Tariff wars: Flooring industry braces for impact of retaliatory hikes

Home Inside FCNews Tariff wars: Flooring industry braces for impact of retaliatory hikes

May 13/20, 2019: Volume 34, Issue 25

By Ken Ryan

While some flooring executives applaud the hardline stance the Trump administration is taking with China regarding trade, the verdict is unanimous that the tariff increase to 25% on goods sourced from China—including vinyl flooring and raw materials for solid hardwood—will hurt the flooring industry.

On May 10, the Trump administration hiked tariffs on $200 billion of Chinese goods to 25% from 10%. Three days later, China responded by announcing it would raise duties to 25% on nearly 2,500 U.S. products. The U.S. then threatened to impose duties on all goods imported from China that had been exempted from tariffs until now. U.S. officials contend that China backed away from commitments it made at the negotiating table by balking at the prospect of changing Chinese laws to solidify the reforms the Trump administration had been pushing. China is accusing the U.S. of reneging on a pledge not to raise tariffs further while talks were going on.

All of this saber rattling has made for some uneasy moments among flooring leaders who worry about the long-term consequences. “Though this method of negotiation is directly out of President Trump’s play-book, it has a potential downside that he may not have rightly calculated,” Scott Humphrey, president and CEO of the World Floor Covering Association, told FCNews. “Personally, I agree that the trade imbalance is unsustainable. Knowing what I know of the Chinese culture, I strongly wish the President would refrain from his commentary related to every move made by either party in the negotiation. His tactics make it very difficult for China’s leaders to save face with any concessions to which they might agree. That is likely prolonging a situation that could see a more immediate resolution.”

Other flooring executives agreed no quick resolution is in plain sight. Those observers who have extensive business experience in Asia believe Trump is within his rights to hold China accountable on issues such as intellectual property, even though the consequences may damage flooring concerns. Don Finkell, CEO of American OEM, a domestic producer of hardwood, said the tariffs are necessary to get China to address the issue of intellectual property theft, which has devastated many U.S. industries. “In the long run this will be good for the domestic industry, although the uncertainty of what the tariffs will be hurts everyone,” he explained. “It has the effect of making people wait and see—and not ordering.”

Not surprisingly, companies with roots in China, such as CFL Flooring, have a different viewpoint on this escalating trade dispute. Thomas Baert, president of CFL, based in Shanghai, said the trade conflict should be viewed through a much wider lens. “This is a change of international order with the rising power that is China threatening to displace the ruling power of the West,” he said. “This rivalry is there to stay for the next 10 years. Even if an agreement is made on the specific tariffs, there are likely other actions taken by the parties to protect their interest which, in turn, will impact our industry. The West will need to gradually get used to a powerful nation that China has become.”

Moving production
During the latter stages of 2018—following the initial 10% tariff and before the threat to raise duties to 25% on Jan. 1, 2019—many flooring companies began to look at other countries to serve their sourcing needs. Meanwhile, others expanded their own onshoring efforts in the U.S.

Santa Fe Springs, Calif.-based Galleher, a top 5 U.S. flooring distributor, transitioned 100% of its wood flooring sourcing to countries other than China. As of mid-May that process was essentially complete. “Most of our rigid LVT will be sourced from other countries by the beginning of the third quarter,” Jeff Hamar, president, told FCNews. “Given our currently high inventory levels and foresight, we believe Galleher and our customers are exceptionally well positioned.”

CFL recently started three new fully integrated production operations outside of China—one in Taiwan (SPC), and two in Vietnam (one for SPC and one for laminate) where the recent tariffs do not apply. Shipping SPC from Vietnam started in November 2018; Taiwan began shipping in March. Laminate from Vietnam starts in June. “This is a time when important U.S. players will question their sourcing activities,” Baert noted, “Most will align themselves with players that can offer solutions for this changing world. Smaller Chinese producers will be facing tough times.”

For those LVT companies that continue to source primarily from China, conventional wisdom suggests the additional costs will be passed along with consumers ultimately paying the price—or potentially delaying their flooring purchase altogether.

Executives concur the tariff issue emphasizes the overall uncertainty and volatility of sourcing from China. But for U.S. producers, there’s also a flip side. “It also underscores the value of Mannington’s continued commitment to investing in domestic manufacturing capabilities,” said Zack Zehner, president, residential business. “We are always looking to onshore manufacturing, which is evidenced by the dramatic increase in the number of jobs at our Georgia locations over the past few years.”

Consumers to feel the pinch
According to an Oxford Economics estimate, the tariff increase will cost the U.S. economy $62 billion by 2020, equating to about $800 per household. The tariff hike is likely to cool off the red-hot WPC/SPC market at a time of robust double-digit growth. While laminate and hardwood may benefit, the overall impact of the tax is going to tamp down industry growth, observers say.

“We should not underestimate the cumulative effect of a near 25% price change on certain goods in less than a year’s time,” said Scott Rozmus, president and CEO of Romeoville, Ill.-based FlorStar Sales, a top 20 distributor. “Indeed, at the end of the day, I feel this will not be good for our industry despite the alternatives everyone has to find product. Certainly, some firms will do better than others. But when consumers repeatedly hear on television and else- where in the media that stuff is becoming more expensive because of tariffs, I don’t see them running out in droves to buy floor covering.”

American OEM’s Finkell said his main concern is the sawmill industry, which makes the raw materials for solid wood flooring. “Many of these companies export over 50% of their products to China, especially red oak. Who can withstand losing 50% of their business for long? Solid red oak prices will go down; not so much for white oak. Consumers will pay more for Chinese flooring, less for red oak solid flooring and more for LVT—which will help wood flooring modestly.”

Galleher’s Hamar, with years of international business experience in Asia, said China will likely further devalue its currency and provide subsidies to manufacturers which will, in turn, diminish—but not eliminate—the impact of the tariffs. “There simply isn’t enough margin at the importer level to absorb the tariffs without passing them on to subsequent buyers,” he explained. “I don’t think U.S. manufacturers will see a big gain initially due to the fact that most of the products imported from China are in high demand by consumers today, and U.S.-based suppliers can’t produce any significant quantities of these specific products.”

Some flooring dealers credit the Trump administration for attempting to hold China accountable. Included in that group is Eric Langan, president of Carpetland USA, Davenport, Iowa. “This issue has been ignored for far too long. Unfortunately, I do believe these tariffs will negatively impact the flooring industry through the consumer delaying flooring purchases or allocating those disposal dollars somewhere else.”

Kevin Frazier, president of Frazier’s Carpet One Floor & Home, in Knoxville, Tenn., believes any immediate and unexpected increase in prices is detrimental to the flooring industry, regardless of the product category. However, he took a silver-lining approach. “In the long run, given how often China plays fast and loose with international trade law and/or uses hardball negotiation tactics, for the sake of our overall economic health we cannot let China actively participate in our economy if they aren’t willing to play fair on a level field. Additionally, if this protracted trade fight forces more high-quality manufacturing jobs back into the United Sates, then—even though the process will be painful—I’m for that.”

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