokeswoman said the company did not.

Nearly half the respondents said production costs in China have gone up.

Yet among American Chamber members, tariffs do not seem to produce the incentive the White House promised a return of U.S. manufacturing jobs. Only 6 percent of survey respondents said they were considering relocating manufacturing facilities to the U.S. Nearly two-thirds said they had no plans to relocate anywhere.

How this will change if Trump taxes another $267 billion worth of Chinese imports to the U.S. remains to be seen. Such a move would increase the price American companies pay for virtually everything they buy from China. Those cost increases would likely be passed on to consumers.

This will reach to Target, Kehoe predicted.

Consumer reaction to higher prices without corresponding increases in their paychecks is potentially explosive. If cost increases are significant, consumer behavior could be affected.

Consumers havent seen any real impact yet [from the tariffs], said Russell Price, a senior economist with Ameriprise Financial.

It may be months before they do. In addition, Price said, cost increases caused by tariffs may not be substantial if the value of the U.S. dollar continues to grow as it recently has against the Chinese currency, the yuan. Recent growth in the value of the dollar against the yuan has all but neutralized the impact of a 10 percent tariff. So the tariff does not add much, if any cost to U.S. importers of Chinese raw materials, parts and goods.

A 25 percent tariff on virtually all Chinese imports might shake up current U.S. sources of materials, but the tariff applies to the purchase price of goods, not the retail price, Price said. Retail prices can be many times the purchase price because they factor in such things as transportation costs, overhead and profit margins.

The biggest concern may not be tariff costs, but not knowing what will happen next, said Robert Kudrle, a professor of international trade at the University of Minnesota.

Going forward, we dont know the path of the dollar against the yuan, Kudrle said. Nobodys getting raises The biggest enemy is uncertainty Were talking about disruption of the world economy.

Kudrle, Kehoe and Price do not see China backing down without a fight, even if it hurts them in the short term.

The White House strategy to tax imports from China seeks to take advantage of the trade deficit. China has many fewer dollars worth of U.S. imports on which to impose tariffs.

Kehoe says the Chinese purchase of U.S. bonds gives them leverage, as does the need for U.S. businesses to sell to the worlds second largest economy.

The Chinese, Kehoe said, have lots of room to retaliate.

Jim Spencer 202-662-7432

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