Summer 2018 saw the continuation of tariff threats among major world trading partners affecting nearly all major industries. Following the Trump administration’s announcement of tariffs on imports from Canada, Mexico, Turkey, the European Union, and China, many of these countries announced countermeasures, escalating the situation and threatening a trade war. Affected goods range from imported steel and aluminum, fruit, handbags, and beauty products, to exported lumber, pork, cheese, fruit, corn, and grain, as well as whiskey, motorcycles, technology components, and lawnmowers. While the picture has evolved since then and, as of this writing, a general climate of uncertainty has given rise to mixed reactions among asset-based lenders. Of respondents to a joint TSL and Gordon Brothers survey, 41 percent are concerned about recently announced or enacted tariffs, while 47 percent are neutral. (See infographic on page 28.) The balance, 12 percent, feels positively about the impact of tariffs. After all, the intention of the administration’s tariffs is to stimulate domestic industry, and some sectors are benefitting. At the same time, others are poised for stress depending on the degree and duration of changes and customer response to increased pricing. For better or worse, change brings potentially increased risk and lenders are adapting. The majority of respondents (63 percent) have adjusted their portfolio monitoring based on their level of concern. Specific sectors where clients have altered monitoring include metals (55 percent) and agricultural commodities (31 percent) where tariffs are already in place. Additional sectors lenders felt warranted monitoring include automotive (41 percent) and retail (35 percent), while technology (18 percent) ranked lower. As part of their efforts to mitigate risk, lenders reported increasing their “diligence regarding potential direct and indirect impact[s] on borrowers;” “relying on third-party appraisal firm[s] to help monitor go-forward changes;”
“avoiding cross-border activities with Chinese companies;” and limiting certain asset categories and sectors from their portfolios. High-Level Impacts to Asset Values Macro-economically, some sectors will benefit, like domestic metals manufacturing, and others suffer, like U.S. soy farming. In the short term, some inventory values may increase, though the gain will be short-lived. Long term, tariffs may make certain business or product lines uneconomical, and they will certainly have an inflationary impact across a large number of industries To the extent investment occurs to support positively affected industries, machinery and equipment values may increase. However, it is unlikely that significant investment will occur until a new paradigm of tariffs and trade agreements is in place and stability returns to the market. In sectors where investment is not occurring, machinery and equipment values will decline. The impact on retail and consumer finished goods inventory will depend on consumers’ willingness to withstand price increases. To the extent that increased costs cannot be passed on to consumers, asset values will suffer. Below we detail broader trends by asset class and the sector-specific impacts to help lenders understand how to focus their monitoring activity. Keeping It In Perspective—Geographically and Historically The early action in U.S.-imposed steel and aluminum tariffs has affected North American trade more so than Chinese trade to date. The Chinese retaliatory rates on soybeans, seafood products, and other products have had significant impacts, but compared to a full-on trade war like that of the early 1930s, current tariffs are still very low. Nevertheless, Great Depression era history shows that unabated tariff escalation can have a detrimental impact on economic growth. At its peak in 1932, the average U.S. import tariff rate was just under 20
percent. Current rates are comparatively low at 1.5 percent for the year-to-date period ended July 2018. In examining China only, year-to-date duties are 2.8 percent relative to 2.7 percent for the same period in 2017. As U.S. steel and aluminum trade volume with Mexico and Canada is high, the impact of tariffs has been material with a $332 million increase in Canadian duties in 2018 and a $145 million increase in Mexican duties. Again, duties still remain historically very low at aggregate rates for imported goods of around 0.2 percent for each country. But this could change; in fact, governments have announced that it will. These figures only show the change in duties paid to the U.S. and do not measure the increase in duties paid abroad by U.S. exporters. These tariffs also don’t reflect the impact of trade diverted and shifts in pricing that has affected trade flows. For example, soybean tariffs implemented by China in June shifted Chinese buyers to the Brazilian market. This shift depressed U.S. soybean prices, but did not result in a significant increase in duties paid on soybeans in China. A Mixed Blessing for Manufacturers New tariffs could spur investment domestically to offset the lack of imported supply, as seen with U.S. solar panel manufacturing, where about $1 billion in new spending plans were announced. To meet this new demand, companies will have to increase production. Braidy Industries, for example, recently broke ground on a $1.3 billion aluminum rolling mill in Ashland, Kentucky. In Illinois, U.S. Steel Corporation has reopened one of its shuttered steel manufacturing facilities. Equipment asset reinvestment can be achieved in a number of ways including reactivating idle equipment, upgrading existing equipment with new technology, or making capital expenditures in new machinery. However, many producers are hesitant to make the investment due to concerns that these conditions will not prevail long-term. On the other hand, new tariffs are THE SECURED LENDER NOVEMBER 2018
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