Opportunities Surrounding Wood Tariffs
Over the past few months, we’ve waited with bated breath as the U.S. and China trade war—initiated by the U.S. to balance trade with China—has gained momentum. For those in our industry who produce hardwood flooring, whether that be offshore in China or domestically, the impact of the 10 percent tariff on Chinese imports, and as a response from China, U.S. exports, has been sudden and direct. And just days away from 2019, the current U.S. administration is reportedly set to increase the import tariff to 25 percent at the start of the New Year.
While the current and potential future tariff has caused some uncertainty, particularly for U.S. mills that source their wood from or produce their products in China, there are also several opportunities for both offshore and domestic producers in light of the tariffs.
“The situation with China is predicated on what’s called Section 301 of the Trade Act of 1974,” said Dana Lee Cole, executive director of the Hardwood Federation. “This Trade Act gives the administration, the president, the right to respond if a company is found to not be adhering to international trade law or international trade agreements.”
Cole says that the U.S. administration has used the findings of what she calls “bad behavior” in intellectual property and technology transfer as a way to impose tariffs on China and Chinese products coming into the U.S. as a way to encourage China’s compliance with international trade laws.
In response to the tariffs, some mills that produce in China are choosing to continue production there—some are raising their prices, others are packing up and moving to the U.S., or they are finding new ways to continue offshoring in low-cost manufacturing countries like Malaysia and Indonesia.
“Due to a large combination of factors such as inexpensive labor, highly relaxed regulations for both the workers as well as the environment, government subsidies, currency manipulation—the list goes on— Chinese manufactured wood flooring has been generally less expensive than its domestically produced counterparts, even after you factor in the cost of placing it on a diesel powered freighter and pushing it across the largest ocean in the world,” said John Dupra, co-founder of Revel Woods.
Dupra and others we spoke to say that although U.S. consumer behavior indicates that buying domestically produced goods, hardwood flooring included, is desired, that desire is often superseded by price.
“The consumers have developed a taste for low prices, and it’s harder for retailers to sell on quality vs price,” said Marge Kehrer Flamme, San Diego regional sales manager at A&W Group Inc. Ark-Floors Inc. “That’s the very reason that manufacturing in China became so prevalent—American consumers wanted cheaper prices.”
For mills remaining in China, a price increase is inevitable, but Flamme suggests that even with an increase, consumers will continue to be drawn to lower priced options: “Don’t think that these tariffs will make consumers run back to American-made goods, unless the American manufacturers can lower their prices.”
American manufacturers might not be adjusting their prices in response to the tariffs just yet, but they are jumping at the opportunities presented by the level playing field the tariffs have created.
“Tariffs are tools used to accomplish various objectives, like leveling the playing field, punishing unfair trade practices, and protecting domestic industries,” said Allie Finkell, executive vice president of American OEM who makes engineered wood floors in Tennessee. “In this case, protecting intellectual property has been stated as the primary goal in relation to Chinese trade practices, which is not going to be easily resolved.”
Finkell says that though it would be reasonable for American OEM to raise prices in light of the tariffs, the manufacturer won’t be doing that.
“We certainly could put a price increase out there, but we are committed, and we’ve announced to our customers, that we won’t be raising our prices in reaction to the tariffs. We would rather increase our business with them.”
Aside from increased prices, there are tremendous opportunities for domestic producers like American OEM and Revel Woods to increase sales as they will not be subjected to the tariffs, says Michael Martin, CEO of the National Wood Flooring Association: “Their raw material costs will not go up; they will remain stable. It also makes U.S. wood products more competitive with wood look-alike options [LVT, tile, etc.], which are largely imported from China.”
This rings true for American OEM, and Finkell says the tariffs are giving the manufacturer the ability to be a better solutions provider and to be more competitive in the entry level product category.
“We’ll be doing some products on HDF core board, which is more cost effective and then also looking at doing some 3/8” platforms in Tennessee, which we haven’t historically done,” she said.
American OEM is focused on being a forerunner in providing alternative solutions during this window of opportunity, and it has dedicated internal resources to work on these new projects for product development and product line development.
Dupra says that with no price disadvantage, consumers’ motivation to trust and buy domestically produced wood flooring should only increase. “If the consumer is not saving a significant amount by buying Chinese flooring, then the preference is likely to be for the domestic product.”
Long before the current administration, or any talk of tariffs, Revel Woods made the decision to only offer products from U.S. and Canadian sources, based on the long history of American sourcing, environmental practices, labor consideration and safety of materials used. Dupra shared that Revel Woods’ target customer is someone who appreciates quality, sustainability, responsibly sourced materials, and is willing to invest in their overall quality of life.
While we continue to watch where things will land in the New Year, sources we spoke to advise retailers to maintain good relationships with suppliers in order to offer customers the most accurate product information and pricing.