Trump’s Tariffs Are Bad for the Audio Business

In the game of global economics, Donald Trump sees himself as a formidable player — one to be respected, and even feared. On Friday, November 2nd, the president tweeted a photo of himself with the words “Sanctions Are Coming” appearing in a font conspicuously similar to the one used in HBO’s Game of Thrones. The tweet was a play on that show’s ominous tagline “Winter is coming,” and was posted shortly after Trump administration officials announced the reimposition of economic sanctions on Iran. The sanctions had been lifted by President Obama as part of the 2015 Iran nuclear agreement. For the record, HBO was not amused by the stunt, responding with a statement saying, “We were not aware of this messaging and would prefer our trademark not be misappropriated for political purposes.” The reinstated sanctions just took effect on November 5th, so it remains to be seen if they will have the desired effect of stopping what Trump calls Iran’s various “malignant” activities, including alleged cyber attacks, ballistic missile tests, and support for violent extremist groups. But many of the Trump administration’s other economic policies have already had far-reaching effects that are being felt around the world as well as in the United States. Chief among these are the tariffs that the president has imposed on imported goods. Mr. Trump began in January of 2018 with fairly specific targets, placing high taxes on imported solar panels and washing machines. But in a matter of months, the increasing number of tariff announcements issued from the White House began to spark fears that the president was spiraling toward a full-blown trade war with China.

In March of 2018, Trump announced his plan to impose a 10% tariff on aluminum, and 25% tariff on steel imports. The president said that his intention was to fulfill a campaign promise to bring back jobs for blue-collar workers, but many experts believe that Trump’s tariffs will do more harm than good. A Reuters survey of 60 economists found that nearly 80% believed that the tariffs on steel and aluminum imports would be a net harm to the American economy. Forbes contributor and Samford University economics professor Art Carden wrote that:

“by raising steel prices, tariffs increase the costs of important inputs into construction, automobile manufacturing, and other industries. The buildings that aren’t built and cars that aren’t made — and the jobs that don’t exist as a result — are impossible to actually see, but they’re real nonetheless.”

In May, the National Taxpayers Union sent an open letter urging the president to reconsider his tariff policy. The letter was signed by over 1,100 economists, both liberals and conservatives, representing an assortment of think-tanks, research institutes, and universities including Harvard, MIT, Amherst, Swarthmore, The University of Chicago, Penn State, and The University of Wisconsin.

Trump Tariff Impacts on Audio Industry YouTube Discussion  added 6/23/19

But on July 6th, the Trump administration doubled down on its policy, setting a new 25% tariff on over 800 categories of Chinese goods, with an estimated worth of $50 billion. The White House indicated that the tariffs were meant to pressure China into changing or discontinuing longstanding unfair trade practices that are detrimental to the American economy. Mr. Trump has accused China of stealing American intellectual property and wants Beijing to make amends by buying more American products, opening itself up to more U.S. investment, and putting an end to the alleged theft. Instead, China retaliated against Trump by imposing its own tariffs on U.S. products, including beef and soybeans. Unsurprisingly, U.S. exports suffered as a result. A New York Times article published on November 5th reported that, according to the latest federal data, American soybean sales to China are down by an incredible 94 percent compared to 2017 figures.

But the president showed no signs of backing down from this tit-for-tat exchange, ordering his officials to produce a list of further Chinese products to penalize, including consumer products, foodstuffs, minerals, chemicals, industrial materials, and textiles. In September, Trump announced that the U.S. would impose tariffs on the $200 billion worth of goods, issuing what the Washington Post called “one of the most severe economic restrictions ever imposed by a U.S. president.” The new tariffs, which apply to refrigerators, air conditioners, furniture, televisions, toys, and over 1,000 other products, would start at 10 percent before rising to 25 percent at the beginning of 2019. As if this move were not extreme enough, Trump also said that his advisors were preparing yet another list of penalties on a further $267 billion in Chinese goods — a package that comprises practically every remaining product made in China — which would be set into motion “if China takes retaliatory action against our farmers or other industries.” China is expected to respond, however, and that could mean bad news for American companies that are dependent on Chinese components for cars, phones, TVs, and other electronics. As the world’s two largest economies continue to trade blows, the impact is being felt here at home, with small and medium-sized businesses bearing the brunt of China’s retaliatory action.

According to an analysis by industry groups operating under a coalition called Tariffs Hurt the Heartland, American businesses paid $4.4 billion in tariffs in September of 2018, an increase of over 50 percent from the previous year. The tariffs levied against China cost American businesses $800 million in September, even though the president’s most aggressive policies didn’t go into effect until the end of the month. And unlike the first round of tariffs, the most recent package wasn’t designed to minimize impact on American consumers. China may be the intended target, but the likely result of these new tariffs will be higher prices on everyday products for American consumers, since most companies will have no choice but to pass the costs associated with the new tariffs along to their customers. Trump’s cavalier actions might suggest that his administration is simply unaware of the tariffs’ potential to hamper the U.S. economy. But back in August, the Trump administration held six days of public hearings on the proposed $200 billion package of tariffs, during which time American manufacturers and retailers warned that the policy could shrink their profits and limit their hiring and growth activity. Many American businesses asserted that the U.S. simply didn’t have the ability to produce replacements for all of the Chinese products that would be affected by the new tariffs.

