The Toll of a
It’s not just giant companies that are being hurt
by Trump’s tariffs on Chinese goods.
Norm Brodsky is a
He is the co-author
of Street Smarts:
An All-PurposeTool Kit
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norm brodsky b STREET SMARTS
100 ● Inc. ● NOVEMBER 2018 ● ● ● ● ● ●
ptimism, we’re told, is
at an all-time high in the
world of small to mid-
size companies, thanks
in no small measure to
President Trump’s tax
cuts and deregulation, but
his trade policies are already
threatening to put a damper on
the good mood. His China tarifs,
especially, are jacking up the costs of the thousands of U.S.
businesses with Chinese suppliers. One such business is
owned by my friend Ryan Zagata, founder and president of
Brooklyn Bicycle Co. We hadn’t talked in more than a year
when he called me out of the blue this fall and asked if we
could have lunch. I readily agreed.
Brooklyn Bicycle, with slightly less than $2 million in
annual sales, is known for the innovative designs and
craftsmanship of its bikes, one of which was selected by the
Museum of Modern Art to be sold through its gift shop. They
are manufactured in China using parts from fve or six countries, mostly in Asia. Over lunch, Ryan told me that, although
the business was doing well, he had questions about what to do
if Trump carried through on his threat to add $200 billion in
new tarifs on Chinese imports, which would include an additional duty of up to 25 percent on bicycles and bicycle parts.
He was already paying a duty of 5. 5 percent. An increase to
30. 5 percent would force him to make some tough decisions.
One possibility would be to simply absorb the additional
cost. On a typical bicycle costing him $200 to manufacture,
he would have to pay an import duty of $61, as opposed
to the $11 he was paying currently. That would be a $50
increase in the bicycle’s cost of goods sold and an equivalent
decrease in the gross proft it generated.
Alternatively, he could ask his customers to cover the
increase and raise the bike’s price by $50. But the bicycle
market is very competitive. Ryan couldn’t be sure what efect
the price increase would have on his sales. So maybe, I told
him, he should do some combination of the two, raising prices
by a smaller amount—say, $10 or $15—and absorbing the rest.
Or maybe he should move production to another country,
such as Vietnam? “That’s not as easy as it sounds,” he said.
“To begin with, it’s not worth doing unless the cost savings
is going to be more than $50 per bicycle. Not to mention the
R&D and travel costs of sourcing a new factory, and having
samples made and tested. Every bike model we bring into this
country from a new supplier we have to send to the Consumer
Product Safety Commission for testing. So moving production
to another country would be a big efort with a lot of costs
we would never recover. There’s also a risk if you’ve built your
reputation, as we have, working with one or two suppliers.
Will a new manufacturer understand what we’re looking for
and give us the same level of quality?”
What about manufacturing domestically? “For us, it’s the
same problem,” he said. “There’s nobody in the United States
making rims, hubs, spokes, saddles, chains, drivetrains—all
the things we’d need in the quantities we’d need them. We’d
have to import the components, and they’re subject to the
same tarif as the bicycles themselves.”
Ryan could see no simple solution to the problems he’d
face if the 25 percent tarif was imposed, and I couldn’t either.
I asked what he planned to do. “I’ll watch my competitors,”
he said. Meanwhile, he was taking a closer look at each of the
possible options, “making sure we’re dotting all the i’s and
crossing all the t’s,” as he put it, so that he would have all the
information he would need if he did have to make a decision.
No doubt thousands of small to midsize companies are
struggling with similar issues because of Trump’s trade wars.
I’m glad to see that the major business organizations have
fnally begun to raise a stink about them. Let’s just hope they
can get him to end the tarif war sooner rather than later.