How are Tariffs & Trade Barriers Impacting the Furniture Business?

Threats of new trade tariffs have the potential to change the furniture industry, even at a company such as Formaspace that manufacture 100% of its furniture products here in the USA. We take a look at the effect of tariffs on the furniture import/export business as well as their impact on the availability of raw materials used in the furniture making industry.

Are we in a trade war?

That’s the billion dollar question that the stock market investors, businesses, and consumers are asking.

The stakes are high as the administration turns to the threat of tariffs as part of its ongoing negotiating strategy to sign new international trade agreements, which they believe are more favorable to American manufacturing and that safeguard American intellectual property (IP).

Actions threatened by Washington against one particular company, the Chinese multi-national electronics and communications giant Huawei, seem to have grabbed all the headlines in recent days – understandably so given the enormous consequences for tech companies, from Apple to Qualcomm, who are facing up to the prospect of having to unwind a truly global supply chain for computer chips and telecommunication components.

U.S. Trade Deficits in the Durable Manufactured Goods

But despite the importance of the electronics industry, it’s not the entire economy, at least not yet.

Given the seriousness of the current and proposed tariffs, we think it’s important to take a look at the balance of trade in durable manufactured goods, then drill down into the effects that tariffs will have on our corner the market: the furniture business.

Where do we stand at the moment with current U.S. trade deficits?

For durable manufactured goods, the picture is not great. Federal agencies report that in 2018, the US imported around $605 billion more durable manufactured goods than we exported. The trend has worsened over the last 5 years: the U.S. net trade deficit in durable manufactured goods has grown by 144% since 2014.

As you can see from the economic data shown in the chart above, we are currently running an account surplus in durable manufactured goods with Canada, Hong Kong, the Netherlands, Australia, and the United Arab Emirates, as well as many other countries shown in green on the map above.

At the other end of the scale are five countries – South Korea, Germany, Japan, Mexico, and China – with whom we have the largest net trading deficits in durable manufactured goods.

Imbalanced trade with China in durable manufactured goods poses a big problem for the US: In 2018, we bought $338 billion more durable manufactured goods from China than we were able to sell to back them – creating a trade deficit that is nearly 10 times the net surplus we have with our best customer, Canada.

The Threat of Raising Section 301 Tariffs on Chinese Goods from 10% to 25%

The administration in Washington responded to the overseas trade deficit with China by instituting a 10% tariff on many Chinese imports under Section 301 of the Trade Act of 1974. (This was in addition to a tariff on steel and aluminum products, more on that later.)

Then on May 10, 2019, the office of the U.S. Trade Representative announced: “Earlier today, at the direction of the President, the United States increased the level of tariffs from 10 percent to 25 percent on approximately $200 billion worth of Chinese imports. The President also ordered us to begin the process of raising tariffs on essentially all remaining imports from China, which are valued at approximately $300 billion.”

How will this affect our corner of the market, the furniture business?

Fortunately for Formaspace, the direct effects will be minimal. As you probably know, we manufacture all our furniture here in the USA at our Austin, Texas factory headquarters – using locally-supplied raw materials, including domestic steel and wood products.

As a result, Formaspace won’t be directly affected by the new tariffs on imported goods and materials (with the exception of some hardware items, which do come from overseas); however, there may be some indirect effects from these tariffs over the coming months, such as the possibility of increased prices for domestic steel.

But what about other companies that import Chinese furniture products or depend on Chinese raw materials? They could be hit pretty hard.

How hard? Let’s first take a look at the trade balance for imports and exports of U.S. furniture products.

According to Federal trade statistics, the United States is currently running a nearly $40 billion deficit in the overall furniture and fixtures market. Once again, China is racking up the biggest trade deficit, it sold nearly $26 billion more furniture and fixtures to the US in 2018 than we sold back to them. The Chinese imbalance in furniture trade is relatively large compared to that of our other trading partners: e.g. China’s furniture trading deficit is five times larger than that of the next country on the list, Vietnam.

Long-term South African Expat Vlogger Serpentza Provides his Perspective on US-Chinese Trade Relations

What are the Consequences of Raising Section 301 Tariffs on Chinese Imported Furniture from 10% to 25%?