American Audio Companies Speak Out About the Impact of Trump Tariffs

One such American business was JLab Audio, a manufacturer of consumer wireless headphones and portable speakers. JLab’s CEO, Win Cramer, explained that Trump’s plan would be catastrophic for his company. In an interview with the Los Angeles Times, Cramer described the tariffs as an economic vise from which his privately-held company could not wriggle free. Nowhere other than China could JLab find manufacturing partners with the necessary expertise, experience, and shipping connections to make its products and deliver them to the United States. Cramer estimated that around 80 percent of JLab products would be subject to the new tariffs, and that the likely consequences would include layoffs among the company’s 40-person American staff. “Just about any wireless accessory made for a phone is going to be affected,” Cramer said.

“We are going to have to start charging retailers more, and my guess is they can’t afford the haircut either. So at the end of the day the consumer is going to pick up the tab.”

Cramer added that his bigger competitors, such as Beats and Sony, may have the ability to absorb some of the costs associated with the tariffs, but smaller outfits like JLab will have no choice but to raise prices and risk losing sales.

In fact, bigger businesses have a number of advantages over their smaller rivals when it comes to navigating the obstacles presented by Trump’s tariffs. Some, such as Apple and Microsoft, have the resources and access needed to obtain special exemptions from the government for their imports. According to the Washington Examiner, the conservative political journalism website and weekly magazine, the White House has granted approximately one out of every five requests for exclusions from the steel and aluminum tariffs. But those exemptions rarely go to small businesses like Bricasti Design, the Massachusetts-based maker of high-end, handmade audio electronics for both the audiophile and pro audio markets. (I first became aware of Bricasti in 2011, when John Marks wrote about the company’s superb M1 Dac in a column for Stereophile.) Bricasti’s president Brian Zolner recently explained in an interview with the conservative magazine National Review how his business has been affected by Trump’s tariffs. “Our metal costs arbitrarily rose by as much as 50 percent,” he said. And there is an unexpected twist to Zolner’s story: Bricasti doesn’t import foreign aluminum. The company builds its chassis from American metal, but the tariffs have caused such instability in the market that prices for domestic aluminum have increased significantly. Bricasti does use some imported parts, which now are either vastly more expensive, or simply unavailable. “We’ve had open orders with our vendors for thousands of parts,” Zolner said. “Last month they said we don’t know how and if we can deliver.” Where there was once a stable and long-established supply chain, Zolner and thousands of other small business operators are now faced with confusion and unpredictability.

Another American audio business suffering under Trump’s tariff policy is Apogee, the California-based maker of digital converters and audio interfaces for professional recording studios. The company made its name in the 1980s, designing unique anti-aliasing filters that were used in digital recording systems from Sony and Mitsubishi. (I first became familiar with Apogee in 2008, when my college a cappella group recorded an album in a professional studio that used Apogee gear.) The company is now being hit so hard by the tariffs that it has dedicated an entire page of its website to the subject, asking its customers to help by writing to their elected representatives. Here’s what Apogee has to say:

"Apogee Electronics takes pride in manufacturing our products in the US, but like most companies we rely on electronic components from China. In many instances there is not a second source for these components outside of China. The July 6th tariff imposing a 25% tax on electronic components from China (has affected) a large percentage of our material costs, which will ultimately result in price increases, something we actively try to avoid. In addition, in order to stay competitive we may need to look outside the US to manufacture our products, which goes against our company philosophy. This ultimately can have an impact on the employees of Apogee, their families, and our ability to keep our charitable commitments."

- Apogee Electronics

We just got back from a factory tour of JL Audio in Miramar, Florida (where most of their products are hand assembled in America), and asked them to comment on how the Trump tariffs are affecting their business.

“As one of the few companies committed to building loudspeakers in the U.S.A., we are being told that the tariffs are supposed to help us. Bizarrely, the opposite is true. Complete loudspeakers made in China are not currently subject to any additional tariffs, but many of the parts JL Audio sources from China to build speakers here have been hit with 10-25% tariffs. This has put pressure on us to raise prices, not only making us less competitive in the global market, but also in our own country. In our particular case, the tariffs are hurting an American manufacturer and aiding companies that build complete loudspeakers in China.”

-  Manville Smith, VP Marketing of JL Audio

And, of course our friends at RBH Sound (based in Layton, Utah) are also feeling the impacts of the Trump Tariffs.

“The Trump tariffs negatively affect RBH Sound in numerous ways, from raw costs of materials for loudspeaker components to where our products are produced. Much like Harley Davidson, which announced it would need to INCREASE overseas production of its motorcycles to offset the tariff increase, we are finding ourselves in a similar situation with regards to product we SELL to China. In a meeting with our China distributor (which sells our U.S.-assembled product in China), we were told they would likely reduce, if not stop, purchasing the RBH products that were coming from the U.S. due to the retaliatory tariffs that have be enacted there. They said they may have to look to European-made products to replace our products. Thus far, it looks as though the best solution to try salvaging our sales into China is to have MORE of the products we sell to China, made in China. Historically, China has been one of the best markets for our U.S. made/assembled products. The trade war is also negatively affecting our U.S. based production. Time will tell how this will affect profitability and sales in the long run.”

