US bikemaker feels he foots the China tariff bill

Seattle-based electronic bicycles firm Rad Power Bikes said it has absorbed almost the entire burden of US tariffs on China.
Seattle-based electronic bicycles firm Rad Power Bikes said it has absorbed almost the entire burden of US tariffs on China.PHOTO: MIKE RADENBAUGH/FACEBOOK

SEATTLE (WASHINGTON POST) - The first time President Donald Trump took a swing at China, he hit a Seattle maker of electronic bicycles instead.

That was last summer, when the President imposed his first round of 25 per cent tariffs on Chinese imports. The new levy meant a sharp cost increase for the e-bikes, tyres, inner tubes and other components that Rad Power Bikes purchases from Chinese suppliers.

At first, Mr Mike Radenbaugh, the company's co-founder, raised the retail price of his US$1,500 (S$2,050) e-bikes by US$200. That cooled consumer demand, so Rad's management team overhauled the e-bikes' design and manufacturing process in a hunt for savings.

By February, Mr Radenbaugh was able to return his retail price to its original level, though at some cost in lost profits.

Today, as Mr Trump moves forward with plans for additional tariffs on Chinese products, the President insists that China is paying the tariff bill. But that's not how it looks from Mr Radenbaugh's Seattle office.

"Our company has absorbed almost the entire burden," he said. "It's been very frustrating. We just want to build a great bike at a great price."

The President's continued insistence that China is bearing the cost of his import taxes has become a notable and unusual feature of his "America First" trade offensive. Many industry groups and most economists describe tariffs as a tax on Americans, paid by the American companies that bring foreign goods into the US.

A pair of recent studies, by two teams of economists from institutions such as the Federal Reserve Bank of New York, as well as Princeton, Yale and Columbia universities, both concluded that Americans are bearing nearly the entire cost of Mr Trump's tariffs.

But speaking to reporters on the South Lawn of the White House on Tuesday (May 14), the President said the US is "winning" the trade war with China, adding: "We're going to be collecting over US$100 billion in tariffs."

 
 
 
 

The Treasury Department estimates that total customs duties will be about US$69 billion for the current fiscal year.

Mr Trump said he is considering "very strongly" the imposition of tariffs up to 25 per cent on roughly US$300 billion in Chinese products that are not covered by previous levies.

If he opts to proceed - and he took the first official step toward doing so on Monday - the economic impact will dwarf his previous levies on foreign washing machines, solar panels, industrial metals, and about half of what the US purchases each year from China.

Once in place, the tariffs would cost the typical family of four nearly US$2,400 annually, destroy 2.2 million jobs and shave more than US$200 billion from the size of the economy, according to a study for an anti-tariff group by Trade Partnership Worldwide, a Washington-based consultancy.

"Generally, the big impact on prices is here at home. It's basically a tax on consumers," said Mr Gary Hufbauer, an economist at the Peterson Institute for International Economics, who has studied tariff episodes dating to the 1970s.

The economy-wide figures mask countless boardroom decisions made at large and small companies across the country about how to respond whenever the government imposes a new tariff on imported products.

In most industries, it's an unfamiliar exercise. No president since the 1930s has used tariffs as freely as Mr Trump. Occasionally, presidents have deployed them to protect individual industries, such as President George W. Bush's move to safeguard the steel industry in 2003 or President Barack Obama's aid for domestic tyre makers in 2009.

But ever since the Smoot-Hawley tariffs in 1930 were blamed for deepening the Great Depression, most presidents have sought to lower trade barriers, not raise them.

A new tariff, particularly one of the magnitude that Mr Trump is discussing, poses a complex calculus for a company. If the government imposes a 25 per cent tariff on goods from China, the cost of a US$100 Chinese product rises to US$125. The additional US$25 is paid to the US Customs and Border Protection Service by the American broker that represents the domestic company buying the product.

Then, the company can choose whether to accept smaller profits and pay the tariff itself. Or it can raise its retail prices and make its customers pay. Finally, it can try to persuade its Chinese supplier to accept a lower price for its product.

That decision will turn on basic economic issues such as supply, demand and competition.

If the American company makes something that its customers could find elsewhere - perhaps from a maker that is unaffected by the Chinese tariff - it won't be able to raise its selling price to cover the tariff.

After all, its customers could just go elsewhere.

Likewise, if the American company could buy its product from a supplier in, say, Vietnam or Bangladesh rather than China, the Chinese supplier might decide to eat the tariff cost rather than see its American customer defect.

"It can change by product and by industry," said Mr Phil Levy, a senior fellow at the Chicago Council on Global Affairs who was a White House economist in the George W. Bush administration.

At Rad Power Bikes, Mr Radenbaugh couldn't quickly switch to a non-Chinese supplier. China produces almost all the e-bikes sold globally, leaving retailers with few immediate options. The young executive, an evangelist for e-bikes as an alternative mode of transport, also wanted to pour his profits into new investment to feed the fast-growing business.

 
 
 

That left only the consumer to pay the tab.

Rad's dilemma bore little relationship to the reassuring statements coming from the White House. Mr Trump - who has dubbed himself "Tariff Man" on Twitter - has repeatedly said that China is paying the tariff bill.

He occasionally has been more specific, arguing that China pays 21 percentage points of the current 25 per cent tariff - a breakdown that appears to come from a 2018 simulation by Swiss and German economists Benedikt Zoller-Rydzek and Gabriel Felbermayr.

But unlike the two US studies that recently concluded Americans paid nearly the entire tab, the German-Swiss paper did not examine real-world results in the wake of the President's tariff measures.

Mr Robert Lighthizer, the President's chief trade negotiator, has suggested that the tariffs' financial pain is worth the potential gains involved in resetting the US economic relationship with China.

Beijing's rampant theft of American technology, through coercive joint ventures and cyber hacking, poses an "existential" threat to US economic leadership, he says. The tariffs are designed to compel China to abandon those practices.

Mr Trump began his day on Tuesday tweeting that "Tariffs have rebuilt our Steel Industry". And before leaving for a quick trip to Louisiana later in the day, he said that US companies could easily escape the financial sting of his anti-China trade measures.

"So you have no tariff to pay whatsoever if you're a business," Mr Trump said. "All you have to do is build or make your product in the United States. There's no tariff whatsoever. So that really works out very well."

Economists and some executives say the President's view overlooks the difficulties involved in switching to new suppliers, as well as the erosion of US supply networks over the past quarter-century of globalisation and automation.

In some cases, the necessary domestic manufacturing infrastructure does not exist.

"It's very frustrating to hear we should bring manufacturing back... It's impossible to bring manufacturing back to the US if it never existed here to begin with," Mr Radenbaugh said.

Rad's e-bikes are assembled in a Chinese factory near Shanghai, in the heart of an industrial cluster Mr Radenbaugh calls "bike valley". Matching the trained workforce and robust factory networks that dot the Chinese landscape would take the US "decades", he said.

"We could invest millions and millions of dollars and get just a trickle of e-bikes," he added.

For now, the tariffs are not crippling the e-bike company. But they are sapping money that could be used to hire more workers to fill some of Rad's existing vacancies or to finance expansion.

"Business is good. We're not going to let this thing slow us down," Mr Radenbaugh said. "It's just hard to stomach that we're being nailed by this tax."