Will Chinese exporters be able to survive in a world with 25% U.S. tariffs?

It could be grim for many Chinese companies which have been operating on razor-thin margins for years.

Indeed, few of the nearly 1,000 Chinese export companies investigated by Bloomberg Economics could expect to survive the new 25% U.S. tariffs over the long haul, researchers say. Take, for example, Yang’s Sunrise Furniture Company based in Dongguan in southern China. The company’s owner, Ben Yang, tells Bloomberg reporters, “We (will) probably have to switch to making something else or shut down altogether.”

Meanwhile, the mood was undeniably “sour” at the Canton Fair in Guangzhou China, the three-week-long trade fair, which attracts buyers from around the world. The South China Morning Post reports from the show that US Q1 imports of Chinese-made furniture by retail companies, such as Home Depot, Ikea, Target, and Rooms-to-Go, fell 13.5% while imports from countries not facing sanctions, Vietnam and Taiwan, rose 37.2% and 19.3% respectively.

Indeed, this is what economists predict will happen in the coming months: if there is no US-China trade agreement, more of the Chinese furniture manufacturing industry will shift its production to Vietnam, Taiwan, and other Southeast Asian countries to avoid U.S. tariffs.

Possible Retaliatory Trade Actions by the Chinese Government

By its very nature, trade is a two-way street: the Chinese government may choose to retaliate in response to US tariffs. But how?

We’ve already mentioned the likelihood of Chinese export manufacturers moving their supply chains to other countries, but what other options could the Chinese government pursue?

One possibility is that China could continue to pump up its economy in order to withstand an assault on its export trade. Economists believe that the Chinese government has up to $3.65 trillion set aside in a rainy day fund. They could also weaken their currency somewhat, to lessen the impact of tariffs.

There has also been concern raised about the Chinese government slowing down their purchases of US treasuries, which fund the US federal government’s budget deficit.

Retaliation might also come in the form of trade restrictions as well. China is the world’s leading producer of rare earth minerals, an essential ingredient in the production of today’s electric car motors, LED lights, and other high-tech products. Export restrictions of rare earth minerals could constrain manufacturing outside of China significantly.

Tensions are rising in China as a result of the trade war threats. One retired official, Mr. Zhao, wrote an anti-U.S. trade war anthem that has become a viral sensation in China.

What Effect Will the Trade War Have on American Furniture Companies?

For companies that source their furniture in China, costs are going to go up. The real question is whether they can pass these costs onto consumers or not.

Some companies have managed to do some belt-tightening and swallow the increased costs. But if and when tariffs rise to 25%, that will prove difficult.

Yet the decisions of pricing may be outside the control of some importers. For example, some retailers who supply products to Amazon (disclaimer, Amazon is a Formaspace client) are finding it difficult to convince the online retailer of the need to raise prices.

Consumer prices for imports are likely to rise in the coming months as a result of the tariffs, though there is speculation that the effect will lag thanks to intensive stockpiling in the weeks and months leading up to the tariffs going into effect.

Effect of Steel and Aluminum Tariffs on Furniture Manufacturing

Raw material prices have been affected by tariffs as well.

As you undoubtedly know, in addition to the Chinese product tariffs, the US trade administration had earlier issued 25% tariffs on imported steel products and 10% tariffs on aluminum products. (Update: In the last week, the administration has promised relief on steel and aluminum tariffs from Canada and Mexico; this change is widely interpreted as a tactic to help usher through ratification of the administration’s replacement for the NAFTA trade agreement, the USMCA.)

Quite a few companies have been caught in the crossfire with these combinations of tariffs. The Cato Institute has identified 200 major companies facing difficulties due to the resulting changes brought about by the new tariffs.

Steelcase, for example, has reportedly had to increase prices for the second time in four months due to tariffs on the specialty steel products in uses in its contract office furniture. Other companies, such as the boutique San Francisco furniture company, making the popular Thicket coffee table sold by Design Within Reach, have had to suddenly source new steel suppliers to avoid hefty cost increases. (In the case of the Thicket, designer Ted Boerner was obliged to revise the product design because the new supplier couldn’t deliver the same patina surface treatment as the original.)