- Roger B. Hassing, President of RBH Sound

There are countless examples of American manufacturers — the types of businesses that Mr. Trump claims to be defending with his actions — that simply cannot function without reliable access to Chinese parts and materials. Sage Chandler, an international trade expert at the Consumer Technology Association, discussed these supply-chain woes in an interview with the Los Angeles Times last August. “These companies based their business models on an existing infrastructure,” she said. Of the CTA’s 2,200+ consumer technology companies in the United States, Chandler said about 80 percent are small businesses dependent on China for their supply chains. Chandler went on to suggest that Mr. Trump simply doesn’t understand the realities of modern manufacturing. He “waxes nostalgic for beautiful factories from the 1950s,” she said. “The expectation that you’re going to see more (American) workers employed” as a result of the tariffs on Chinese goods “is probably not very well informed,” she concluded.

Other CTA representatives have also expressed their concern in no uncertain terms. “The Trump Administration’s proposed tariffs and China’s announced retaliation will hurt commerce, businesses, and consumers," said CTA President and CEO Gary Shapiro, in a press release after the first round of tariffs was introduced. When the president announced tariffs on another $200 billion in Chinese goods, Mr. Shapiro’s criticism intensified. “Today’s retaliatory tariffs are not an effective trade policy and may violate U.S. law,” he said. “We urge the administration to reconsider its misguided approach of increasing tariffs, as they are directly paid for by American companies and consumers.” Former CTA chief economist Shawn DuBravac also offered his analysis of the big-picture impact that the tariffs will have on the consumer technology industry. Here’s what DuBravac had to say in an email to Jeff Berman of HomeTheaterReview.com:

"Trade barriers generally raise prices and reduce the quantities of goods and services. This in turn lowers the level of economic activity, reduces employment, and lowers income. Lower employment and lower income reduce the ability of Americans to buy goods and services, so I'd expect to see a reduction in discretionary spending, which would include less overall spending on tech. Because tariffs raise prices, higher prices could also crowd out spending. As a result, there's likely to be a spillover effect. If consumers have to pay higher prices for one good, it means they'll have less to spend on other goods. A trade war (also) negatively impacts sentiment, both of consumers and businesses, which will hinder consumer spending and business investment. Again, this will be especially felt on discretionary goods. Because tariffs make certain goods more expensive, we'll import less of these products. We'll also export less because of the retaliatory tariffs. The list of products imported from China that will be subject to higher tariffs includes… parts and components that U.S. firms use to be more globally competitive. Import restrictions make the U.S. economy less productive and U.S. firms less globally competitive. Moreover, China imposed retaliatory tariffs on U.S. exports, which include items like new vehicles and airplanes. These categories include significant tech in the finished product. These tech categories will be directly negatively impacted by the reciprocal tariffs."

- Shawn DuBravac

The big picture sounds pretty dire. I spoke with Matthew Botsch, an Assistant Professor of Economics at Bowdoin College, and asked if there was any good news.

“The ‘good news,’ so to speak, is that tariffs don't tend to be very effective at changing the trade balance,” he said. “The reason why is because if we are importing fewer goods from our trading partners, then the supply of dollars on foreign exchange markets will decrease, and this causes the exchange rate to rise. We have already seen a major appreciation of the dollar against the Chinese renminbi this year, from 6.4 yuan/dollar in January to 6.9 yuan/dollar in October. A stronger dollar will make our exports more expensive, partially or mostly offsetting the effect of the tariffs on the trade balance. But in the end everyone is worse off: even if the trade balance is unchanged, the volume of trade declines. We are exporting fewer goods and importing fewer goods, so consumers everywhere in the world are paying more and have less choice.”

Is Judgement Day Coming?

Is there any hope for improvement? Perhaps. On Thursday, November 1st, the president tweeted that he had just had “a long and very good conversation” with Chinese President Xi Jinping. “We talked about many subjects, with a heavy emphasis on Trade,” Trump said in the tweet. “Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina.” The following day, Bloomberg news service reported that Mr. Trump had ordered Cabinet officials to draft a trade deal to be presented to Xi at the G20 summit, which will begin on November 30th in Buenos Aires. But White House economic adviser Larry Kudlow put a damper on this fleeting moment of optimism, telling CNBC that America shouldn’t get its hopes up just yet. “We're not on the cusp of a deal,” Kudlow said. “We're doing a normal, routine run-through of things that we've already put together and normal preparation.” Still, President Xi Jinping offered his own encouraging words in a speech he made at the start of the China International Import Expo, or CIIE, on Monday, November 5th. Reuters reported that the Chinese President promised to lower tariffs, broaden market access, and increase international imports, while protecting the interests of foreign companies by punishing intellectual property theft.

Is this the beginning of a mutually beneficial end to the trade war, or will the situation continue to escalate? Share your thoughts in the related forum thread below.