How does this trade war end? Business can't wait

The Donald Trump administration thinks ongoing negotiations with China and the European Union (E.U.) are taking the country toward a truce in the trade war over tariffs and a big win for the United States. But if those talks remain unresolved for very long, they may be too little, too late for certain businesses in Minnesota and across the country.

The problem, analysts and scholars say, is that timetables that dictate industry actions are not as flexible as negotiating tactics.

Every economic sector has some kind of deadline, noted Kyle Goldschmidt, an authority on supply chains at the University of St. Thomas. Best Buy might need to get its Christmas orders for electronics in six months in advance, or Target must ensure it has inventory on the shelves for peak buying season.

Until it is resolved, the trade war must be accounted for in every business' plans.

"It doesn't matter what industry you're in," Goldschmidt said. "These tariffs are going to affect you."

The White House and the U.S. trade representative's office did not respond to requests for comment. But President Donald Trump has highlighted E.U. willingness to cut automotive tariffs on U.S. vehicles and a promise to buy more U.S. liquefied natural gas as signs of progress. He also has pledged to give up to $12 billion to American farmers to offset the financial hit they are taking on tariffs.

Negotiations with China are ongoing, but have yet to render a breakthrough. Instead on July 31 Trump, who has already imposed import tariffs on $50 billion worth of Chinese products, threatened to raise from 10 percent to 25 percent potential new import tariffs on $200 billion more in Chinese goods.

"Companies are not going to sit around and see what's going to happen," said Karen Donohue, a University of Minnesota professor specializing in supply chains and operations. They will bank inventory and look at new sources of supply and production. In the long run, Donohue added, businesses may redesign products to eliminate expensive raw materials. Redesigns could thwart Trump's attempts to rebuild certain U.S. industries and drive business and jobs back to America.

Polaris CEO Scott Wine said in a statement to the Star Tribune that he is "encouraged by last week's discussion of the prospects of eliminating all tariffs with Europe and [is] supportive of similar types of agreements with China and all trading partners."

But Wine has made clear that Polaris is running out of time for a trade-war truce. The Minnesota-based motorcycle and outdoor-vehicle maker recently boosted its estimate of the impact of U.S. tariffs on imported steel and aluminum from $15 million to $40 million.

"The current approach [to trade] is imposing a $40 million cost we must offset in 2018 with a much larger, but not estimable impact on 2019," Wine told analysts in a second-quarter 2018 earnings call.

"I'm very pleased with the countermeasures our team has implemented to enable us to hold our guidance, but there is a limit to how much more we can cover, particularly since the numerous additional tariffs that have been threatened, if implemented, are expected to far exceed the damage [of] those already implemented."

"While I am hopeful that this trade war will soon be resolved satisfactorily," Wine said on the earnings call, "we will ramp up motorcycle production in Poland regardless."

"Once companies move production or change suppliers," said Donohue, "there is a very large likelihood that they are not coming back."

Miles White, CEO of Abbott Laboratories, which acquired Minnesota-based St. Jude Medical last year, said in a first-quarter 2018 earnings call that tariffs could knock a penny off the dividend for each share of his company's stock. Most companies in Minnesota's massive medical device industry have yet to put a price tag on tariffs because the situation is so fluid.

Representatives of the Health Industry Distributors Association (HIDA), whose education foundation includes 3M Health and Medtronic, painted a grim picture for consumers, device makers and distributors if the Trump administration makes good on the president's threat to expand the list of Chinese imports subject to tariffs and raise the percentage rate of those levies.

Testifying to the U.S. trade representative on July 24, HIDA's Linda Rouse O'Neill explained that, "While some of the products on the tariff list are also made in other countries, they are usually more-expensive options and there is not enough of the product to fill the gap coming from China. The immediate result will be a spike in demand, an increase in cost and product shortages of critical supplies. Additionally, any ability of other suppliers to ramp up production may take up to one year."

If the trade war is not called off in the next two months, Minnesota's soybean farmers face an October harvest with huge financial risk. China is set to tax U.S. soybeans in response to Trump's tariffs on Chinese products, so U.S. farmers may need to store soybeans to avoid a financial beating in a depressed market, said Steve Suppan, senior policy analyst with the Minnesota-based Institute for Agriculture & Trade Policy. Those forced to sell for lack of storage capacity could be badly hurt financially, he added.

China's plans to tax U.S. products may also cost Minnesota hog farmers and dairy producers dearly.

No matter how they fare, Suppan said, Minnesota crop farmers must decide in November what and how much to plant for the 2019 growing season. In an unsettled trade war, it will not be an easy call.

Uncertainty bodes across all industry sectors that eventually could affect bottom lines, said University of Minnesota trade specialist Robert Kudrle. "If the president figures a way to back out of all of this, then the earnings calls may be good," he said. "But as long as the rhetoric is as hot as it is now, no one can relax."