The 2018 US trade deficit in primary metals production was nearly $37 billion, making it slightly smaller than the trade deficit last year in furniture and fixtures.

However, metals production, especially steel, is a politically fraught issue for politicians. Domestic steel production symbolizes the industrial strength of a country (think highway bridges, skyscrapers, and military tanks and ships), it’s historically been a major employer, and when a steel company shuts down (as British Steel did this week in the UK), it can be devastating for laid-off workers trying to find another high-paying industrial job.

Steel production peaked in 2007, and since that time, there has been an over-capacity glut across the world. There are fewer and fewer steelworker jobs as well, thanks in part to increased levels of automation. In 1974, there were an estimated 521,000 American steelworkers, today, the Bureau of Labor Statistics estimates that in 2017 there were fewer than 75,000.

Because Formaspace builds its furniture in the USA using American-sourced steel, aluminum, and other materials, such as wood products, we have not had to pay tariffs on our major raw material purchases.

However, as other manufacturers switch to sources of raw materials that are not affected by the new tariffs, domestic prices have been going up. Unfortunately, as a result, we have had to increase prices on some of our furniture products. Speak to your Formaspace Design Consultant for details.

Effect of Wood Product Tariffs on Furniture Manufacturing Companies

Canada is the biggest net exporter of wood products into the United States, as shown in the following government economic trade data report below:

The trade deficit with Canada for wood products was over $8 billion in 2018.

And the trade relations over wood exports have not been easy either.

Of course, unless you happen to be involved in the lumber and wood products industry, you might not be aware that Canada and the U.S. have had a long-simmering trade dispute since the early 1980s over softwood lumber products (the U.S. claims that the Canadian government unfairly subsidizes its lumber exports, which Canada vigorously disputes).

(If you’re not familiar with the difference between hardwoods and softwoods, here’s a short primer: softwood lumber is made from trees such as Douglas Fir, Eastern White and Southern Yellow Pine, and Red Cedar. Softwood lumber is most commonly used for making construction lumber, plywood, as well as stronger grades of paper and paper board for bags and boxes. Hardwood trees, such as Ash, Maple, Oak, and Walnut, are more commonly used for making furniture, flooring, veneers, and pallets; hardwoods are also used for making print grades of paper products.)

Tensions with our northern neighbors certainly increased when Washington imposed steel and aluminum tariffs on Canada and Mexico on May 31, 2018. In response, the Canadian government imposed $13 billion worth of tariff countermeasures on July 21, 2018, which included tariffs on certain steel and aluminum products, plywood, wood veneered panels, laminated wood, furniture cabinets for electronics, and upholstered wooden seats.

Now that the US Government has signaled it intends to roll back last year’s tariffs on Canadian (and Mexican) steel and aluminum, it’s likely that the Canadian government will also ratchet down the tariffs it imposed in response to Washington’s actions.

Here at Formaspace, we use top-quality, American-sourced hardwoods in many of our furniture products: Maple, Oak, and Walnut are some of the most popular choices for their durability and warm character.

By choosing American wood products, we’re able to deliver the highest quality products without being subject to the increased tariff costs imposed on Chinese and Canadian exports.

Take the Next Step: Choose American-Made Furniture Products from Formaspace

If you can imagine it, we can build it.

As a GSA Schedule Supplier, we have a long, successful track record helping our clients design, manage, build, and install unique, top-quality furniture installations custom manufactured for your project.

Each piece of Formaspace furniture is made by skilled craftsmen and women in our Austin, Texas factory headquarters using American steel and components.

Our products are made to the highest industrial grade standards, backed by a no-questions-asked 12-year guarantee – even if you use the furniture three shifts a day.

Find out why leading companies, including SpaceX, Oculus, Toyota, Busch, Apple, Google, Twitter, and Capital One choose Formaspace.

To learn more or to get answers to any questions you may have, contact your Friendly Formaspace Design Consultant today. They’ll be happy to share their expertise with you and help you make your next project a success.